Before you raise capital, structure your team, or pitch your first LP, you face a foundational question: Where should your fund live?

Emerging managers launching hedge, private equity, or real estate funds typically have two choices with entity formation: Delaware or the Cayman Islands. Your decision shapes tax obligations, regulatory requirements, investor perception, and operational costs.

Get it wrong, and you’re stuck with unnecessary compliance burdens, higher expenses, or a structure that turns off the LPs you need. Get it right, and you’ve built a solid foundation for growth.

We’ll walk through seven core factors that should drive your domicile decision and give you practical guidance to align your entity formation strategy with your fund’s goals, investor base, and operational realities.

Legal Structures and Domicile Frameworks

Delaware and the Cayman Islands both offer proven legal frameworks for fund entity formation, but each serves a different purpose.

Delaware has earned its reputation as the go-to for U.S.-based funds. You can form an LP or LLC quickly with minimal paperwork, and the Court of Chancery provides predictable case law for business disputes. Delaware law gives you maximum flexibility to customize governance and fiduciary arrangements without minimum capital requirements.

Cayman dominates offshore fund formation. Exempted Limited Partnerships and LLCs operate under English-style common law, offer complete tax neutrality, and provide the same contractual freedom that fund managers expect. Formation takes slightly longer since you’ll need an exempted license and registrar approval, but the framework defers heavily to your partnership agreement.

What matters most is that institutional LPs know both jurisdictions well. Domicile alone rarely kills a deal. Delaware works best for domestic fundraising; Cayman opens the door to global capital.

Tax Considerations and Investor Impact

Tax treatment often drives the entity formation decision more than any other factor.

Delaware funds operate as U.S. taxable entities. You’ll file Form 1065, issue K-1s to partners, and provide counterparties with a simple W-9. The compliance path is straightforward, and you can access U.S. tax treaties for cross-border transactions.

Cayman funds pay zero local taxes and typically skip U.S. filings unless they earn effectively connected income. The trade-off? You’ll need W-8IMY forms and must disclose partner documentation, which some managers find uncomfortable when protecting non-U.S. investor identities.

Your investor mix matters here. U.S. tax-exempt institutions and foreign LPs often prefer Cayman structures to avoid unrelated business taxable income and reduce withholding. U.S. taxable investors generally lean toward Delaware for cleaner IRS reporting.

The practical question: Where does your capital come from? Match your entity formation strategy to your largest LP constituencies, and work closely with tax advisors to minimize leakage across investor classes.

Regulatory and Compliance Environment

Beyond taxes, regulatory requirements can impact your entity formation strategy.

Cayman funds operate under the Cayman Islands Monetary Authority (CIMA). Open-ended funds register under the Mutual Funds Act; closed-ended funds fall under the Private Funds Act. You’ll need a CIMA-approved auditor, often a licensed administrator, and must register within 21 days of accepting capital. Cayman also enforces strict AML rules, and since January 2025, funds must maintain beneficial owner information with reporting obligations. Cayman also cleared the FATF grey list, and the EU removed it from its AML blacklist in early 2024, confirming the jurisdiction meets global standards.

Delaware offers a lighter local touch. No fund-specific regulator exists at the state level. Your compliance obligations flow from federal rules: SEC registration (depending on size and investor base), IRS reporting, FATCA, and the Corporate Transparency Act’s beneficial ownership filings with FinCEN.

One practical consideration: If your fund targets CFIUS-covered investments in critical U.S. industries, a Delaware entity formation simplifies disclosure requirements. For purely offshore strategies, Cayman provides flexibility without sacrificing regulatory credibility.

Formation and Administrative Costs

Cost differences between Delaware and Cayman add up fast, especially for budget-conscious emerging managers.

Delaware entity formation runs lean. State filing fees typically stay under $100, and you’ll file a one-page certificate to get started. Ongoing requirements remain minimal: no mandatory audits, no public financials, and no annual reports for partnerships or LLCs. Amendments take a simple filing with the Secretary of State.

Cayman carries a heavier price tag. Legal counsel, licensing fees, and government charges can push costs roughly 10% higher than a comparable Delaware setup. You’ll also need a local registered office, an independent CIMA-approved auditor, and often a fund administrator. Annual CIMA filings, ownership registers, and AML/KYC documentation create recurring administrative work. Even smaller Cayman funds typically prepare audited financial statements.

The bottom line: Delaware keeps your entity formation and maintenance costs low. Cayman demands a larger operational budget but delivers the global infrastructure that many international investors expect.

Investor Perspectives and Market Considerations

Who writes the checks should also influence your entity formation decision.

Large institutional LPs have seen it all. Pension funds, endowments, and fund-of-funds invest through both Delaware and Cayman structures regularly, and most will back a strong manager regardless of domicile. But exceptions exist. Some European corporations, especially German institutions, follow internal policies that rule out “tax haven” jurisdictions. And certain non-U.S. investors push back on Delaware because they’d rather keep a distance from U.S. regulatory reach.

Investor type matters too. U.S. taxable investors typically want Delaware’s familiar partnership structure and clean K-1 reporting. Foreign and tax-exempt LPs often gravitate toward Cayman to avoid U.S. tax filings and streamline estate planning.

