Venture Institute

Venture Capital Entities

Demystifying the Entities: The Fund, The General Partner, and The Management Company

Venture capital firms consist of three main components: the Fund, the General Partner (GP), and the Management Company (ManCo). Each has a significant role in the operation and success of the firm. Understanding the responsibilities and interactions of these entities is fundamental to navigating the venture capital ecosystem. This article aims to provide a comprehensive understanding of these components.

The Management Company

The Management Company is the brand owner. It manages intellectual property and vendor relationships. Its operations are overseen by Managing Partners, and it employs full-time staff and vendors as needed. The ManCo receives management fees, which cover its operating costs. It usually resembles a small business.


  • Manages brand image
  • Protects intellectual property
  • Handles vendor contracts
  • Operates with full-time staff
  • Uses management fees for operational costs

Typically, in the first round of fundraising (Fund I), firms aim to minimize expenses by avoiding having staff and opting to distribute management fees instead of paying salaries.

The General Partner

The General Partner makes the investment decisions. It oversees one or more funds, decides where the funds’ money will be invested, and distributes the “carried interest” from those funds. The GP consists of Managing Partners, General Partners, and Venture Partners.


  • Makes investment decisions
  • Manages fund or funds
  • Distributes carried interest
  • Comprises Managing Partners, General Partners, and Venture Partners

The General Partner often shifts between funds, particularly if new team members are introduced or economics are changed. The GP also normally commits 1% into the fund pro rata based on the ownership, which is a standard requested by the Limited Partners (LPs).

The Fund

The Fund is the financial fuel. It collects and invests capital from Limited Partners, invests in high-growth companies, and holds securities or investment interests on their behalf. The fund’s expenses and organizational costs are covered by the Limited Partners, and capital is called upon for investments as needed.


  • Collects and invests Limited Partner capital
  • Invests in high-growth companies
  • Holds securities on behalf of Limited Partners
  • Covers fund expenses
  • Calls capital for investments

Venture capital managers prioritize minimizing fund expenses to increase the pool of available capital for investments by employing strategies like lean staffing, effective vendor management, and stringent cost control

Pass-Through Entities

The Management Company, General Partner, and Fund in a venture capital firm are usually established as pass-through entities. This means that these entities themselves do not pay taxes on their income. Instead, the income, deductions, and credits are passed through to their owners, who report these amounts on their personal tax returns.

Tax Advantages

  • Avoids Double Taxation: Earnings are taxed only at the owner’s level, not at the corporate level.
  • Simplifies Tax Filing: Owners report their share of the entity’s income or loss on their individual tax returns.
  • Offers Flexibility: The pass-through structure can adapt to changes in ownership or business operations.

The primary reason for this structure is to ensure favorable tax treatment for the investors. It allows the profits of the investments made by these entities to be taxed only once, at the individual investor level. This is unlike the typical corporate structure where profits are taxed at the corporate level and then again when distributed to individuals as dividends.

However, the portfolio companies that the fund invests in are not structured as pass-through entities. This is because the investors do not want the gains and losses of the portfolio companies to be directly reflected on their own tax returns. Managing these gains and losses can be complex and administratively burdensome for individual investors, especially when there are many investors in a fund.

As a result of this structure, most funds are restricted from investing in companies that are structured as pass-through entities, despite being pass-through entities themselves. This ensures that the tax implications for the fund’s investors remain manageable and predictable. Thus, the choice of entity structure – for both the venture capital firm’s internal entities and the companies it invests in – plays a critical role in determining tax implications for investors.

Governing Agreements

Each entity within a venture capital firm operates under specific legal agreements, which outline their roles, responsibilities, and relationship with other entities. These agreements provide structure and rules, facilitating smooth and transparent operations.

Management Company Agreement

The Management Company operates under an operating agreement. This document details the responsibilities of the managing partners, including managing the firm’s brand, intellectual property, and vendors. It outlines the operating budget and how management fees fund the company’s expenses.

General Partner Agreement

The General Partner operates under a separate operating agreement, which is often simplified. This agreement spells out the partners’ duties, which may include the decision-making process for investments. It also details the distribution of carried interest, the profit-sharing arrangement between the General Partner and the Limited Partners.

Limited Partnership Agreement

The Fund operates under a limited partnership agreement. This document establishes the relationship between the General Partner (who makes investment decisions) and the Limited Partners (who provide capital). It outlines how capital is called, invested, and returned, and it specifies the allocation of fund expenses.

Investment Agreement

When the fund invests in a company, an investment agreement is made. This document outlines the terms of the investment, including the amount of capital, the equity received, and the fund’s rights as an investor.

These legal agreements ensure all parties have a clear understanding of their obligations, rights, and the mechanisms for resolving any disputes. They form the legal backbone of a venture capital firm’s operations and investment activities.

Interplay of Entities

Venture capital firms embody a complex, yet harmonious, interplay between various entities, namely the Management Company, the General Partner, and the Fund. Each entity has distinct roles and responsibilities but collectively, they contribute to the firm’s primary goal – making and managing investments for high returns.

