Why Do Fund Managers Separate the ‘General Partner’ Entity from the ‘Management Company’ Entity?

Why Not Combine Them for Simplification?

Deductibility of Expenses

Separating the entities mitigates the risk that ManCo-related expenses get commingled with GP expenses and/or allocated to the GP’s equity interest in the fund. In short, misallocation could create excess tax liability and possibly ‘phantom’ income where owners have a tax liability without the net cash to pay the taxes.

Employee Matters

Separating the entities facilitates grants of carry equity from the GP to ManCo employees without causing the employees to lose their ManCo W-2 status and related access to certain fringe benefits. It also allows you to keep the ManCo consistent while giving carry to different people in respect of different funds.

Segregation of Liability

Separating the entities keeps liabilities from one entity from infecting the assets of the other entity. Carry is safe in the GP and management fees are safe in the ManCo.

Future Planning

Separating the entities can facilitate future tax planning in connection with potential third-party investments, insider sales, and other changes in entity ownership.

State or Local Tax

Certain state and local jurisdictions have special tax regimes that drive GPs and ManCos apart. For example, funds with NYC-based principals often divide ManCo and the GP into separate entities to mitigate the impact of the dreaded NYC ‘unincorporated business tax’ which can impose an extra 4% on income or gain.