If you've ever wondered how a VC fund is actually put together legally, this one is for you.

Let’s get into it.

How are VC funds legally structured?

VC funds have a very unique structure. Money flows from the Limited Partners, through the General Partner and to the startups, and I'm going to explain precisely how that is legally structured.

It is important to note that a venture capital firm is different from a venture capital fund. They work hand in hand, but they are not the exact same thing. Think of the firm as the fund's house.

The venture capital fund is the vehicle that raises capital from limited partners and then deploys it. The venture capital firm is the management company that runs all the operations of the venture capital fund. Think of basic things like getting an office, branding and marketing, and hiring staff. When you hear a popular name like "Sequoia Capital" or "Andreessen Horowitz," it usually refers to the firm (often called the "management company") that can run multiple distinct funds over time.

Please note that I am using a US fund structure to illustrate this. There are slight differences across other jurisdictions, though most of the principles broadly apply. Let me know if you'd be interested in a breakdown of fund structures across different jurisdictions.

The main legal entities

At the core of a standard US VC setup, you'll usually see four key layers:

Management Company

A management company is an entity set up by the firm's general partners. It is responsible for managing the firm's operations across all its funds, collecting its fees, and paying expenses. It also holds the fund's brand. This entity can span across multiple funds. It usually signs an investment management or advisory agreement with each fund, under which it provides investment management services. In return, it receives an annual management fee from the fund, typically a percentage of committed or invested capital, to pay salaries and overhead. This is the operating company of the VC business. It is legally distinct from each fund and from each GP entity. In practice, this entity acts as the fund's investment adviser and is responsible for complying with securities and investment adviser regulations in its home jurisdiction.

General Partner (GP)

While this refers to a role, i.e., the person responsible for raising funds, it also refers to an entity. The GP is responsible for the active management of the fund, deciding where to invest the funds, distributing the carried interest (the GP's share of the fund's profits) from those investments, and filing/signing tax returns. The GP is typically a separate LLC or limited partnership formed specifically to be the general partner of a single fund. The individuals who run the fund are members/partners of this GP entity. The GP is the legal recipient of the fund's carried interest. The GP has unlimited liability at the partnership level, but structuring it as an LLC means the individuals behind it benefit from limited liability at the personal level. The people who start and run the fund almost never act as GPs in their individual capacity. Instead, they form a GP LLC to represent their interests and to hold the legal liability at the entity level rather than personally. This GP entity is usually unique to one fund and not reused across multiple funds. When a firm raises Fund II, it typically forms a new GP entity specifically for that fund. This ring-fences liability and economics on a per-fund basis.

The GP usually commits capital to the fund as well. This is often referred to as the "GP commitment" and typically accounts for 1-3% (or more) of the total fund size. This ensures the GP has skin in the game and is investing alongside the LPs.

While the GP entity legally receives the carried interest, the economics of that carry are typically allocated among the individual partners through a separate carry allocation agreement.

Limited Partnership

The fund itself is usually structured as a limited partnership, for example, a Delaware limited partnership in the US. This is the entity to which external investors contribute their capital. It must have at least one general partner and at least one limited partner. It is generally treated as a pass-through entity for tax purposes, so income and gains are taxed at the partner level rather than at the fund level. The rules governing this entity are set forth in the Limited Partnership Agreement (LPA).

The LPA describes exactly how the fund will operate, including the fund's investment objective and strategy, what the fund can and cannot invest in (e.g., sector, geography, and concentration limits), the size and timing of management fees paid by the fund to the management company, how proceeds are distributed (the "waterfall") and how carried interest is calculated and allocated, voting rights, key-person provisions, advisory committee mechanics, how and when partners can be admitted or removed, and the rights of LPs to receive reporting and information. The limited partners in this structure do not participate in day-to-day management and have limited liability. Their risk is generally capped at the amount of capital they commit to the fund.

When LPs join the fund, they also sign subscription documents. These sit alongside the LPA and handle matters such as their commitment amount, investor status (e.g., accredited/qualified), and regulatory and tax information.

Most VC funds have a fixed term, typically 10 years, with an initial investment period of around 5 years. Extensions are common. This reflects the long-term, illiquid nature of venture investing.

Although LPs commit a fixed amount of capital to the fund, they do not wire the full amount upfront. Instead, capital is drawn down over time through capital calls as investments are made and expenses are incurred. Many funds also establish an LP Advisory Committee (LPAC) composed of selected LPs. The LPAC typically reviews conflicts of interest, valuation matters, and key-person events, adding a layer of governance to the structure.

Putting it all together

Imagine we set up a VC firm called ABC Ventures. ABC Ventures decides to set up its first fund, the A Fund.

The A Fund is a legal entity called a Limited Partnership. This limited partnership will be made up of at least one general partner and at least one limited partner. The GP manages the fund, and the LP contributes capital to it. The LP can be an individual, such as a High Net Worth Individual, or an entity, such as a family trust, college endowment fund, or pension fund.

The words general and limited refer to the role that each partner has in this partnership. Remember, we mentioned above that the general partner is responsible for managing the partnership's business operations. Based on this, they carry full liability in the fund. The Limited Partners contribute capital and don't actively manage the fund, so they have limited liability. This means that if the fund has any debts or legal liabilities, the amount that the LPs are responsible for is limited to their individual investment stake in the partnership and does not extend to any of their other assets.

General Partners, on the other hand, have unlimited liability. This means that they are directly responsible for the fund's liabilities, debts and obligations. To avoid being directly responsible for the fund's liabilities, the fund's founders and managers establish a GP entity. They typically use a Limited Liability Company (LLC) to represent their interests and become members of that GP LLC. The LLC provides its members with limited liability, and the entity assumes legal liability, not the members who manage it.

So in practice, Mr VC sets up ABC Ventures (the firm). They spin off the first fund, Fund A, which is a Limited Partnership. The University of VC Land Endowment, Very Good Pensions and Valhalla Family Office invest as Limited Partners. They represent themselves in the fund entity. Mr VC sets up Mr VC LLC as the General Partner to represent him in the fund and assume responsibility.

In later years, ABC Ventures might raise Fund B. The same management company (ABC Ventures) remains at the top. A new GP entity is created for Fund B, a new limited partnership is formed for Fund B, and a fresh set of LPs (and documents) is established. The basic structure stays the same; you just add more funds under the same firm.

In larger or cross-border funds, additional parallel funds, feeder vehicles or blocker entities may also be established for tax and regulatory reasons, but the core GP-LP structure remains the same.

How the firm gets paid

Now that you can see how the structure fits together, let's look at how money actually flows through it.

The management fee is a recurring fee paid by the fund to the management company to cover the firm's operating expenses, such as salaries, rent, and travel. It's typically around 2% of the fund's committed capital per year. So if ABC Ventures raises a $100M fund, the management company receives $2M annually to keep the lights on. This fee is paid regardless of how the fund performs.

The big picture

ABC Ventures is the firm and management company sitting at the top, handling operations and collecting the management fee. It spins up a GP LLC to represent the partners' interests and manage Fund A on their behalf. Fund A itself is a Limited Partnership, the vehicle that pools capital from LPs such as endowments, pension funds, and family offices. The LPA governs how the whole thing runs, and when the fund eventually returns a profit, the GP collects carried interest as their reward for picking the winners.

This structure exists for a reason: it aligns incentives between managers and investors, limits liability, allows for tax pass-through treatment, and has become the institutional standard that large LPs are comfortable underwriting.

Every VC fund you come across, no matter how big or small, is essentially a variation of this same structure.

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