Fund Structures Compared: Limited Partnerships, LLCs and Corporations

Private funds are built from a small set of legal entity types. The fund itself is most often a limited partnership, in which investors are limited partners with limited liability and a general partner manages the business. The general partner, the management company and deal-specific vehicles are usually limited liability companies. Corporations appear where a fund needs to block pass-through tax treatment, typically for tax-exempt or non-U.S. investors.

Understanding why each form is used where it is helps managers make cleaner structuring decisions and helps LPs read a structure chart. This guide compares the main options and how they fit together.

The limited partnership#

A limited partnership has at least one general partner and at least one limited partner. In private funds:

• The general partner manages the partnership, makes investment decisions (usually delegated to the management company) and is liable for the partnership's obligations.
• The limited partners contribute capital, share in profits and losses under the partnership agreement and are generally liable only up to their capital commitment, provided they stay within the statutory limits on participating in management.

Why the LP dominates fund formation#

1. Pass-through taxation. In the U.S., a partnership is not taxed at the entity level. Income, gains, losses and deductions flow to the partners, who report them using Schedule K-1. This avoids a second layer of tax and preserves the character of gains, which matters for carried interest.
2. Contractual freedom. Delaware's limited partnership statute gives broad effect to the partnership agreement, so economics, governance, waterfalls and transfer restrictions can be tailored in the LPA.
3. Familiarity. Institutional LPs, administrators, auditors and counsel know the form well, which lowers diligence friction.
4. Clean separation of control and capital. The GP/LP split maps naturally onto a sponsor managing outside capital.

The GP liability problem#

A general partner has unlimited liability for the partnership's debts. No sponsor wants its principals personally exposed, so the GP is formed as an LLC (or occasionally a limited partnership with its own LLC general partner). The individuals own the GP entity, and liability stops at that entity.

The limited liability company#

An LLC combines limited liability for all members with flexible management and, by default for multi-member LLCs, partnership tax treatment. It can be managed by its members or by a designated manager.

LLCs are used throughout fund structures:

LP vs. LLC for the fund itself#

An LLC can serve as the fund vehicle, and some venture and smaller funds use one. Tax treatment is generally the same as a partnership. The main reasons most institutional funds still prefer the LP are convention and familiarity: investors and their counsel expect an LP with a GP, and the body of practice around LPAs is deeper. An LLC fund will typically name a managing member or manager to perform the GP's role.

Series LLCs#

Some jurisdictions, including Delaware, permit series LLCs, in which separate series hold separate assets and liabilities under a single LLC. Some SPV platforms use them to form many deal vehicles efficiently. Their treatment across states and for tax purposes has been less settled than for standalone entities, so they are best used with specific advice.

Corporations and corporate-treated vehicles#

Corporations are taxed at the entity level, which is usually a drawback for a fund but is sometimes exactly the point.

• Blocker corporations sit between certain investors and a fund or investment. U.S. tax-exempt investors use them to avoid unrelated business taxable income (UBTI), and non-U.S. investors use them to avoid effectively connected income (ECI) and the U.S. filing obligations that come with it.
• Offshore feeder funds, often Cayman exempted companies, are treated as corporations for U.S. tax purposes and pool non-U.S. and tax-exempt investors. This structure is especially common in hedge funds; see master-feeder.
• Registered vehicles such as business development companies are typically corporations or statutory trusts that elect regulated investment company status.

Entity classification ("check-the-box")#

U.S. tax rules let many non-corporate entities choose how they are classified. A domestic LLC with two or more members defaults to partnership treatment but can elect to be taxed as a corporation. Many foreign entities can also elect their classification. This flexibility is how a Cayman limited partnership or exempted company can be made to fit a particular tax plan, but the elections have consequences that are hard to reverse and should be made deliberately.

Offshore and non-U.S. forms#

Funds with international investors often use non-U.S. vehicles that mirror the U.S. forms:

The choice depends on where investors are, the tax treaties and regulatory regimes that matter to them, and marketing rules in the jurisdictions where the fund is offered.

Putting it together: a simple fund#

Assume a hypothetical first-time venture manager raising $60M from U.S. individuals, family offices and a few small institutions.

If a foundation later wants to invest and the strategy may generate UBTI, the manager can address it with a blocker or a parallel vehicle when needed, rather than building it in from the start. If the manager plans to raise from non-U.S. investors, it may add an offshore parallel fund or feeder. Our guide to private equity fund structures shows how these layers fit together for larger sponsors.

How to choose#

When deciding on an entity for each role, work through:

1. Liability. Who must be protected, and from what?
2. Tax. Is pass-through treatment desirable for every investor group, or do some need it blocked?
3. Investor expectations. What forms are institutional LPs, their counsel and their administrators used to seeing?
4. Governance flexibility. How much tailoring of economics and control is needed?
5. Jurisdiction. Where are investors located, and where will the fund be marketed?
6. Operating cost. Every entity needs its own books, tax return, often an audit, and ongoing maintenance.

The simplest structure that serves the actual investor base is usually the right answer. Complexity can be added as investors arrive; it is much harder to remove.

How Privatis helps#

Privatis maintains a double-entry general ledger for every entity in a structure, including the fund, GP, management company and SPVs, with period close for each. Capital calls, distributions, management fees and waterfall calculations run against the right entity, K-1s and capital account statements are delivered through the LP portal, and every change is recorded in the audit trail.

Entity selection has legal and tax consequences specific to your situation, so confirm structuring decisions with fund counsel and tax advisers.