Purpose of LLC serving as GP of HF?
I used to work at a hedge fund, but I never handled the paperwork. I am starting my own now with one other person. I have set up an LP to be the investment vehicle, and an LLC that me and my partner each own half of, to be the GP of the LP. I was told this was necessary in order to claim carried interest tax, but why is that, and is that true at all, and what is the purpose of it? Why can't me and my partner each be GP? Or lets say it was a one man operation...what is the advantage of me owning an LLC, and the LLC being the GP of the fund? I could see it making sense if I had multiple funds, but I have only one. Why can't I just be the GP? Why is the extra layer necessary?
Also, I have heard of people owning an LLC that is the GP to the fund, and then the LLC is owned by another LLC which is owned by the owner, and that making it pass from the LP through TWO LLC makes it even more tax advantaged. Why?
Thank you in advance.
This is just a guess:
I think that if you're a GP, you can still be held liable for certain things (whereas the Limited Partners in the fund have limited liability)
If you have a Limited Liability Company (LLC) as the GP, the LLC is "liable".
Then if you're an owner in an LLC, you, as a person, are not liable; therefore, the structure protects you.
Ask a lawyer.
This. Post this question in jdoasis.com
TITCR. Do you want your personal assets at stake if your partners decide to sue you?
IANAL, but I was involved in the formation of two funds in my career.
I would say it's more of a risk limiting steps to make sure that your personal assets are not at risk.
As you are aware, in most LP formations (most funds) only the limited partners have the limited liability protections. On the other hand, general partners do not have that luxury - and they can be subject to unlimited liability - exposing yourself to all sorts of headaches like being liable for the debts of the LP entity.
By making the LLC as the GP of the partnership, you get the limited liability protection, and get the partnership treatment for the federal tax purposes.
But mind you, the structure won't protect you if you are ever sued for negligence....I've seen funds where an LLC was a GP of the Limited Partnership, with another LLC being the sole member of the first LLC...... none of those helped in a lawsuit
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