What Corporate Structure is Best for an Investment Fund? (2024)

FAQs

What Corporate Structure is Best for an Investment Fund? ›

Private investment funds technically are not structured as corporations, but rather as limited partnerships (LPs) or limited liability companies (LLCs).

C Corporations

This business structure provides the best protection against liabilities. There are also no limits to the size of investments or number of investors, which attracts equity investors more.

The most common investment structures are OEICs (Open Ended Investment Companies), Unit Trusts, CIFs (Common Investment Funds) and Investment Trusts. As well as thinking about which investment structures are best for your organisation, you'll need to select a specific type of fund, such as: Single-asset funds.

Investors prefer C corporations over S corporations and LLCs because shares in a C corp are freely transferable. By design, C corps have a well-established, standard framework for the issuance and distribution of equity (stock and stock options).

An investment company can be a corporation, partnership, business trust or limited liability company (LLC) that pools money from investors on a collective basis. The money pooled is invested, and the investors share any profits and losses incurred by the company according to each investor's interest in the company.

Private investment funds technically are not structured as corporations, but rather as limited partnerships (LPs) or limited liability companies (LLCs). (In a few states — Delaware and Florida among them — the fund can also register as a limited liability limited partnership (LLLP).)

S corporations may have preferable self-employment taxes compared to the LLC because the owner can be treated as an employee and paid a reasonable salary. FICA taxes are withheld and paid on that amount.

A typical fund management team includes three core roles: senior deal team leader, associate, and analyst. These roles can be expanded or collapsed as needed; for example, a fund may have multiple analysts or associates depending on its size and need.

VC firms are structured as limited partnerships, with two main categories of partners: general partners (GPs) and limited partners (LPs). The GPs are the partners who manage the fund and make the investment decisions, while the LPs are the investors who provide the capital for the fund.

Venture capitalists can't invest in LLCs because of stockholder rules. Some investors, such as venture capital funds, can't invest in pass-through companies such as LLCs, because the VC fund has tax-exempt partners that can't receive active trade or business income due to their tax-exempt status.

Which corporation is most attractive to investors? ›

That generally means that a business entity that provides a liability shield is preferable. C corporations often catch the eye of investors due to their ability to issue different classes of stock and their established structure, including a board of directors.

The management flexibility, tax benefits and protection of personal assets offered by LLCs make it a great vehicle for investment opportunities. Since there can be more than one member, it's often the business entity of choice when multiple people are looking to invest in something as a group.

An investment fund may be held by the public, such as a mutual fund, exchange-traded fund, special-purpose acquisition company or closed-end fund, or it may be sold only in a private placement, such as a hedge fund or private equity fund.

These funds are generally formed as either a Limited Partnership (“LP”) or Limited Liability Company (“LLC”). The advantages of these structures for a private equity fund are as follows: 1) Perhaps the biggest advantage for investors is that they are exposed to limited liability.

While venture funds are usually formed as a limited partnership, venture capital firms are commonly organized as limited liability companies (LLC). An LLC is another type of legal entity that has members, rather than partners. Members can be individuals or legal entities.

The private limited legal structure is most commonly used for the incorporation of a company. It is preferred because this structure keeps the liability of the members limited to their share in the capital.

When deciding between a single-member LLC and a sole-proprietorship, focus on the needs of your business. As an entrepreneur testing the waters, a sole proprietorship may be an easy and cost-effective option, while a fast-growing business that needs funding would be better suited to an LLC.

If you plan to raise a large amount of capital through fundraising or an IPO, a C Corp may be a better option for your startup. C Corps can issue different classes of stock with different voting rights, allowing you to retain control of your company while still raising funds from outside investors.