# Delaware LP for Funds: GP/LP, Carry, and Blocker Structures > Fund structured as Delaware limited partnership: GP and LP roles, pass-through taxation and Schedule K-1, carried interest and §1061 rule, blocker corporations for foreign and tax-exempt investors. Author: Мария Плотникова — юрист, Family Office (https://wiki.private.law/authors/plotnikova) Last modified: 2026-07-21T09:26:00.000Z Canonical: https://wiki.private.law/en/delaware-lp-fund Topics: structures Jurisdictions: usa Semantic tags: fund-vehicle --- ## How This Form Emerged Delaware became the jurisdiction of choice for American funds for good reason. The local partnership law—Delaware Revised Uniform Limited Partnership Act, DRULPA ([Title 6, Chapter 17 of the State Code](https://delcode.delaware.gov/title6/c017/index.html))—is built around the principle of freedom of contract: the state explicitly declares that it gives "maximum effect" to the agreements of partners and their enforceability. Fiduciary duties of the GP to investors can be expanded, limited, or even eliminated by the terms of the LPA; the only non-waivable obligation that remains is the implied covenant of good faith and fair dealing. The second pillar is the Court of Chancery, a specialized court for corporate disputes without juries, with precedent-setting case law spanning decades. A fund manager, an investor from Boston, and a pension fund from California know in advance how a Delaware court will interpret a disputed LPA provision. This predictability has made the limited partnership the industry standard for private equity, venture, and hedge funds; competing forms like [Series LLC](https://wiki.private.law/en/series-llc) and offshore structures address specific use cases, but the industry framework remains Delaware-based. > 💡 Why partnership and not corporation: a corporation's profit is taxed twice—corporate tax at the company level and dividend tax at the shareholder level. A partnership is tax-transparent and passes income directly to investors, and for a pooled vehicle that holds stakes in portfolio companies and then distributes profits, this is a key advantage. ## Concept A Delaware limited partnership is the standard form for American private equity and venture capital funds: the majority of such funds are domiciled in Delaware. The structure relies on the state's flexible contract law, a specialized court (Court of Chancery), and pass-through taxation. Legally, a partnership is a separate entity: it owns assets, enters into contracts, and appears in court in its own name, while each LP's liability is limited to their contributed capital. Only the GP bears unlimited liability, which is why the GP role is almost always filled by a separate LLC rather than an individual. The fund itself is a closed-end structure with a fixed term (typically 10 years plus two years of extension): investors sign commitments, and capital is called in tranches as deals are made, through [capital calls](https://wiki.private.law/en/capital-calls). ## GP, LP, and LPA An LP fund consists of a general partner (GP) and limited partners (LPs). The GP manages the fund and bears unlimited liability for its obligations, so the GP itself is usually structured as an LLC to limit the risk to its principals. LPs are the investors: their liability is limited to their committed capital, and they do not interfere in management. All relationships are governed by the limited partnership agreement (LPA)—the fund's primary document. Delaware operates under DRULPA and gives parties broad freedom of contract. The LPA is the fund's constitution, and DRULPA's freedom of contract is most evident in it. A typical set of provisions includes: a key-man clause that suspends the investment period if key partners leave; the right of LPs to remove the GP "for cause" or even without cause by a qualified majority; clawback—the return of excess carried interest at the end of the fund's life; an advisory committee of major LPs (LPAC) to approve conflicted transactions; as well as side letters and most-favoured-nation provisions for anchor investors. ## Pass-Through Taxation The partnership itself does not pay tax at the fund level. Income, gains, and losses are allocated to partners and reported on their tax returns via Schedule K-1; the character of income is preserved—capital gains remain capital gains. This eliminates double taxation, and investors account for the fund's results directly. The fund's transparency is convenient for U.S. investors but creates complications for two categories. A foreign investor through a transparent LP may receive effectively connected income (ECI)—income "connected" with a U.S. business, along with the obligation to file a U.S. tax return and be subject to withholding under §1446; transactions involving U.S. real estate add FIRPTA. Tax-exempt U.S. pension and endowment funds risk receiving unrelated business taxable income (UBTI), especially when the fund uses debt financing. Each investor receives a Schedule K-1 breaking down their share of income—and it is precisely these two inconveniences that give rise to blocker structures. ## Economics: Fee, Carry, Hurdle Typical economics include a management fee of around 2% of commitments and carried interest of around 20% of profits to the GP, often with a hurdle rate of around 8% for investors. Carry is taxed as capital gains, but §1061 of the U.S. Tax Code requires holding the asset for at least three years; otherwise, carry is recharacterized as ordinary income at a higher rate. > ⚙️ Carried interest is the manager's share of the fund's profits. The preferential capital gains rate for carry is available when assets are held for three years or more. Carry is almost never calculated from the first dollar of profit. First, LPs recover their invested capital and preferred return (hurdle, typically around 8% annually), then the GP receives a catch-up, and only above that is profit split in a ratio of approximately 80/20. There are two waterfall types: European (whole-fund)—carry is paid only after all fund capital is returned, and American (deal-by-deal)—calculated separately for each deal, which is more favorable to the manager. The GP also invests its own money—GP commit is typically 1–2% of the fund size, so the manager has real skin in the game alongside investors. > ⚙️ Since 2018, carry in the U.S. has been subject to [§1061](https://www.irs.gov/businesses/partnerships/section-1061-reporting-guidance-faqs) rules (introduced by the Tax Cuts and