Investment Fund Entities

1. Purpose and Structure

Investment funds can come in all shapes and sizes. These funds are generally split into different groups, such as venture capital, private equity, and hedge funds. Generally, a fund allows outside investors to subscribe to a predetermined investment strategy and pool their capital together in an investment vehicle. The capital is then deployed via strategic investments that may vary in size, structure, and timeframe. Here at PaperOS, we support various asset classes, including venture capital, private equity, real estate funds, among others. Within the investment fund ecosystem, there are various fund structures we can help you choose from:

1. 1. Limited Partnership Model (GP/LP): A limited partnership is a legal entity made up of at least one General Partner (GP) and one Limited Partner (LP). Typically, the LP is an outside investor that provides the capital and is subject to limited liability, while the GP manages where the capital goes, how each deal is structured, and is subject to unlimited liability (unless the GPs operate through an LLC).
      1. 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.
   2. Management Limited Liability Company (LLC): A Management LLC is a different legal entity that has members (individuals or entities), rather than partners. Like partnerships, LLCs allow for pass-through taxation (see above). Unlike partnerships, LLCs offer all members limited liability protection.
   3. Special Purpose Vehicle (SPV): An SPV may be formed under either an LLC or an LP entity structure, but use a Series LLC structure (see (d) below). In either case, SPVs allow for pass-through taxation. The main difference between an SPV and other fund structures is that an SPV makes an investment into a single company.
      
      1. SPVs offer certain unique benefits. For LPs, minimum investment amounts may be lower (such as $1,000) and each LP knows which company their money is going towards. For GPs, they can use an SPV as a "follow-on" investment if their traditional fund does not have enough capital left to deploy and provides GPs with a greater network of LPs. For company founders, SPVs show up as just one simple line-item on their cap table.
   4. Series Limited Liability Company (LLC): A Series LLC consists of an operating or parent LLC (often referred to as a Master LLC), followed by a series of LLCs. Each series operates like a separate entity with a unique name, bank account, and separate books and records. A Series LLC may have different members and managers with unique rights and obligations. Most importantly, this structure offers liability protection to each series. Assets owned by one series are shielded from the risk of liability of other series within the same series LLC.
      

      1. A benefit of the Series LLC is that articles of formation are only filed once. After forming the initial master LLC, each additional series is formed through internal mechanisms spelled out in the operating agreements. Typically, this is done by amending the master LLC operating agreement and adding an additional series.