Limited Partnership Agreement: Fill & Download for Free

Roger Royse nailed this answer but I want to expand and give the answer a little more visibility. The core reason that VC’s don’t like to invest in LLC is because the pass through nature of losses/profits of an LLC are problematic for VC funds.VC’s form limited partnerships and capitalize these limited partnerships with funds raised from investors. The largest investors in VC funds are institutions such as pension funds, foundations and endowments.Pension funds, endowments and foundations are tax-exempt entities. They don’t like to pay taxes. When a VC sets up its limited partnership / fund they sign a contract with their investors called the Limited Partnership Agreement (“LPA”) that defines the economics and limitations of the partnership. Within the LPA you will usually find pages of hard to read legal language indicating that the VC must use its best efforts to avoid generating any income to its investors.The income referenced is called Unrelated Business Taxable Income (“UBTI”). If a VC fund invests into a company formed as an LLC then all of the profits and losses of that company flow through to its investors including the VC limited partnership. This generates UBTI to the VC’s investors.So…VCs try to avoid investing into LLCs because contractually through the LPA, the VC has told its not-for profit investors that it will use its best efforts to avoid generating any taxable income / UBTI.Now there are work-arounds. The VC can make its investment through something called a blocker corporation to block the tax impact going back to the partnership. This is done on a somewhat regular basis but adds complexity and administrative cost to an investment so the VC tries to avoid this if possible.

Private equity funds are closed-end investment vehicles, which means that there is a limited window to raise funds and once this window has expired no further funds can be raised. These funds are generally formed as either a Limited Partnership (“LP”) or Limited Liability Company (“LLC”). The advantages of these structures for a private equity fund are as follows:Perhaps the biggest advantage for investors is that they are exposed to limited liability. If anything goes wrong in the investment process (bankruptcy, lawsuits, etc.), the investor risks only the capital they have committed.LPs and LLCs are pass-through entities for federal income tax purposes.Illustrated Organizational Chart:Raising a private equity fund requires two groups of people:1) Financial Sponsor (“Sponsor” in image): The team of individuals that will identify, execute and manage investments in privately-held operating businesses. This is generally comprised of a General Partner and a Management Company.General Partner: The entity with the legal authority to make decisions for the fund. This entity also assumes all legal liability.Management Company: The operating entity that employs the investment professionals responsible for allocating capital and managing investments.2) Investors: The individuals that will provide the capital to make those investments. Because funds are generally formed as Limited Partnerships, investors are often referred to as limited partners.In raising a fund, the fund founders will reach out to sources of institutional capital such as pension plans and university endowments, as well as high net worth family offices and individuals. The commitment to the fund, known as the “capital commitment,” will be made via a partnership agreement stipulating that the capital invested or resulting assets will be returned within a fixed period of time (typically 10 years). In most cases this is structured as a limited partnership agreement (LPA). The LPA will typically include the following:Mandate: The partnership agreement may provide parameters for acceptable investments. These restrictions could relate to scale, geography and security type, etc.Fund Term: This defines the time horizons available for investment and divestment.Management Fees: This defines the fee tied to the capital raised, or assets under management (“AUM”). The Management Company will typically earn an annual 2% fee on AUM.Distribution Waterfall: Distribution waterfalls define the economic relationship between the general partner (“GP”) and limited partners (“LP”). This is how the GP earns what is known as a carried interest, which is typically 20% of the proceeds after the LP has received distributions equal to the original capital invested plus a defined preferred return. Please follow this link for an example.Original post: Private Equity Fund Structure

This is not all that complicated, and does not have to include a Soap Opera.You use a Limited Partnership.It’s that simple.The Investors will be the Limited Partners. They will be prohibited by law from taking part in the management of the business. In return, their personal liability will be limited to the amount they invested.You will be the General Partner. You will be in complete control of the business and you will have complete liability for whatever happens. However, you can shield yourself from personal liability by creating an LLC, and have the LLC be the General Partner.The Limited Partnership Agreement can provide that the Limited Partners will be paid an annual return on their investment of 12% if the profits are sufficient to permit that, and any shortfall will be carried forward.The Agreement can also provide that at the end of five years, the Partnership Interests of the Limited Partners will be purchased by the General Partner for the amount of their original investment plus 30%, plus any existing shortfalls.Limited Partnership law is different for each State, but you can put almost any terms into the Limited Partnership Agreement that all of the parties agree to.But be careful with Limited Partnerships. The Interests are considered to be securities, and if you are promoting and selling to the public, you will have problems, both State and Federal.They are ideal, however, if you can qualify a small group of Investors, which is what you should be doing with a Startup anyway.I hope this helps.Good Luck.Michael Lantrip, Attorney | Accountant | InvestorMichael Lantrip