How to Structure a Private Fund: Legal Framework, Entity Selection, and Practical Considerations
Launching a private fund requires more than a good investment thesis. The legal structure you build around the fund will define your economics, your tax position, your regulatory exposure, and how investors interact with the vehicle for the entire life of the fund.
This article covers the core structural decisions fund managers face at formation. We walk through entity selection, the documents you need, the regulatory exemptions that apply, and the practical trade-offs behind each choice.
Topics covered:
• Choosing Your Legal Entity: LP, LLC, or Corporation
• Building the Entity Stack: Fund, GP, and Management Company
• Core Fund Documents and What Each One Does
• Securities Law Exemptions: 3(c)(1) vs. 3(c)(7)
• Regulation D: Structuring the Private Placement
• State Registration and Blue Sky Compliance
• Tax Structuring Considerations
• Conclusion
1. Choosing Your Legal Entity: LP, LLC, or Corporation
The default structure for a U.S. private fund is a Delaware limited partnership. The reasons are straightforward. A limited partnership cleanly separates the general partner, who manages the fund and takes on unlimited liability, from the limited partners, who contribute capital and whose downside is capped at the amount they commit. The structure also gives you pass-through tax treatment, which is what most investors expect and what most fund strategies require.
Limited liability companies work well in certain situations, especially funds with a smaller number of investors or where two or more principals share management responsibility. An LLC gives you more flexibility in governance than a limited partnership and can still be taxed as a partnership if properly structured.
Corporations are rarely the right vehicle for a pooled investment fund. Double taxation is a real problem for most fund economics. That said, you do see corporate structures in specific contexts, such as where QSBS benefits are a meaningful part of the pitch or where the fund will have a large number of passive investors who want formal board-level governance.
Start with a Delaware limited partnership unless you have a clear reason to go a different direction. Most institutional LPs and sophisticated individual investors expect it, and it is the structure that fund counsel, administrators, and auditors know best.
2. Building the Entity Stack: Fund, GP, and Management Company
A private fund is never just one entity. At minimum, you are forming the fund itself, a general partner entity, and usually a separate management company. Each one serves a different function:
• The fund is the limited partnership (or LLC) that holds investor capital and makes investments.
• The general partner controls the fund, makes investment decisions, and owes fiduciary duties to the limited partners. For liability insulation, the GP should be a limited liability entity, usually a Delaware LLC.
• The management company employs the investment team, enters into the investment management agreement with the fund, and earns the management fee. This is also typically a Delaware LLC.
Why not just collapse the GP and the management company into one entity? Liability isolation. If the fund faces claims, the GP is directly exposed. You do not want your management fee stream, your employees, and your other business operations housed inside the same entity that carries that GP-level exposure. Keeping these entities separate also makes it easier to bring in new partners, restructure economics, or expand the platform across multiple funds.
3. Core Fund Documents and What Each One Does
Fund formation produces a specific set of legal documents. Each one serves a different audience and a different purpose:
• Limited Partnership Agreement (LPA). This is the governing document of the fund. It covers capital commitments, capital calls, distributions, the waterfall, management fees, carried interest, GP removal rights, key person provisions, and every other material economic and governance term. If you negotiate one document carefully, it should be this one.
• Private Placement Memorandum (PPM). This is the main disclosure document you share with prospective investors. The PPM describes the fund’s strategy, team, terms, and risk factors. It is not a pitch deck. It is a legal document designed to satisfy your disclosure obligations under federal and state securities law.
• Subscription Agreement. Each investor signs this to make a capital commitment. The subscription agreement also contains representations about the investor’s accredited investor or qualified purchaser status and confirms the investor has received and reviewed the PPM.
• Investor Questionnaire. This collects regulatory compliance information: suitability, ERISA status, OFAC and AML diligence, and tax reporting details.
• Investment Management Agreement (IMA). This formalizes the relationship between the fund and the management company, covering advisory scope, fee terms, and termination provisions.
Side letters are worth a separate mention. Institutional LPs routinely request bespoke terms like most favored nation clauses, co-investment rights, fee discounts, or enhanced reporting. These are documented in side letters negotiated between the fund and the specific investor. Be careful here. The terms you grant one LP may need to be extended to others under MFN provisions in the LPA.
