Fund Entity Stack
medium confidence — compiled with source citation from the investment brain.
Fund Entity Stack
Fund Entity Stack
A US private fund is not one legal entity but a deliberately fractured stack of five or more vehicles, each existing to solve a specific liability, tax, or economics problem. ^[reports/Fund structuring tax jurisdictions.md] The base layer is a Delaware limited partnership governed by a Limited Partnership Agreement filed under the Delaware LP Act (6 Del. C. § 17-101 et seq.); a 2025 real-world specimen is CVC-PE Global Private Equity Fund, LP, formed in September 2025 under that statute. ^[reports/Fund structuring tax jurisdictions.md]
The general partner is not a person but a company — a thinly capitalized, vintage-specific LLC that holds the carried-interest economics and occupies the unlimited-liability seat the LP form attaches to a GP. ^[reports/Fund structuring tax jurisdictions.md] The management company (ManCo) is a separate, long-lived LLC that employs the investment team and holds the leases, intellectual property, and insurance. ^[reports/Fund structuring tax jurisdictions.md] Around this core sit deal-level SPVs (one per portfolio company, holding the actual asset) and tax-driven blocker corporations for tax-exempt and non-US investors. A mid-size sponsor running several vintages plausibly maintains 60–100 active legal entities. ^[reports/Fund structuring tax jurisdictions.md]
The cleanest tax reading of the whole stack is a separation of three income streams: the management fee flows to the ManCo as ordinary income, while carried interest flows through the GP as capital-gains-character income. ^[reports/Fund structuring tax jurisdictions.md] This split is the structural fact that determines tax character and who bears clawback and UBTI risk. The 2018 textbook notes management fees are taxed at higher ordinary-income rates while carried interest is treated as an allocation of profits — a spread of roughly 19.6 percentage points that has driven repeated attempts to reclassify fee income.
Why Delaware
Delaware dominates because it codifies maximum freedom of contract. The LP Act states its policy is to give maximum effect to the principle of freedom of contract (§ 17-1101(c)), and § 17-1101(d) lets an LPA modify or eliminate a GP's fiduciary duties, subject only to the implied covenant of good faith. ^[reports/Fund structuring tax jurisdictions.md] That flexibility is available to LPs and LLCs but not to corporations, which is why funds use LPs and LLCs rather than C-corps. The LP liability shield sits at § 17-303(a): a limited partner is not liable for fund obligations unless it also acts as a GP or participates in control. ^[reports/Fund structuring tax jurisdictions.md] A Delaware Court of Chancery ruling reported in March 2026 reinforced that a party cannot repackage fairness or disclosure theories as implied-covenant claims where the agreement already eliminated duties and authorized the conflicted action. ^[reports/Fund structuring tax jurisdictions.md] Chancery's predictability on these questions is itself part of the value — see public-vs-private-markets for why institutional capital prizes that certainty.
Exemption from the Investment Company Act
Private funds avoid registration through one of two exemptions plus a Reg D offering exemption. A 3(c)(1) fund takes no more than 100 beneficial owners (or 250 for a qualifying venture fund under $12M); a 3(c)(7) fund restricts itself to qualified purchasers — a natural person with at least $5,000,000 in investments, or an entity investing at least $25,000,000 on a discretionary basis (§ 2(a)(51)). ^[reports/Fund structuring tax jurisdictions.md] 3(c)(7) funds typically cap at 499 investors to stay below the § 12(g) 500-investor Exchange Act reporting threshold. A common misconception: the SEC did not widen these statutory thresholds in 2023 — that year's action was the adviser-level Private Fund Rules, vacated June 5, 2024. ^[reports/Fund structuring tax jurisdictions.md]
Adviser registration, as of 2026
The line separating Exempt Reporting Advisers from SEC registration is the $150M private-fund RAUM threshold under § 203(m). ^[reports/Fund structuring tax jurisdictions.md] The SEC's Private Fund Adviser Rules — adopted August 23, 2023 — were vacated in their entirety by the Fifth Circuit on June 5, 2024, and the SEC announced on November 1, 2024 it would not seek review, so the pre-2023 baseline applies. A bill to raise the threshold to $175M (H.R. 3673) remained pending, not enacted, as of the research date. ^[reports/Fund structuring tax jurisdictions.md]
The instruments an investor actually holds
The LP interest (a pass-through limited-partnership unit carrying a K-1), the subscription agreement (the contract by which the investor commits capital and certifies suitability), and side letters (negotiated special terms that override the LPA for specific investors). ^[reports/Fund structuring tax jurisdictions.md] The 2015 fund-formation guide lists the subscription agreement and investor questionnaire as exhibits to the private placement memorandum alongside the LPA.
Emerging-manager economics
Organizational costs are typically LP-borne, capped around $250K, with ILPA's norm at 0.5–1.5% of commitments. ^[reports/Fund structuring tax jurisdictions.md] The GP itself commits roughly 1% of capital (range 1–10%) to align interests, typically exempt from fee and carry — a figure the researchers flag as directional only, with no clean 2025 benchmark. ^[reports/Fund structuring tax jurisdictions.md]
The entity stack is, at bottom, a cost-of-capital problem in disguise: each layer exists so that a given investor class pays its own cost-of-capital rather than being dragged into a worse tax or fiduciary posture than the strategy's economics justify. See capital-allocation for how the same discipline applies inside the portfolio.
Sources
textbooks/markdown/banking-valuation-training-pdfs__Chapter-19---Organization--Compensation--R_2018_Investment-Banks--Hedge-Fund.mdtextbooks/markdown/fund-mgmt-pdfs__Forming and Operating Hedge Fund.md