Forming the fund: U.S. & offshore vehicles

Every fund starts with a structural decision that shapes everything after it: what entity, in what jurisdiction, with what classes of investor. Get it right and the raise, the deals, and the taxes all flow cleanly. Get it wrong and you are unwinding it later at your investors' expense.

Choosing the entity

Most domestic funds are built as a Delaware limited partnership or an LLC taxed as a partnership, with the manager acting as general partner (or managing member) through a separate management entity, and investors coming in as limited partners. This pass-through treatment means the fund itself pays no entity-level tax; income, gains, and losses flow through to the investors, who report their share. Two reasons Delaware dominates: a deep, predictable body of business-entity case law, and investor familiarity — sophisticated LPs expect it.

You are typically forming more than one entity:

• The fund — the LP or LLC that holds the capital and the investments.
• The general partner / managing member entity — holds the carried interest and controls the fund; usually its own LLC to separate liability and carry.
• The management company — employs the team and receives the management fee; often a separate entity for liability and tax reasons.

The document package, section by section

This is what a complete formation actually delivers — and the items a sophisticated investor (or their counsel) will read closely. When you review your own documents, these are the sections that matter most:

1. Private Placement Memorandum (PPM)

The disclosure document that lets you raise capital lawfully under a securities exemption. Its job is to disclose, fairly and completely, what an investor is getting into — which is also your single best protection against a later claim that you left something out. Key sections to scrutinize:

• Executive summary & the offering terms — the fund at a glance: strategy, minimum investment, target size, fees.
• Investment strategy & objective — what the fund will actually do; this should match how you market and how the LPA is written.
• Risk factors — the most important section legally. Generic risk factors are a red flag; they should be tailored to your strategy, leverage, liquidity, and concentration.
• Fees & expenses — management fee, carried interest, and crucially what expenses the fund bears versus the manager. Fee ambiguity is a common dispute.
• Conflicts of interest — other activities of the manager, allocation of opportunities, related-party dealings. Disclosure here is protective.
• Distribution & withdrawal terms — when and how investors get money out (or cannot); lock-ups, gates, redemption notice.
• Tax considerations — how the structure is taxed to investors; cross-references the structuring.
• Subscription procedures — how to invest, eligibility, and required representations.

2. Limited Partnership Agreement / Operating Agreement

The governing contract — the economics and the power. Where the PPM describes, the LPA controls. Look hard at:

• The distribution waterfall — the order money flows: return of capital, preferred return/hurdle, GP catch-up, then the carry split (commonly 80/20). This is the heart of the deal.
• Management fee mechanics — rate, base (committed vs. invested capital), and how it steps down over the fund's life.
• Carried interest & clawback — the GP's profit share and whether there is a clawback protecting LPs if early gains reverse.
• Capital calls & default remedies — how capital is drawn and what happens to a defaulting LP.
• Governance — GP authority, LP advisory committee, key-person provisions, removal rights, amendment thresholds.
• Term, extensions, and wind-down — the fund's life and how it ends.

3. Subscription Agreement & investor questionnaire

How an investor commits and how you confirm they are eligible. It collects the accredited-investor (and, for 3(c)(7) funds, qualified-purchaser) representations, AML/KYC information, and the investor's acknowledgment of the risks. Under Rule 506(c), this is also where verified-accreditation evidence ties in.

4. Investment Management Agreement (IMA)

The contract between the fund and your management company — scope of authority, the fee, standard of care, and termination. It is what lets the management entity actually run the fund's assets.

5. Privacy policy, Form D & funding instructions

The privacy policy (Regulation S-P) is required for pooled vehicles. Form D is the federal notice filing made after your first sale. Funding instructions tell investors how to wire — and should be paired with anti-fraud verification habits, because wire fraud targets exactly this moment.

When one entity is not enough

The single-entity fund works beautifully until a different kind of investor shows up — a foreign investor, or a U.S. tax-exempt one. At that point you may need a master-feeder structure with an offshore vehicle so each investor class enters through the right door. Building the original fund with that possibility in mind makes the later add-on a clean, scoped project rather than a teardown.

Common questions