Entity types and tax considerations

Your entity choice determines who can invest in your deal, what tax treatment they receive, and whether the structure works at all for key investor segments. Get this wrong and you’ll either trigger entity-level tax that destroys economics, create phantom income that alienates investors, or exclude entire categories of capital.

This isn’t a decision to make casually or delegate entirely to counsel. You need to understand the trade-offs before the first call with your lawyer, because the right answer depends on who you’re trying to attract as investors.

The entity selection problem

Every ABF structure needs at least one special purpose entity to hold the collateral. The question is what type of entity and how it’s taxed. The answer drives:

• Investor eligibility — Can tax-exempt investors participate without UBTI issues? Can non-US investors avoid US tax filing?
• Tax treatment — Does the entity pay tax, or does income pass through to investors?
• Regulatory treatment — How do insurance companies and banks classify the investment?
• Operational complexity — Does the structure require K-1s, withholding, or multiple jurisdictions?

You can always form a Delaware LLC and figure out the rest later. But restructuring after you’ve closed a deal is expensive, time-consuming, and sometimes impossible.

Deep-dive topics

This overview introduces the framework. For detailed guidance on specific topics, see:

Entity selection

• US entity types for ABF — Delaware LLCs, statutory trusts, LPs, and corporations: when to use each, formation costs, and governance characteristics

• Tax classifications explained — Grantor trust, owner trust, partnership, and REMIC: requirements, benefits, and limitations of each classification

Structuring for different investors

• Structuring for tax-exempt investors — UBTI mechanics, debt-financed income rules, and blocker structures for pensions, endowments, and foundations

• Structuring for non-US investors — ECI triggers, FIRPTA considerations, portfolio interest exemption, and blocker structures for non-US capital

• Insurance and bank investor considerations — NAIC designations, Schedule D vs. BA, RBC charges, Basel risk weights, CECL, and VIE consolidation

Jurisdiction and compliance

• Offshore structures — When you need offshore, Cayman Islands vehicles, Ireland Section 110, and other jurisdictions

• FATCA and CRS compliance — FATCA classification, GIIN registration, CRS requirements, and documentation

• State tax considerations — Delaware dominance, state withholding, and nexus issues

Entity selection decision framework

Step 1: identify your investor base

Before talking to counsel, know who you’re trying to attract:

Investor Type	Key Constraints	Preferred Structure
US taxable	Minimal	Flexible, prefer simple reporting
US tax-exempt	No UBTI	Debt position or blocker
Non-US	No ECI, minimal withholding	Debt position, offshore, or blocker
Insurance (US)	NAIC treatment	Rated notes, standard structures
Banks	RWA, consolidation	Debt position, no VIE triggers

Step 2: map structure to constraints

Work backward from investor constraints to entity choice:

All taxable US investors:

• Simple Delaware LLC or statutory trust
• Pass-through is fine
• Grantor trust if you want 1099 instead of K-1

Mix including tax-exempts:

• Senior positions structured as debt (no UBTI issue)
• Equity/residual held only by taxable or with blocker
• Consider capitalizing blocker as part of structure

Significant non-US:

• Senior debt with appropriate withholding
• Offshore issuing vehicle if investor base demands it
• Blocker for any equity positions

Insurance company targets:

• Delaware statutory trust (standard form)
• Rated notes preferred
• Plan for NAIC filing from the start

Step 3: confirm no red lines

Before finalizing, verify:

• No investor will receive UBTI from the structure
• No investor will have ECI from the structure (unless they accept it)
• Entity qualification is achievable (grantor trust rules, REMIC tests)
• State tax treatment is understood and acceptable
• FATCA/CRS obligations are identified and manageable

Common patterns by deal type

Warehouse facility:

• Single-purpose Delaware LLC
• Taxed as disregarded entity or partnership
• Investor is capital provider (debt position, no pass-through)

Term ABS:

• Delaware statutory trust
• Grantor trust or owner trust election
• Multiple tranches of rated notes

CLO:

• Cayman exempted company as issuer (for non-US investors)
• Or Delaware LLC with multiple share classes
• Warehouse often in separate US entity

Private placement:

• Depends entirely on investor base
• Flexible, negotiate structure with lead investor

Multi-tier structures

Why multiple entities

Complex deals often need layers:

• Depositor (LLC or trust) to purchase assets from originator
• Issuing trust to issue securities to investors
• Blocker for tax-sensitive investors
• Master trust for repeat issuance

Common multi-tier pattern

Originator
    |
    | (true sale)
    v
Depositor (Delaware LLC, disregarded)
    |
    | (contribution/sale)
    v
Issuing Trust (Delaware Statutory Trust)
    |
    | (notes)
    v
Investors

Why the depositor layer:

• Isolates originator from issuing entity
• Provides additional bankruptcy remoteness
• Allows originator to retain residual at depositor level
• Standardizes multiple issuances through same depositor

When simple is better

Not every deal needs multiple layers. Single-entity structures work when:

• Investor base is homogeneous
• No tax-sensitive investors need special treatment
• Deal is one-off, not repeat issuance program
• Simplicity reduces costs meaningfully

Rule of thumb: Don’t add entities unless they solve a specific problem. Each layer adds $10,000-$25,000 in formation and ongoing costs.

Practitioner checklist

Before engaging counsel on entity selection:

Investor analysis:

• Identify target investor types (taxable, tax-exempt, non-US, insurance, bank)
• Determine approximate allocation by investor type
• Understand investor-specific constraints (UBTI tolerance, K-1 acceptance, etc.)
• Identify any investors with veto on structure decisions

Tax classification:

• Determine preferred tax treatment for issuing vehicle
• Confirm grantor trust or REMIC qualification is achievable (if desired)
• Identify whether blocker is needed and at what level
• Understand state tax implications for target states

Jurisdiction:

• Confirm domestic (Delaware) vs. offshore requirement
• If offshore, determine jurisdiction (Cayman vs. Ireland vs. other)
• Understand ongoing compliance costs by jurisdiction

FATCA/CRS:

• Classify entities under FATCA
• Identify GIIN registration requirements
• Build documentation requirements into subscription process

Cost estimates:

• Get formation cost quotes from counsel
• Understand annual maintenance costs
• Factor in tax leakage from any blocker structures
• Compare total cost across structure alternatives

Documentation:

• Confirm entity structure in term sheet before document drafting
• Ensure tax opinions will be available at closing
• Build entity maintenance into ongoing deal administration