The anatomy of a modern fund structure

Thinking of starting your own private fund and wondering how it works? The legal structures of private funds can make you question your grasp on the English language. There’s a lot of new vocabulary to get familiar with when learning about venture capital and private equity—like LPs, GPs, LPAs, and LLCs. There are funds, and firms; and by the way, why is everything located in Delaware?

Complicated? Definitely. Impossible? Definitely not. Understanding your fund's architecture is foundational to sound fund management and fiduciary compliance. Taking a little time to get familiar with these terms—and the legal structures they describe—will give you insight into how to structure your fund.

What is a private fund structure?

A private investment fund structure is the legal and financial framework that allows a group of investors to pool their capital to invest in private assets, such as startups or private companies. Think of it as the blueprint for how a fund is built and operated. This blueprint defines the roles of everyone involved, how money flows, and how decisions are made.

While there are various models, the most common structure for venture capital (VC) and private equity (PE) is the limited partnership. This structure is designed to align the interests of the fund managers and investors while providing important legal and tax advantages. It creates a clear system where active managers can make investment decisions while passive investors provide the necessary capital with limited risk.

The relationships between the different entities in a fund can be complex. A typical structure involves a general partner (GP) who manages the fund, a management company that handles operations, the fund itself which holds the investments, the limited partners (LPs) who provide the capital, and the portfolio companies (portcos) that receive the investment.

This video gives an overview of how VC funds are structured as part of Carta’s free VC 101 curriculum.

The components of a private fund

A fund is not a single company but a collection of separate legal entities working together, each with a specific purpose. This separation is intentional and serves to protect the different parties involved in these fund structures. Understanding the role of each player is essential to understanding the overall company structure.

The general partner

The general partner (GP) entity is the primary decision-maker of the fund. This is the entity that manages deal flow, performs due diligence, and ultimately decides which companies the fund will invest in. The GP is responsible for the overall fund strategy and investment thesis, fund performance, and managing the fund's operations from start to finish.

While it's called a "general partner," this entity is usually a limited liability company (LLC). This structure is important because it protects the individual fund managers from being personally liable for the fund's debts and obligations. This means if the fund faces legal issues, the personal assets of the fund managers are not at risk.

The management company

The management company is the operating business that employs the investment professionals and staff. It is responsible for paying all the firm's day-to-day expenses, such as employee salaries, office rent, and software subscriptions. Essentially, it's the business that runs the fund.

This entity is kept separate from the fund for a critical reason. This legal separation isolates the firm's operational liabilities, like an office lease or employee lawsuits, from the fund's investment assets. This structure protects the capital invested by the LPs from any legal or financial trouble the management company might face. If the management company were to be sued, the fund's investments in portcos would remain safe.

The fund

The private fund itself is the core investment vehicle, legally formed as a limited partnership. This is the entity that holds the capital commitments from investors and officially owns the equity in the portcos, which is tracked on a cap table. The term "venture capital or private equity fund" typically refers to this limited partnership.

Because these are private investments, the fund operates under specific securities laws. For this reason, participation is typically limited to certain types of sophisticated investors, such as accredited investors or qualified purchasers, who meet specific wealth or income thresholds under exemptions like 3(c)(1) and 3(c)(7). This is because various private market regulations assume these investors can better understand and bear the risks of private market investing.

The limited partners

The limited partners (LPs) are the investors who contribute the vast majority of the capital to a fund, typically providing more than 98% of the total. The GP's own investment is usually a much smaller fraction; the median GP commit is just 1.2% for funds under $1 million and as low as 0.39% for funds over $50 million. These investors can come from a variety of backgrounds and are the financial backbone of any private fund. Often, LPs are institutional investors, such as pension funds, college endowments, trusts, insurance companies, health care systems, family offices, and sovereign wealth funds. Sometimes, firms also make investments into outside funds as LPs, called a fund of funds (FoF).

Common examples of LPs include:

• University endowments

• Pension funds

• Insurance companies

• Family offices

• High-net-worth individuals

The most important aspect of the LP role is that it is passive. LPs provide the capital but do not participate in managing the fund or choosing investments. Their liability is limited to the amount of money they committed to the fund, which is a key protection in the GP LP fund structure. This means if the fund's investments fail, an LP cannot lose more than their original investment.

