If you are launching a venture capital fund in the United States, the first structural question you will face is where to form it. And in almost every case, the answer is Delaware. Over 70% of entrepreneurs choose Delaware for business formation [1], and the percentage is even higher among venture capital limited partnerships. I have worked with dozens of emerging GPs on their first and second funds, and I can count on one hand the number that seriously considered forming anywhere else.
That is not inertia. Delaware earned its position through a legal framework that gives fund managers real operational advantages: predictable case law, maximum contractual flexibility, pass-through tax treatment, and a formation process that takes days rather than months. If you are a first-time manager trying to get from formation to first close quickly, those advantages matter.
The formation process
Forming a Delaware Limited Partnership is straightforward. You file a Certificate of Limited Partnership with the Delaware Division of Corporations, designate a registered agent with a physical address in the state, and pay formation fees of $200 for the LP plus $50 for a certified copy [1][32]. For an LLC, the numbers are $90 plus $50 [32]. Directors, managers, and shareholders do not need to be Delaware residents, so a GP team based in San Francisco, New York, or London can form and operate a Delaware fund without relocating anyone or anything.
The whole process can be done online through the Division of Corporations, and expedited filings come back within 24 hours. Compare that to certain European jurisdictions where fund formation can involve months of regulatory back-and-forth before you even have a legal entity. If you are racing to close your fund on a timeline that aligns with LP commitments, speed of formation matters more than people realize.
Why Limited Partnership, not LLC
Both Delaware LPs and LLCs are pass-through entities for federal tax purposes, and both offer limited liability to investors. But the LP structure has become the industry standard for venture funds for a reason.
The LP structure creates a clean separation between the General Partner (who manages the fund and has unlimited liability) and the Limited Partners (who invest capital and have liability limited to their commitment). This two-tier structure maps directly to how venture funds actually operate: the GP makes investment decisions and earns carried interest, while LPs provide capital and receive distributions. The Limited Partnership Agreement governs everything.
LLCs can accomplish similar things, but institutional LPs expect the LP structure. When a pension fund or fund-of-funds evaluates your vehicle, they want to see a familiar architecture. Using an LLC for a venture fund is not wrong, but it creates questions you do not need to answer during fundraising.
Pass-through tax treatment
This is the main economic reason to use a Delaware LP. Unlike a C-corporation, which faces double taxation at both the entity and shareholder levels, a Limited Partnership is a pass-through entity for federal tax purposes. The fund itself pays no income tax. Instead, gains, losses, and other tax items flow directly to investors based on their partnership interests [1][21].
For venture capital, this is a big deal. When a portfolio company exits and the fund distributes proceeds, LPs receive favorable long-term capital gains treatment on those distributions. The tax obligation sits with each LP individually, based on their allocable share of fund income. There is no entity-level tax eating into returns before distributions reach investors.
The pass-through structure also means that losses flow through to LPs. In a venture fund's early years, before exits start generating gains, the fund may be generating net losses (from management fees and write-downs). Those losses pass through to LPs who may be able to use them against other income, depending on their individual tax situations.
Foreign LPs and tax treatment
For managers raising from non-US investors, Delaware's pass-through structure has a further benefit. Capital gains from the sale of US securities are generally not subject to US federal income tax when realized by foreign investors, unless the fund is engaged in a US trade or business [1]. This is a big part of why Delaware has become the default for international fund formation.
That said, there are withholding obligations that managers must understand. IRC Section 1446 imposes withholding taxes on certain allocations of effectively connected income to foreign partners, and Section 1446(f) requires withholding on transfers of partnership interests by foreign persons [40]. I will cover these in detail in a separate article on Delaware tax considerations for foreign investors. The point here is that while the baseline treatment is favorable, the mechanics require proper tax structuring from the start.
Annual obligations
Delaware's ongoing compliance requirements are modest but non-negotiable. Every LP and LLC formed in Delaware must pay an annual tax of $300 by June 1st each year, regardless of whether the fund is actively deploying capital [32]. Miss the deadline and you face a $200 penalty plus 1.5% monthly interest on the unpaid balance. You also need to file an Annual Report with the Division of Corporations, which can be done online quickly.
These are small numbers relative to the fund's operating budget, but I have seen first-time managers forget about them in the chaos of launching a fund. Put them on the calendar and treat them as non-negotiable. A lapsed Delaware entity creates problems that are far more expensive to fix than the $300 annual tax.
The freedom of contract principle
Delaware's real advantage over other states is not just formation speed or tax treatment. It is the legal framework itself. The Delaware Revised Uniform Limited Partnership Act (DRULPA), codified in Delaware Code Title 6, Chapter 17 [9], provides default governance rules but explicitly allows partners to override almost all of them through the Limited Partnership Agreement.
The Court of Chancery has consistently emphasized that the LPA is the governing document, and that statutory provisions operate primarily as defaults that apply only when the agreement is silent [9]. This "freedom of contract" principle means you can design a partnership structure that fits your specific investment strategy, fee arrangements, and governance preferences without being boxed in by inflexible statutory requirements.
For emerging managers, this flexibility shows up in practical ways: you can structure your carried interest waterfall however you and your LPs agree, set your own rules for GP removal and replacement, define your own conflict-of-interest procedures, and customize almost every aspect of the fund's operations. The statute gives you a starting point; the LPA gives you control.
Why not another state?
Other states offer their own formation options. Wyoming, Nevada, and South Dakota have all tried to attract fund formations with low fees and favorable laws. But Delaware's advantage is not just about the statute on paper. It is about 200 years of case law from the Court of Chancery, a specialized business court with judges who understand partnership law deeply. When a dispute arises between a GP and an LP, there is almost always relevant Delaware precedent. That predictability matters to investors and their counsel.
Institutional LPs and their lawyers know Delaware law. They know what the standard provisions mean, how courts interpret them, and what risks they are taking. Forming in a less common jurisdiction means your LPs' lawyers need to spend time getting comfortable with a different legal framework, which adds friction to your fundraise.
How we handle Delaware formations at Infra One
We form Delaware LPs and LLCs for our fund manager clients as part of our end-to-end fund administration service. That includes entity formation, registered agent setup, EIN applications, and coordination with fund counsel on the LPA and PPM. We also handle the ongoing compliance: annual tax payments, report filings, and maintaining the entity in good standing with the Division of Corporations.
For first-time managers, we pair the Delaware formation with our full fund launch workflow, covering everything from investor onboarding and KYC/AML through capital calls and distributions. If you are planning a US fund and want to talk through the structure, get in touch.
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