The Management Company serves as the operational backbone of the venture capital firm. Run by Managing Partners, it handles the firm’s brand, intellectual property, and vendor relationships, ensuring smooth day-to-day operations. While the Management Company oversees operational aspects, it’s financed by management fees, underlining the interconnectedness of these entities.

The General Partner plays a crucial role in steering the firm’s investment strategy. This entity, run by Managing Partners, General Partners, and Venture Partners, makes investment decisions for the Fund, using its deep industry knowledge and strategic insights. The General Partner also takes on the task of distributing the carried interest, a portion of the Fund’s profits, among the partners.

The Fund, on the other hand, is the financial heart of the venture capital firm. It collects and invests the capital committed by Limited Partners in high-growth companies. The fund also handles the expenses associated with making and managing these investments.

In summary, the Management Company, the General Partner, and the Fund are distinct yet interconnected entities within a venture capital firm. They each have separate roles but work together to ensure the firm’s smooth operation and success in its investment activities. This symbiotic relationship is what makes venture capital firms unique and effective in driving innovation and entrepreneurship.

Example Investment Process

Venture capital investment follows a structured process, from the initial identification of a prospective portfolio company to the final distribution of returns. The steps below illustrate the general flow of activities:

  1. Identification: The General Partner identifies a promising technology startup and decides to invest $1 MM after comprehensive due diligence.
  2. Transaction Oversight: Upon decision of the investment, the Management Company ensures smooth execution by handling all legal and operational matters related to the transaction.
  3. Investment: The Fund, which holds the capital committed by the Limited Partners, is utilized to pay the $1 MM for the investment.
  4. Portfolio Management: The General Partner provides the startup with strategic advice and support over time, fostering its growth and value increase.
  5. Exit: After a typical period of five years, the startup is sold for a substantial amount, say $1 Bn, resulting in a return of $100 MM.
  6. Return Flow: The proceeds from the exit, the $100 MM, flow back into the Fund.
  7. Distribution: The General Partner ensures the return of the initial capital to Limited Partners and covers the Fund’s expenses. Any remaining profit is divided, with a standard portion of 20% (known as carried interest) retained by the General Partner. 

This sequence exhibits the capital and profit dynamics within a venture capital firm, beginning with the initial investment made by the General Partner using the Fund’s resources, through to the profitable exit and distribution of returns. It provides a high-level view of the lifecycle of a venture capital investment.

Structural Nuances

Operating a venture capital firm involves intricate decisions and operations. These nuances reflect the firm’s unique structure and operational approach, which requires a high degree of consensus and precision.

A distinctive aspect of venture capital operations is the consensus required for operational decisions. For instance, even the procurement of basic office supplies needs agreement from all Managing Partners. This is because the management fees, which are the earnings of the Managing Partners, fund the Management Company’s operating costs. Consequently, every expense, regardless of size, is a shared financial responsibility, emphasizing the culture of efficiency and fiscal discipline.

Consensus also plays a crucial role in investment decisions. Each potential investment needs approval from the Managing Partners, Partner, and even Venture Partners. These discussions can turn intense due to differing opinions on potential risks and returns. Achieving consensus in such scenarios is challenging but crucial, as it shapes the firm’s investment strategy and determines its success.

Disputes can lead to the collapse of a firm or the departure of a Managing Partner or Partner. Starting a  new Management Company is akin to hitting a reset button. It redefines the status of seasoned managers as new managers. New managers, regardless of their past experience, must establish and prove their operational processes within the context of the new firm. LPs often adopt a cautious stance with new managers due to the risks associated with getting a new firm established.


The functioning of a venture capital firm hinges on the symbiotic relationships among its three main entities: the Management Company, General Partner, and Fund. By understanding the roles, functions, and interdependencies of these components, one gains a clearer perspective on the venture capital landscape. This knowledge is invaluable for those involved in or considering venture capital investments, helping them make more informed decisions and potentially contributing to their financial success.


Carried Interest: This refers to the share of profits that the General Partner receives from the investments made by the fund. It’s a percentage of the profits, typically around 20%, that the General Partner receives as compensation for managing the investments.

Due Diligence: The process of carefully investigating and evaluating a potential investment opportunity to assess its risks and merits. In the context of venture capital, it includes analyzing the business model, financial statements, market potential, management team, and legal considerations.

Limited Partners (LPs): These are the investors who provide capital to the venture capital fund. They have limited liability and are not involved in the day-to-day management of the investments.

Management Fees: Fees that the Management Company receives to cover its operating costs. These are typically a percentage of the committed capital within the fund.

Pass-Through Entities: A legal structure where an entity does not pay income taxes at its own level. Taxes are “passed through” to the owners, who report the income, deductions, and credits on their individual tax returns.

Portfolio Companies: These are the companies in which the venture capital fund has invested. The fund holds equity or other forms of investment interests in these companies, expecting them to grow and provide returns.

Pro Rata: A term that refers to the proportional allocation of something, such as ownership or investments. In the context of the article, it relates to the General Partner’s commitment to the fund based on ownership.

Venture Partners: Individuals who assist the General Partner in sourcing, evaluating, and managing investments. They may have a less formal or committed relationship with the firm compared to General Partners and Managing Partners.