A Guide to Management Companies

At a Glance

• A management company is a separate entity, often an LLC, that handles the operations of a venture fund, including fees, expenses, and regulatory filings.

• It protects fund managers from personal liability and makes it easier to track operational costs for tax and accounting.

• Typical responsibilities include collecting management fees, paying staff, and managing fund compliance.

• While not legally required, most fund managers choose to create one for liability protection and clearer separation of fund and personal finances.

• Forming a management company is usually straightforward, but managers should seek legal, tax, and accounting advice to set it up correctly and keep it compliant over time.

What Is a Management Company?

In a typical venture fund structure, there are at least two key entities:

• The fund (often a limited partnership or LLC) that holds the portfolio investments.

• The management company (often an LLC) that provides investment and management services to the fund.

The management company’s core functions usually include:

• Collecting management fees from the fund.

• Paying operating expenses, such as salaries, technology, office costs, marketing, and business travel.

• Entering into contracts with employees, contractors, and vendors.

• Handling regulatory, tax, and compliance obligations associated with the advisory business.

Instead of routing all of this activity through an individual (or directly through the fund), the management company centralizes it in a dedicated business entity.

How Does a Management Company Operate?

Ownership of the management company typically mirrors the economic or decision-making structure of the GP team. Common patterns:

• Single-member LLC: One person owns and controls the management company.

• Multi-member LLC: Several partners or team members hold ownership interests, often aligned with their economic participation (for example, salary and/or carry allocations).

The management company usually:

1. Enters into an Investment Management Agreement with the fund and GP.

2. Provides advisory and management services, such as sourcing, diligencing, negotiating, and monitoring investments.

3. Receives management fees (commonly around 2% annually of commitments or assets under management, subject to the fund’s terms).

4. Pays operating expenses of the venture business from those fees and other revenues, if any.

Some funds use front-loaded management fees to better cover early operating costs. For example:

• Higher fees in earlier years (e.g., 2.5% during the investment period).

• Reduced fees in later years (e.g., 1.5% during the harvest/monitoring period).

This can be especially helpful for emerging managers who depend on management fees as their primary income before carry is realized.

Why Create a Management Company?

A management company is not legally required to manage a fund, but it is strongly preferred in most professional setups.

Key Benefits

1. Liability Protection

   • An LLC structure can help shield individual managers from certain business liabilities, subject to proper formalities and law.

2. Clean Separation of Activities

   • The fund focuses on holding investments and distributing returns.

   • The management company focuses on operating the business and providing advisory services.

   • This separation simplifies accounting, tax reporting, and recordkeeping.

3. Scalability and Team Structure

   • Easier to add partners or team members as equity holders, employees, or carry participants.

   • Clearer framework for compensation, carry sharing, and internal governance.

4. Regulatory Alignment

   • The management company often serves as the investment adviser for Advisers Act purposes (for example, as an Exempt Reporting Adviser if relying on 203(l) or 203(m)).

   • Having a discrete advisory entity simplifies Form ADV and other regulatory filings.

For solo or very small managers, these benefits may not seem necessary at the beginning—but as the platform grows, having a well-structured management company becomes increasingly important.

How Do You Create a Management Company?

The steps will vary by jurisdiction, but common elements include:

1. Choose a Jurisdiction and Entity Type

   • Many venture managers form the management company as a limited liability company (LLC), often in Delaware or their home state.

2. File Formation Documents

   • Prepare and file a Certificate of Formation (or equivalent) with the chosen state.

   • Designate a registered agent for service of process.

3. Adopt an Operating Agreement

   • Even if not required to file with the state, an operating agreement is essential for:

     • Ownership percentages.

     • Decision-making processes.

     • Economic sharing (including how carry allocations are reflected, if at all).

4. Obtain Tax Identifiers and Open Bank Accounts

   • Apply for an Employer Identification Number (EIN).

   • Open a dedicated bank account for the management company (separate from personal and fund accounts).

5. Coordinate with Fund Documents

   • Draft or update the Investment Management Agreement between the fund/GP and the management company.

   • Ensure that management fee terms in the fund documents align with how the management company is set up and operated.

Throughout this process, it is advisable to work with:

• Legal counsel (for entity structure, operating agreement, and fund/management contracts).

• Tax and accounting professionals (for income recognition, expense treatment, and long-term planning).

How the Management Company Fits Into the Venture Stack

In the broader fund structure, the management company is one of several key entities. At a high level:

• Fund: Holds LP capital and portfolio investments.

• GP entity: Serves as the general partner or managing member of the fund and holds carry economics.

• Management company: Provides advisory services, receives management fees, and employs the team.

For a more complete picture of how these pieces fit together, see our related guide, A Guide to VC Structures and Stakeholders.

Key Takeaways for Emerging Managers

When deciding whether and how to create a management company, consider:

1. Liability and professionalism: A separate management company is a standard feature of institutional-quality fund structures.

2. Operational clarity: Keeping investment operations in one entity and fund assets in another simplifies bookkeeping, tax, and internal management.

3. Growth and team building: The management company is the natural home for your growing team, carry-sharing arrangements, and firm-level strategy.

4. Regulatory needs: If you operate as an Exempt Reporting Adviser or beyond, having a distinct advisory entity is often the cleanest approach.

With the right structure, advisors, and infrastructure, a management company can give you a strong foundation for scaling from a first fund or initial SPVs into a durable, multi-vehicle investment platform.