Venture capital fund structures

Venture capital fund structures

Authors: Rita Astoor, Josephine Koh
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Read time:  5 minutes
Published date:  30 August 2022
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Updated date:  15 April 2024
Thinking of starting your own venture capital fund? Learn the legal vocabulary of VC fund structure, including LPs, GPs, LPAs, and LLCs.

Thinking of starting your own venture capital fund and wondering how VC works? The legal structures of VC funds can make you question your grasp on the English language. There’s a lot of new vocabulary to get familiar with when learning about VC—like LPs, GPs, LPAs, and LLCs. There are venture funds, and venture firms. And by the way, why is everything located in Delaware?

Complicated? Definitely. Impossible? Definitely not. Taking a little time to get familiar with these terms—and the legal structures they describe—will give you insight into how to set up your venture fund.

This video gives an overview of how venture capital funds are structured as part of Carta’s free VC 101 curriculum.

Here’s a glossary of a few terms that describe common legal structures and a rundown of how they work.

Limited partnerships in venture capital

The core component of most venture capital funds is a limited partnership. This is a legal entity used for a wide variety of business purposes in the United States. A limited partnership is made up of at least one general partner (GP) and at least one limited partner (LP) who do business together.

The GPs and LPs of a limited partnership can be individual people or legal entities.

Limited partnership tax benefits

One of the benefits of a limited partnership is that it doesn’t pay taxes. Instead, the partners each pay taxes on proceeds they receive from the business. This is known as pass-through taxation. Other entities, such as corporations, pay taxes twice: once at the corporate level, and again at the individual participant level. This is often referred to as double taxation. 

General partner (GP)

Typically, the general partner of a venture capital fund is a legal entity established and run by people employed by the VC firm. In any limited partnership, the GP manages the partnership. 

As a result, the GP has unlimited liability for the partnership’s business operations. In other words, the GP assumes full responsibility for any business debts or legal liabilities.

Limited partner (LP)

With a venture capital fund, a limited partner is the investor who supplies the capital. These LPs can be individuals or legal entities. Often, LPs are institutional investors, such as pension funds, college endowments, trusts, insurance companies, health care systems, family offices, and sovereign wealth funds. Sometimes, venture capital firms also make investments into outside venture funds as LPs. 

LPs have limited liability in the partnership because they don’t take part in directing its business operations and remain passive investors. When a limited partnership has debts or legal liabilities, the amount that LPs are responsible for is typically limited to their investment stakes in the partnership, and does not extend to their assets outside the partnership. (The GP, on the other hand, would be on the hook for the full amount.) 

GP vs. LP

GP

LP

Role

Manages partnership

Supplies capital

Liability

Unlimited

Limited

The limited partnership agreement (LPA)

A limited partnership agreement (LPA) spells out what GPs and LPs can and can’t do in a limited partnership. 

This agreement includes rules for things like:

  • How someone becomes or is removed as a partner

  • What rights each partner has

  • What the scope of their activities may be

  • How investors make contributions to the partnership

  • How the partnership will distribute investment proceeds

  • How votes will be conducted

Partnership interests

The LPA also specifies partnership interests, which is the amount of the partnership each GP and LP owns. This percentage is usually relative to each partner’s contribution to the partnership. By setting up and signing an LPA, a partnership overrides the default rules that might be applicable by state law with the rules of its own agreement. 

Amended and restated LPA

An existing LPA can be modified by passing an amendment that adds, deletes, or modifies its terms. The partnership is then governed by the amended LPA. Partners can also discard the whole LPA (and any amendments to it) by replacing it with an entirely new agreement known as an amended and restated LPA. As of the date it’s enacted, the entity is then governed only by the amended and restated LPA (which is known as the A&R LPA).  

Limited liability companies (LLCs)

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.

LLCs can consist of just a single member, or have multiple members. The members of an LLC can designate a manager to govern the LLC’s affairs. If they do, the manager doesn’t have to be a member of the LLC. 

The limited liability company (LLC) tax benefits

Like a limited partnership, an LLC provides members with pass-through taxation. But unlike a partnership, it combines pass-through taxation with limited liability protection for all members. 

Limited liability company agreement

The terms governing the LLC and its members are spelled out in an agreement called a limited liability company agreement or limited liability company operating agreement (generally known as the operating agreement). Like an LPA, this agreement governs the LLC in place of any default state rules. Members can change an operating agreement by amending it or by replacing it with an amended and restated operating agreement.

Why Delaware?

Many venture capitalists decide to form their firm and fund entities in Delaware. (Likewise, many companies are incorporated in Delaware.) One reason for this is the robust history of decisions in Delaware state courts about business transactions. Those decisions interpreted Delaware rules and laws governing business transactions with more specificity than exists in other states—which gives businesspeople and lawyers more clarity on how their business decisions might be interpreted in court. Delaware has also streamlined the process for forming entities like limited partnerships and LLCs.  

Setting up your venture fund with Carta

There are many ways to start a venture capital firm and set up a venture fund. You might need to add even more layers of structure to accommodate regulatory rules, different types of investors (like tax-exempt investors), or entities formed in different jurisdictions, among other factors. 

Carta can guide you through designing a fund structure that makes sense for you. The pre-close advisory team helps emerging managers form entities, understand key concepts in their entity documents, obtain tax identification numbers, and open bank accounts. We also help you prepare the management company, GP, and fund agreements.

By making sure your legal fund structure is set up to facilitate your investment goals, you can set your venture capital fund up for long-term success. 

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Rita Astoor
Author: Rita Astoor
Rita Astoor is the Director of Carta’s Venture Capital & Private Equity Business Development team. She also teaches a course on Venture Funds at UC Berkeley School of Law. Prior to joining Carta, Rita was a practicing investment fund attorney.
Josephine Koh is the Director of Investor Services for Asia Pacific & Middle East at Carta, and has over 17 years of experience in the asset management industry. She was an integral member of the international expansion team when Carta launched its first international office, building the fund administration book of business. Prior to joining Carta, she was the Co-Founder and COO at Insignia Venture Partners.
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