European fundraising has also gotten easier for Cayman funds since the EU’s AML blacklist removal opened private placement access.

The takeaway: Perception and practicality both play a role. Know your target LP base, understand their preferences, and let those realities shape your structure.

Fundamental 6: Fund Structure Strategies (Parallel and Feeder Models)

Sometimes you may not need to choose between Delaware and Cayman at all. Many managers use both.

Master-feeder structures solve the problem of serving multiple investor types under one strategy. U.S. taxable investors subscribe through a Delaware feeder LP and receive familiar K-1 reporting. Non-U.S. and tax-exempt investors enter through a Cayman feeder. Both feeders then pool capital into a Cayman master fund where all trading happens. Same strategy, same portfolio, different tax wrappers.

Parallel funds work differently. You run separate Delaware and Cayman vehicles that pursue identical strategies independently. This setup lets you customize terms for each investor group, though you’ll double your administrative burden.

Both approaches, though, do complicate your entity formation and increase costs. The Delaware feeder follows SEC and IRS rules, while the Cayman feeder registers with CIMA and requires local service providers. Each vehicle needs its own documentation and compliance infrastructure.

That said, the trade-off makes sense if your investor base spans geographies and tax profiles. You build flexibility to accept capital from nearly anyone.

Emerging Trends and Regulatory Updates

Finally, both Delaware and Cayman continue to refine their rules, and staying current matters for your entity formation planning. Delaware has made it easier to fix mistakes while tightening certain administrative requirements. Cayman keeps expanding its transparency and compliance frameworks as it cements its reputation as a well-regulated offshore jurisdiction. Here’s what fund managers launching in 2026 need to know.

Delaware Updates

• Registered Agent Rules Tightened: Delaware now prohibits registered agents from operating solely through virtual offices or mail forwarding. Your agent selection requires real diligence, not just the cheapest option on a formation website.
• Expanded Safe Harbor for Fixing Mistakes: The state broadened its ratification and waiver provisions for LLCs and LPs, covering void or voidable acts by members, managers, and partners. Missed consents, signature glitches, and defective admissions can now be cured more easily.
• Clearer Path to Correct Filing Errors: Delaware confirmed that a certificate of correction can nullify a mistaken cancellation. If someone files the wrong paperwork at the wrong time, you have a statutory pathway to fix it.
• BOI Reporting Burden Reduced: FinCEN’s March 2025 interim rule removed beneficial ownership reporting requirements for most U.S. companies and U.S. persons. Your Delaware fund stack likely faces less friction than you anticipated.
• LPA and LLC Agreement Updates Recommended: With the new ratification tools available, counsel teams are revisiting governance and consent language in fund documents to align with expanded statutory flexibility.

Cayman Updates

• Private Funds Act (2025 Revision) Sets the Baseline: Cayman consolidated prior amendments effective January 1, 2025. Closed-ended fund formation now ties directly to CIMA life cycle compliance from day one, including registration, audits, and valuation frameworks.
• New Fee Structure Hits AIV-Heavy Sponsors: December 2025 changes set the annual registration fee at CI$4,125, plus CI$525 for each alternative investment vehicle, segregated portfolio, or separate account. Sponsors running multiple AIVs should model these costs early.
• CIMA Requires Notarized Affidavits: CIMA stopped accepting operator letters for registration applications. You’ll need notarized affidavits, which add signing logistics and potential apostille requirements to your launch timeline.
• CRS 2.0 and CARF Reporting Live January 2026: Cayman implemented updated Common Reporting Standard rules and introduced the Crypto-Asset Reporting Framework. Service providers have already adjusted onboarding workflows, and crypto-adjacent strategies face new structuring considerations.
• Beneficial Ownership Compliance Remains Active: A 2025 amendment bill proposes additional disclosure requirements and information-sharing provisions with foreign authorities. Treat beneficial ownership as an ongoing compliance workstream, not a one-time formation task.

Pick Your Domicile, Then Pick Up the Phone

Delaware and Cayman each bring real advantages to the table, and neither works perfectly for every fund. Delaware gives you speed, familiar governance, and lower setup costs, but you’ll carry U.S. tax filings and compliance obligations. Cayman delivers tax neutrality and global investor appeal, but you’ll pay more upfront and answer to CIMA’s regulatory framework. The fundamentals we’ve covered should guide your decision. And if your investor base spans geographies and tax profiles? Hybrid structures like master-feeders or parallel funds let you capture benefits from both jurisdictions. The goal stays the same: Match your entity formation to your fund’s strategy, your LP base, and your operational capacity.

Michael Coglianese CPA, P.C. helps emerging and established fund managers work through these exact decisions every day. Our team audits and advises hedge funds, private equity funds, and real estate funds on entity formation, tax structuring, and ongoing compliance. We know Delaware and Cayman vehicles inside and out, and we’ll help you build a structure that minimizes tax leakage, satisfies regulators, and holds up under audit. No matter if you’re weighing a master-feeder approach, sorting through new CRS rules, or just trying to figure out where to domicile your first fund, we’ve seen it all.

Contact us today to talk through your fund formation strategy and put these fundamentals into action.