The portfolio companies

Portcos are the private companies that the fund invests in. The fund's equity interest in these companies is the primary asset that will hopefully generate returns for the LPs.

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Why the limited partnership model is standard

The core component of most private investment funds is a limited partnership, which is the most common structure for PE or VC funds in the U.S. Now that we've identified the key players, let's explore why the limited partnership has become the industry standard. This structure is popular because it effectively balances the needs of both fund managers and investors, a fact underscored by how LPs allocate capital: In 2024, established firms raised 79.4% of capital, the highest concentration in a decade.

This balance is achieved through several key benefits inherent in the structure.

• Limitation of liability: This structure protects LPs from any fund losses beyond their committed capital. It also shields the individual GPs, who operate through an LLC, from personal liability. As explained during the The Lifecycle of a Private Equity Deal webinar, this choice of entity is critical: "Limited partnerships and LLCs are entity types that you can typically waive fiduciary duties on, and corporations... are entities you cannot waive fiduciary duties on. So you wanna think about whether or not you need that flexibility."

• Tax efficiency: Limited partnerships are often treated as "pass-through" entities for tax purposes. Instead, profits and losses are passed directly to the partners, who report them on their personal tax returns. This avoids double taxation on the fund's earnings.

• Regulatory compliance: This structure is well-established and recognized by regulators, with the SEC noting that private funds play an important role in the capital markets. It helps the fund advisor comply with key regulations, such as the Private Fund Adviser rules under the Investment Advisers Act and the Investment Company Act, which govern the activities of investment funds. Because the structure is so common, it creates predictability for lawyers, accountants, and regulators.

• Operational flexibility: The partnership model allows for customized agreements with different LPs, which are often documented in side letters. It also provides a clear and legally tested framework for managing capital calls and distributing profits back to investors.

How fund economics flow through the structure

Understanding the entities is the first step; the second is following the money. The standard compensation model in PE and VC is central to how a fund structure works financially. This model is designed to compensate the fund manager for their work while aligning their financial success with that of their investors.

This model is composed of two primary types of compensation for the fund manager.

• Management fee: This annual management fee is typically a small percentage of the fund's total assets, and while the median has long been 2%, recent data shows management fees continue to rise, with the median reaching 2.05% in 2024.

• Performance fee: Known as carried interest, it is only earned after the LPs have received their initial investment back, plus any agreed-upon hurdle rate, or preferred return. This "carry" is the primary incentive for GPs to generate strong returns, though these returns often follow a pattern known as the J-curve.

The limited partnership agreement (LPA)

A limited partnership agreement (LPA) spells out what GPs and LPs can and cannot do in a limited partnership. It is the comprehensive legal template that governs the fund. It is the binding contract between the GP and all the LPs, and it formalizes all the concepts discussed so far. This document is often hundreds of pages long, and lawyers for the GP and the LPs meticulously negotiate its terms.

The LPA is a detailed document that outlines the rights and responsibilities of all parties. It specifies the critical terms of the fund, including the fund's lifespan, the specifics of the management fee and carried interest waterfall, and any restrictions on the fund's investment strategy.

Key terms typically defined in an LPA include:

• The fund's investment period, which is a key component of portfolio construction and is the timeframe during which the GP can make new investments

• The process for calling capital from LPs

• The details of the distribution waterfall, which dictates how profits are distributed

• The rights of the LPs, such as the right to receive reports and financial statements prepared according to standards like ASC 820

• Restrictions on the GP, such as limits on the size of any single investment

The LPA also includes rules for things like:

• How someone becomes or is removed as a partner

• What rights each partner has

• What the scope of their activities may be

• How investors make contributions to the partnership

• How the partnership will distribute investment proceeds

• How votes will be conducted

Partnership interests

The LPA also specifies partnership interests, which is the amount of the partnership each GP and LP owns. This percentage is usually relative to each partner’s contribution to the partnership. By setting up and signing an LPA, a partnership overrides the default rules that might be applicable by state law with the rules of its own agreement.

