Pass-through taxation, K-1 preparation, carried interest treatment, UBTI considerations, and the state and federal tax obligations that follow your fund.
K-1 delivery is the most visible operational obligation your LPs experience. Late or inaccurate K-1s force extensions, delay LP reporting, and generate complaints that follow you into your next fundraise.
Carried interest gains qualify for long-term capital gains treatment only if the fund holds the underlying investment for more than three years. Shorter holds are taxed at ordinary income rates under Section 1061.
Tax-exempt investors are generally exempt from federal income tax, but unrelated business taxable income (UBTI) is an exception. If a tax-exempt LP receives UBTI from a fund, it owes tax on that income.
Qualified Small Business Stock (QSBS) allows investors to exclude up to 100% of gain on qualifying stock. For VC funds, QSBS can be the single most valuable tax benefit available to LPs.
A blocker corporation is a taxable entity interposed between a fund and certain investors to absorb income that would otherwise create tax problems, most commonly UBTI for tax-exempt LPs or ECI for foreign investors.
Private funds can trigger state tax obligations in multiple jurisdictions. State tax compliance is one of the most operationally complex areas of fund administration.
Every Delaware LP and LLC must pay an annual franchise tax. This applies to the fund entity, the GP entity, the management company, and each SPV or series LLC formed in Delaware.
Most private funds use a December 31 fiscal year-end. The choice of fiscal year affects tax reporting, audit timing, and LP coordination.
Capital Company handles formation, compliance filings, and back-office operations so you can focus on investing.