Most Advantageous Structure for Carry?
Searched around WSO but couldn’t find anything addressing this…
I’m about to sign paperwork and receive my first GP carried interest units for our latest fund and I have been considering setting up an LLC (or some other entity) to act as the actual holder of these units.
My questions is two-fold. 1) is there any tangible benefit to doing this, and 2) is it worth the cost, albeit minimal, of setting up and maintaining the entity.
My thoughts in favor of this are primarily around having a separate entity to simplify everything. Should I stay with the firm and receive additional units in future funds, this entity would already be in place. If I were to move, leave the firm (although I don’t have any plans to, but things change), etc. it would be a lot easier from a logistics standpoint to have everything be in the LLC’s name and not my personal address and bank accounts. Additionally, we have the ability to co-invest and I think this structure would also be beneficial there — both from a paperwork perspective as mentioned above, and from being able to easily reinvest my carry proceeds when they start to materialize. I also like the idea of keeping it separate as a savings/investing entity for later in life and not being tempted to spend with cash hitting my bank account.
From a cost-benefit perspective, my state has minimal costs to establish an LLC and no annual fees. I’d probably want to pay a Registered Agent service for the business address, but also not a requirement. I am unsure of the costs to establish a business bank account and would need to look into that.
I don’t think there’s any tangible tax benefits to this structure, at least right now, as it’s still ultimately a pass through entity. I did see a comment on here that said you can’t recognize the income as capital gains for tax purposes unless it’s in a business entity (i.e., can’t go straight into my personal account), but that seems inaccurate — can anyone confirm? It might complicate annual taxes a bit, but I won’t see any carry hit for at least a few years so I can cross that bridge when I get there. Let me know if I’m overlooking something there though.
Curious to hear what older folks have done/been doing for this. This will be my first time receiving carry units and while they’re currently only a few points, I’m hoping this will increase as I progress in my career and want to lay the proper foundation now.
Appreciate the time.
Sounds like extra work for nothing and it’s unlikely that your fund will agree to it.
Curious what the reasoning would be for them not agreeing to it? For context, I’m at a very small shop so I don’t think there would be much of a “if we let them do it, we have to let all the associates do it” factor. I’m sure there’s something I’m missing though.
Have you asked what others are doing and why? If no one does it like this probably a good reason for it
I haven't asked yet, wanted to make sure I was aware of the pros/cons before discussing with the partners. I had the same thought of "if no one is doing it there's probably a good reason" when I couldn't find anything on WSO about this. If that status quo is just to receive the grants in your personal name, that is what I will do, but wanted to understand all of my options first.
Just ask other associates / VPs
Est sint autem dolor quas ut et. Enim tenetur enim in mollitia architecto. Laborum aut consequuntur pariatur sint et. Et sit enim libero quas.
Quis eligendi non autem dicta magnam. Qui provident nam delectus voluptas deserunt. Doloribus vero et aut. Asperiores eum aut porro omnis.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...