Jobs Act): for the manager's share to be treated as long-term capital gain, the underlying asset must be held for more than three years; otherwise, the profit is recharacterized as short-term and taxed at the ordinary rate. This has noticeably lengthened the typical holding horizon for assets in funds. ## Blocker Structures Direct participation in an LP is inconvenient for two categories of investors. Foreign investors entering directly risk receiving "effectively connected income" (ECI) and the obligation to file a U.S. tax return; U.S. tax-exempt organizations—pension funds, endowments—face UBTI. To avoid this, they invest through a blocker—a corporation that intercepts pass-through income, pays the 21% federal corporate tax, and distributes a dividend to the investor. For real estate investments, FIRPTA is an additional consideration. The mechanics are simple: a corporate intermediary—a blocker, essentially a separate [SPV](https://wiki.private.law/en/spv)—is placed between the investor and the fund. It absorbs ECI or UBTI at its level, pays the 21% U.S. corporate tax, and passes a cleaned-up dividend or capital gain to the investor, without requiring them to file a U.S. return. For foreign investors, the blocker is often offshore (e.g., in the Caymans); for tax-exempt investors, it's a U.S. C-corp, and it's integrated into the overall [holding structure](https://wiki.private.law/en/holding-structures). The price of convenience is that 21% on top, so blockers are used where the savings on reporting and tax filings outweigh the cost of corporate tax. ## Application > 🔗 **Related** > [Series LLC](https://wiki.private.law/en/series-llc) · [US LLC for Non-Residents](https://wiki.private.law/en/us-llc-non-resident) · [Funds](https://wiki.private.law/en/funds) · [Cayman Fund](https://wiki.private.law/en/cayman-fund) · [Holding Structures](https://wiki.private.law/en/holding-structures) To raise capital from non-U.S. investors, a Delaware LP master fund is often complemented by an offshore feeder (e.g., Cayman), forming a master-feeder structure. When multiple portfolios need to be isolated within a single U.S. wrapper, a Series LLC is considered. ## Regulation The fund itself does not register securities—it relies on exemptions. Interests are placed through private placements under Regulation D (Rules 506(b) and 506(c)), and the investor base is limited to accredited investors and qualified purchasers. The manager is regulated by the SEC under the Investment Advisers Act of 1940: large managers register and file Form ADV; smaller ones qualify as exempt reporting advisers. In parallel, AML procedures and automatic exchange—FATCA and [CRS](https://wiki.private.law/en/crs-overview)—apply, along with disclosure of [beneficial owners](https://wiki.private.law/en/beneficial-ownership-nominee). The regulatory framework remains fluid. In August 2023, the SEC adopted sweeping [Private Fund Adviser Rules](https://www.sec.gov/announcement-regarding-private-fund-advisers-rules)—mandatory quarterly fee reports, annual fund audits, restrictions on preferential treatment for individual investors. But on June 5, 2024, the Fifth Circuit Court of Appeals vacated them entirely, ruling that the SEC exceeded its authority under the Investment Advisers Act. The practical outcome for the industry: there is no mandatory federal disclosure standard yet, and fund transparency still rests on ILPA industry standards and the bargaining power of large LPs. > ⚙️ For a Russian beneficial owner, a Delaware LP is a foreign structure: if controlled, it may fall under CFC rules, and the fund's account and distributions received must be reported in foreign asset disclosures. Specific thresholds and obligations depend on tax residency and require separate review. ## Where the Structure Is Heading The basic LP framework has not changed in decades, but the superstructure above it is evolving rapidly. Most notable in recent years: continuation funds and GP-led secondaries, where the manager repackages assets into a new fund to extend the holding period; NAV financing against the entire portfolio; "retailization"—evergreen and semi-liquid structures opening access to high-net-worth individual investors alongside institutions. Tax and regulatory pressure is pushing in the same direction: the three-year holding requirement under §1061, increased economic substance requirements for offshore feeders and blockers, expansion of automatic data exchange. For a Russian client, a Delaware LP remains a working tool for accessing U.S. and global funds, but requires careful coordination with CFC rules, currency regulation, and banking compliance. > 💡 The real economics of investing in a Delaware LP are determined by specific LPA provisions—waterfall, hurdle, clawback, GP removal rights, and blocker terms. These are worth reviewing before signing a commitment: the investor will end up with exactly what is written in those provisions, regardless of the fund's stated strategy. > 🍓 The Delaware LP remains the backbone of the private investment industry: freedom of contract, pass-through taxation, and a predictable court. Tax nuances are defined by carried interest with the three-year rule and blocker structures for foreign and tax-exempt investors. This material is for expert informational purposes only and does not constitute individual tax or legal advice. --- ## Sources - [Title 6, Chapter 17 of the State Code](https://delcode.delaware.gov/title6/c017/index.html) - [§1061](https://www.irs.gov/businesses/partnerships/section-1061-reporting-guidance-faqs) - [Private Fund Adviser Rules](https://www.sec.gov/announcement-regarding-private-fund-advisers-rules) --- ## Factual claims - Delaware became the jurisdiction of choice for American funds for good reason. - The second pillar is the Court of Chancery, a specialized court for corporate disputes without juries, with precedent-setting case law spanning decades. - A Delaware limited partnership is the standard form for American private equity and venture capital funds: the majority of such funds are domiciled in Delaware. - Typical economics include a management fee of around 2% of commitments and carried interest of around 20% of profits to the GP, often with a hurdle rate of around 8% for investors. - Tax and regulatory pressure is pushing in the same direction: the three-year holding requirement under §1061, increased economic substance requirements for offshore feeders and blockers, expansion of automatic data exchange.