Delaware vs. Cayman Islands: Which Entity Should Your Fund Use?

September 08 | News

Delaware vs. Cayman Islands: Which Entity Should Your Fund Use?

Delaware versus Cayman gets decided backward more than any other question in fund formation.

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The call came in October. A manager we’ve audited since his first K-1 season, running $16 million in a tidy Delaware LP, had an endowment circling. Their consultant’s questionnaire had one line doing all the work: offshore vehicle, yes or no. He wanted to know how fast we could stand one up.Two weeks, with decent counsel, is what we told him. That part’s easy. But the part nobody had asked yet was whether the endowment planned to sign anything.Delaware versus Cayman gets decided backward more than any other question in fund formation. The analysis is shorter than the industry pretends: Delaware is a pass-through for U.S. taxable investors, Cayman is a corporate blocker for tax-exempt and non-U.S. ones, and you need the second entity when the second kind of money commits. Everything else is dressing.The dressing is expensive, though. AIMA and Marex just put emerging-manager breakeven at $82.9 million of AUM, up from $70.1 million in 2024. Every entity you carry and don’t use works against that number. So before you build anything, figure out the answers to these five Delaware versus Cayman questions.

1. What Ultimately Decides Delaware vs. Cayman?

Your investors decide it. Not your strategy, not the tax rate of either place, and not whichever domicile your law firm used on its last deal. Honestly, that’s how this call gets made more often than anyone admits.The fork is tax status. U.S. taxable money wants a pass-through and a K-1. An endowment wants UBTI kept off its books. A foreign LP wants no U.S. filing obligation at all.A Cayman exempted company serves the last two with one election. File Form 8832 and it’s a corporation for U.S. tax purposes. Income that would have reached those investors as partnership allocations reaches them as dividends instead.Its cousin, the Cayman exempted limited partnership, blocks nothing. It’s a pass-through too, which is why it turns up as the master fund rather than the shield. Not to mention, these two jurisdictions are the whole market: Cayman holds 56% of emerging-manager flagship domiciles, the U.S. most of the rest.

2. When Is a Delaware LP All You Need?

When nobody in the fund needs the shield. Every dollar U.S. taxable means one entity, $300 a year to Delaware, due June 1, no annual report.That was our October caller’s fund, more or less: 22 taxable LPs, two family offices, no pension money, nothing offshore. A Cayman feeder bolted onto it would have bought him a second audit and a second regulator. No allocator has ever wired money because the org chart had an extra box.Delaware’s real product is the contract law. Section 17-1101 gives maximum effect to freedom of contract, so an LPA can restrict or even eliminate fiduciary duties as long as the implied covenant of good faith survives. Forty years of Chancery opinions tell you how your words will be read. That’s worth more than people price it at.Skip the DExit panic while you’re deciding. SB 21 and this February’s Rutledge decision concern DGCL corporations and their controllers. Your LP lives under a different statute, and nobody’s fleeing it.

3. When Does a Cayman Feeder Earn Its Cost?

The week the tax-exempt or offshore investor signs. That’s what we told our caller. Soft interest doesn’t pay CIMA fees, and CIMA fees went up in January.The annual charge now runs CI$4,125 for a registered fund and CI$3,075 for a master, due by January 15. Audited financials and the Fund Annual Return follow within six months of year-end, so June 30 on a December book. Blow that and you can buy three one-month extensions at $610 each. After that, penalties.Then the detail that surprises U.S. managers every year: the opinion must be signed by a CIMA-approved auditor with a physical presence on the island. Your U.S. firm can run the fieldwork. It can’t sign. A feeder means a second audit relationship on a shared deadline, and the deadline doesn’t care whose fieldwork ran late.

4. Does a Cayman Feeder Work for Real Estate or Private Credit?

No, and this mistake costs more than an idle feeder ever will. FIRPTA doesn’t care where the holder sits. Gain on U.S. real property comes back as effectively connected income under Section 897 regardless, so a Cayman entity over U.S. buildings shields nobody.The blocker that works here is domestic, a U.S. C-corp or a REIT, and the REIT rules have been a moving target. T.D. 9992 made REITs look through any non-public U.S. corporation that’s more than 50% foreign-owned. Last October, Treasury proposed unwinding exactly that, with reliance allowed already. Confirm where it landed before anyone restructures. Proposed regs have a way of staying proposed for years.Private credit trips the same wire from another angle. Originate U.S. loans and the offshore fund itself can end up with ECI. That’s an activity problem, and it shows up in the tax workpapers no matter what the org chart says.

5. What Changed in 2026 for Delaware vs. Cayman?

The basic choice didn’t change in 2026. Your investor base and tax needs still determine whether a Cayman feeder belongs in the structure. What changed is the cost of maintaining that feeder, the rules for marketing it in Europe, and the detail advisers must report.

Cayman Became More Expensive: Government fees increased on January 1. Beginning with the 2026 reporting year, the FAR fee is included in the annual registration fee. That makes billing simpler, but raises the total cost.

European Marketing Requires Another Check: The AIFMD II transposition deadline passed on April 16. Private-placement marketing now requires both the fund and manager to stay off the EU’s AML and tax lists. Cayman remained off the February 17 tax list, but firms raising in Europe should check again after the October update.

Form PF Requires More Detail: The amended Form PF takes effect October 1, with additional reporting on master-feeder and parallel fund structures. Large hedge fund advisers must use it for the quarter ending September 30, so a more complicated structure now creates a more involved filing.

Where That October Call Ended Up

He waited for the record. The endowment’s committee met in January, subscription docs signed in March, and the feeder went up in April with its first CIMA cycle due next June. He’ll have paid for the structure exactly as long as capital has sat in it, which is the entire trick.Compare the managers who nearly redomiciled over Section 899 last spring. That tax got pulled from the bill on June 26, 2025, and never became law. A rule that dies in committee shouldn’t be able to move your fund. If it could have, something upstream was already wrong.What we get hired to untangle is rarely exotic. A structure built for money that never arrived, or one that can’t hold the money that did, surfacing in February with the audit half done. Michael Coglianese CPA, P.C. has audited alternative funds for 35-plus years, PCAOB-registered since 2009, clients on five continents, former regulators on staff. We audit the Delaware entities and the manager, keep GAAP and tax-basis books reconciled, and work the Cayman signing auditor’s calendar so June 30 arrives boring. One partner, priced for a fund your size, not one 10 times it.If that yes-or-no questionnaire just landed on your desk, talk to an expert or schedule a consultation. Bring the investor list. The answer’s usually in it.

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September 08 | News

Delaware vs. Cayman Islands: Which Entity Should Your Fund Use?

Delaware versus Cayman gets decided backward more than any other question in fund formation.

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