A private fund is not one entity. At minimum, you need the fund itself and a general partner. Most managers add a third entity: the management company. Getting this structure wrong creates liability exposure, tax inefficiency, and problems when you try to raise your next fund. The cost of setting up the right structure from the start is a fraction of the cost of restructuring later.
The Fund Entity
The fund entity is the investment vehicle itself. It holds the portfolio investments, receives capital contributions from investors, and makes distributions. Every dollar in and every dollar out flows through this entity.
Most funds are formed as a Delaware Limited Partnership. The fund entity is governed by the Limited Partnership Agreement (LPA), which defines the economic terms (management fee, carried interest, hurdle rate), governance rights, reporting obligations, and the process for winding down the fund at the end of its term.
The fund entity does not employ anyone. It does not have offices, staff, or operating expenses beyond fund-level costs like audit fees, legal fees, and organizational expenses. It exists solely as the container for investor capital and portfolio assets.
A typical $50 million fund will have organizational expenses of $150,000 to $350,000, covering legal, accounting, and formation costs. These are usually charged to the fund entity and amortized or capped per the LPA terms.
The General Partner
The general partner (GP) manages the fund. It makes investment decisions, executes transactions, calls capital from LPs, determines distributions, and owes fiduciary duties to the limited partners. The GP is the entity with authority. It signs on behalf of the fund, votes the fund's shares in portfolio companies, and bears responsibility for compliance with the fund's governing documents.
The GP is almost always a separate Delaware LLC. This is not optional. Under the Delaware Revised Uniform Limited Partnership Act, the general partner of an LP has unlimited personal liability for the partnership's obligations. If you serve as GP in your individual capacity, your personal assets are exposed to every claim against the fund. A single-member LLC costs $90 to form and $300 per year to maintain in Delaware. That is the cheapest liability protection you will ever buy.
The GP entity typically has no employees and minimal assets. Its sole purpose is to serve as the general partner of the fund (and potentially future funds). The GP receives carried interest, which is the performance-based compensation (usually 20% of profits above a hurdle rate) defined in the LPA. This flows through the GP entity to the fund manager and any carry participants.
The Management Company
The management company is the operating business that runs the fund. It employs the investment professionals, analysts, operations staff, and back-office personnel. It leases office space, purchases technology, and enters into service contracts. It receives the management fee (typically 1.5% to 2.0% of committed or invested capital) as compensation for providing investment management services to the fund.
The management company exists for three reasons. First, liability insulation: employment claims, lease disputes, and vendor lawsuits hit the management company, not the fund or its investors' capital. Second, fee collection: the management fee flows to the management company, which uses it to cover operating expenses and pay salaries. Third, multi-fund scalability: when you launch Fund II, the same management company can provide services to both funds under separate Investment Management Agreements.
The management company is typically formed as a Delaware LLC or an LLC in the state where the manager operates. It is connected to the fund through an Investment Management Agreement (IMA), which defines the scope of services, fee structure, and termination provisions.
How the Three Entities Interact
Money Flows
Investors contribute capital to the fund entity in response to capital calls issued by the GP. The fund pays the management fee to the management company per the IMA. When the fund realizes investment gains, distributions flow from the fund to all partners, including the GP's carried interest allocation. The GP entity distributes carry to the fund manager and carry participants per the GP's own operating agreement.
Contractual Relationships
Three documents define the relationships between these entities. The LPA governs the relationship between the GP and the LPs within the fund. The IMA governs the relationship between the fund and the management company. The management company's operating agreement governs the internal economics of the management company, including how management fees and expenses are allocated among the principals.
Who Signs What
The GP signs on behalf of the fund for investment transactions, capital calls, and distribution notices. The management company signs employment agreements, office leases, and vendor contracts. Confusing these signing authorities is a common mistake that can create unintended liability for the wrong entity. If the fund signs an employment agreement, the fund's assets (meaning investor capital) could be exposed to employment claims.
Do You Always Need All Three Entities?
No. But the situations where you can safely skip the management company are narrow.
You can skip the management company when:
- You are a sole GP with no employees
- You are managing a single fund with no plans for follow-on vehicles
- You have no office lease, no vendor contracts, and no employment relationships tied to the fund business
- Your investors are comfortable with a two-entity structure (confirm this during fundraising)
You need a management company when:
- You have employees (even one analyst or office manager)
- You plan to raise multiple funds over time
- Institutional LPs expect a three-entity structure (most do)
- You want to separate operating liabilities (employment, leases, vendor disputes) from fund assets
- Multiple principals share management fee economics differently than carry economics
A practical example
You and a partner launch a $75 million fund. You split carry 60/40 but split management fee economics 50/50 because both principals contribute equally to operations. Without a management company, you would need to handle these different economic splits entirely within the GP entity, creating complexity. With a management company, carry flows through the GP (60/40) and management fees flow through the management company (50/50), each governed by its own operating agreement.
Common Structural Mistakes
Commingling the GP and management company. Some first-time managers try to use one entity as both the GP and the management company. This defeats the purpose of the three-entity structure. If the GP employs people and signs leases, the GP's unlimited liability exposure now includes employment claims and lease obligations, which flow through to the fund. Keep them separate.
Not forming a separate GP entity. Acting as GP in your personal capacity, or using the management company as GP, exposes either your personal assets or your operating business to the fund's obligations. A GP LLC costs under $500 per year to maintain. Form it.
Missing the Investment Management Agreement. Without an IMA, the relationship between the fund and the management company has no contractual basis. The management fee has no documented justification. The scope of services is undefined. And if there is ever a dispute between the GP and the management company's principals, there is no governing document to resolve it.
Misallocating expenses between entities. Fund expenses (audit, legal, custody) are charged to the fund per the LPA. Operating expenses (salaries, rent, technology) are paid by the management company out of management fees. Charging operating expenses to the fund is an LPA violation that will surface during audit and damage your relationship with investors.
How Capital Company Helps
Capital Company handles fund and SPV formation, from entity setup through bank accounts and registered agents. Schedule a demo to learn more.
This guide is for informational purposes only and does not constitute legal, tax, or investment advice. Fund structuring involves jurisdiction-specific legal and tax considerations. Consult qualified legal and tax advisors before forming any fund entities. Capital Company provides fund administration services and does not provide legal or tax advice.