Alternative Investment

Simple Steps to Creating Management and General Partnership Entities

Thinking about launching a fund? Welcome to an exciting opportunity, the chance to pursue your vision and build your own business — one with a substantial upside. You’ve already laid the groundwork, demonstrating you can generate sizable returns. Now comes the stretch goal — establishing your credibility as a business owner.

Whether you’ve been trading for two years or two decades, running a fund means new responsibilities: setting up the infrastructure, raising capital, and more. How can you ensure the greatest chance of success for yourself and your stakeholders? Start with these critical steps that shouldn’t be overlooked, especially when it comes to setting up your management company and general partnership entities.

At Richey May, we understand that these foundational pieces are vital to your fund’s success, so let’s walk through some straightforward steps to get you started right.

Entity Set Up: Combined or Separate Entities?

One of the first decisions you’ll face is whether to create one combined entity or two separate ones for your management company and general partnership. Typically, having two separate entities is more beneficial. Why? Because it helps you navigate tax complexities and ownership structures more effectively. For example, if your entity is a partnership, you can’t be on payroll and an owner simultaneously-you need guaranteed payments instead. Having separate entities allows you to pay your employees W-2 salaries through the management company while granting profits interests in the general partnership. Plus, state considerations matter here; you don’t want your carried interest taxed unnecessarily across multiple states due to how your management company is apportioned. We highly recommend consulting your CPA and attorney together to tailor the best structure for your specific situation.

Choosing the Right Entity Type

Next, you’ll decide the tax classification of your entities-LLC, S Corporation, or C Corporation. Most funds opt for LLCs because they offer flexibility in ownership and income distribution. However, an S Corporation might be advantageous if you want to reduce self-employment taxes, while a C Corporation can be useful if you have foreign partners to help block Effectively Connected Income (ECI) and avoid US tax filings. Again, your CPA and attorney can guide you to the right choice based on your ownership and operational needs.

Accounting Considerations

While fund administrators typically handle fund accounting, your management company and general partnership need their own accounting and financial statements for tax purposes. At Richey May, we provide these accounting services to streamline your process. Maintaining accurate capital account tables is crucial, especially when dealing with special profit allocations, ownership changes, and waterfall structures. This ensures your allocations align perfectly with your operating agreements.

Navigating State Taxes

State tax apportionment can surprise many first-time fund managers. Management companies can end up apportioning income to a variety of states based on different factors. Each state has its own rules on how income needs to be apportioned but the following factors will need to be considered: 

• Nexus 

• Payroll 

• Rent 

• Management Income 

• Location of fund investors – some states apportion management fees based on the location of the investors paying those fees 

• Location of income-generating owners 

Once state apportionment is determined, you need to consider how state taxes will be paid. After establishing a liability, quarterly estimated payments must be made to the state: 

• Withholding – Most states you can opt out of entity withholding and the individual owners can pay the estimated tax payments.  

• PTET – Most states now have PTET (Passthrough Entity Tax). This is an entity level tax that creates a federal deduction for the taxes paid and then passes through a credit to the owners.  

• Composite -There are also composite taxes which are essentially an individual tax return filed by the entity so the individual owners do not need to file a return in that state. This tax paid would be treated as a distribution to the partner.  

Understanding these nuances early can save headaches down the road. Setting up your management and general partnership entities is a multi-faceted process that requires thoughtful planning and expert guidance.  

At Richey May, we dive deep to best serve the needs of our clients in the space. Unlike many other accounting firms, our alternative investments team members focus exclusively on this industry, enabling them to understand your business needs on a deeper level and deliver more valuable support. Our team members are dedicated to educating our clients through the frequent publication of thought leadership and educational content. Access all of our resources here. 

For specific guidance on your management and general partnership entities, please reach out to your Richey May tax professional. To learn more about these best practices and how Richey May can help you navigate these issues, reach out to Steve Vlasak, Business Development Partner, Alternative Investments Practice.