4. Securities Law Exemptions: 3(c)(1) vs. 3(c)(7)
Private funds are not registered as investment companies under the Investment Company Act of 1940. To stay outside that registration requirement, funds rely on one of two exclusions:
• Section 3(c)(1) limits the fund to no more than 100 beneficial owners. There is no specific investor qualification requirement beyond accredited investor status, which Regulation D effectively requires anyway.
• Section 3(c)(7) has no cap on the number of investors, but every investor must be a "qualified purchaser." That is a higher bar. Generally $5 million in investments for individuals and $25 million for entities.
First-time managers usually go with 3(c)(1) because their LP base is smaller and includes people who may not meet the qualified purchaser threshold. Larger, more institutional funds tend to use 3(c)(7) to avoid the 100-investor limit.
If your investor base is mixed, you can structure parallel funds. One 3(c)(1) vehicle and one 3(c)(7) vehicle that invest side by side. This adds cost and administrative overhead, but it solves the access problem for a broader range of LPs.
5. Regulation D: Structuring the Private Placement
Fund interests are securities. Because you are not registering those securities with the SEC, you need an exemption from registration under the Securities Act of 1933. The standard path is Regulation D.
Most funds rely on Rule 506(b), which lets the fund raise unlimited capital from unlimited accredited investors, as long as there is no general solicitation. This is the default for the vast majority of private fund offerings.
Rule 506(c) permits general solicitation, meaning the fund can publicly market its offering, but the fund must take "reasonable steps" to verify that every investor is accredited. Verification is more than a check-the-box exercise. Acceptable methods include reviewing tax returns, getting written confirmation from a registered broker-dealer or CPA, or reviewing bank and brokerage statements.
The choice between 506(b) and 506(c) matters. Most emerging managers default to 506(b) because it is simpler, avoids the verification burden, and does not require the fund to advertise. If your plan involves marketing broadly or using digital channels to raise capital, 506(c) may be the right path, but budget for the additional compliance work that comes with it.
6. State Registration and Blue Sky Compliance
Federal Regulation D preempts most state registration requirements for fund offerings, but it does not eliminate state notice filing obligations. Most states require the fund to file a Form D and pay a filing fee after each closing, and some impose ongoing renewal requirements.
Managers overlook these filings more often than they should, particularly first-time managers. That is a mistake. Failing to make required state filings can result in penalties and, in extreme cases, can create rescission rights for investors. Work with fund counsel to identify which states require filings based on where your investors are located.
7. Tax Structuring Considerations
Tax is where fund structure decisions hit hardest in terms of real dollars. A few points that matter for every fund manager:
• Pass-through treatment. A limited partnership (or LLC taxed as a partnership) does not pay entity-level federal income tax. Income, gains, losses, and deductions flow through to the partners on Schedule K-1s. This is the treatment most investors expect and what makes the partnership form preferred.
• Carried interest. The manager’s promote is generally taxed at long-term capital gains rates if the underlying investments are held for more than three years under the current holding period rule. This treatment is central to fund manager economics and needs to be coordinated with the fund’s waterfall and distribution mechanics from the beginning.
• UBTI and tax-exempt investors. Tax-exempt LPs, including endowments, foundations, and pension funds, are sensitive to unrelated business taxable income. Funds that use leverage at the fund level or invest in operating businesses can generate UBTI, which creates tax liability for otherwise exempt investors. Managers raising money from these investors should structure investments to minimize UBTI exposure, often through blocker entities.
• Foreign investors. Non-U.S. investors may face withholding tax on certain income types and may run into "effectively connected income" issues. Many funds create parallel offshore vehicles or use blocker corporations to address these concerns.
Tax structuring is not something to sort out after your first close. It should be built into the fund design from the start.
Conclusion
Fund formation is the foundation of everything that follows. Your ability to raise capital, deploy it efficiently, and deliver returns to investors depends on getting the legal structure right at the beginning.
The decisions you make at formation, from entity selection to the terms in your LPA to the exemption you rely on, will follow you for the full life of the fund. Getting them right upfront is cheaper and less disruptive than trying to fix them later.
For advice on structuring your fund, or to discuss how your specific strategy should inform your fund formation, contact us. Learn more about our Fund Formation practice here.
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