Amended and restated LPA

An existing LPA can be modified by passing an amendment that adds, deletes, or modifies its terms. The partnership is then governed by the amended LPA. Partners can also discard the whole LPA (and any amendments to it) by replacing it with an entirely new agreement known as an amended and restated LPA. As of the date it’s enacted, the entity is then governed only by the amended and restated LPA (which is known as the A&R LPA).

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Why Delaware?

Many fund managers decide to form their firm and fund entities in Delaware. (Likewise, many companies are incorporated in Delaware.) One reason for this is the robust history of decisions in Delaware state courts about business transactions. Those decisions interpreted Delaware rules and laws governing business transactions with more specificity than exists in other states—which gives businesspeople and lawyers more clarity on how their business decisions might be interpreted in court. Delaware has also streamlined the process for forming entities like limited partnerships and LLCs.

Common fund structure variations

While the standard model is a great foundation, managers often use other structures, such as evergreen funds or co-investments, to pursue specific strategies. These variations help them pursue specific strategies or accommodate unique investor needs.

Special purpose vehicles (SPVs)

Special purpose vehicles (SPV) are a popular tool for emerging managers, particularly solo GPs, who use them to execute a single deal and establish a track record before raising a full fund. In fact, data shows that most SPV deployed by solo GPs for this purpose have less than $5 million in assets.

Parallel funds

A parallel fund is a separate fund vehicle that invests alongside the main fund on a proportional basis. Managers often use this structure to accommodate investors with different tax or regulatory needs.

For example, a manager might create a U.S.-based fund for domestic investors and a Cayman Islands-based parallel fund for international investors. Both funds would invest in the same portfolio companies at the same time, but the separate structures address their respective legal requirements.

Master-feeder structures

A master-feeder structure is another way to pool capital from different investor groups, similar in concept to a fund of funds (FoF). In this model, multiple "feeder" funds invest all their capital into one central "master" fund. The master fund is the entity that then makes all the portfolio investments.

You can think of it like multiple rivers (the feeder funds) all flowing into a single, large lake (the master fund). This consolidates the investment activity while still allowing for tailored feeder funds for different types of LPs.

From structure to operations: how Carta connects your fund

Managing a venture fund involves juggling dozens of investor relationships. With the median LP count for a sub-$10M fund at 26 LPs—and growing to more than 100 for larger funds—a manual approach to fund administration can easily lead to errors, delays, and a lack of transparency for both the fund manager and the investors. While this structure is logical on paper, using disconnected spreadsheets, bank accounts, and email chains introduces real-world complexity and risk for fund managers. It creates administrative burdens—from initial fund formations to ongoing reporting—that take focus away from the core job of finding and supporting great companies.

Carta provides an integrated software platform that serves as the operational backbone for the entire fund structure, replacing manual, error-prone processes. This allows fund managers to focus on investing rather than administration.

As Brian Montgomery, chief financial officer at Legalist, explains, "A platform that allows us quick access to real-time information lets us grow our investor base and, following, our asset base. Without a partner like Carta, we run into bottlenecks."

To see how Carta can guide you from thesis to launch, speak to an expert about our fund formation services.

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Frequently asked questions about fund structures

What is the difference between a general partner and a limited partner?

The GP is the active fund manager responsible for making investment decisions and running the fund's operations, while LPs are passive investors who provide capital; these roles are foundational to most fund structures.

What is the difference between the general partner and the management company?

The GP is the entity with legal control of the fund that earns carried interest, while the management company is the operating business that employs the team and receives a management fee.

What does "2 and 20" mean in fund fees?

Two and twenty refers to the traditional fee structure for investment funds, though this standard is evolving. For SPVs, for example, the median management fee was 1.9% in 2023, down slightly from 2% in recent years. Data on SPV management fees shows the typical range has also tightened, with half of all SPVs that charge fees setting them between 1.5% and 2%.

How does a special purpose vehicle structure differ from a traditional fund?

An SPV is a legal entity, often an LLC, created to make a single investment in one company.

How much does it cost to set up a fund?

The cost to establish a fund structure varies based on its complexity, but it includes legal fees for entity formation, document drafting, and initial setup fees for administration and compliance services.