Accounting & Taxes

Most VC firms set up the fund, the general partner and the management company in Delaware, including firms with foreign Managing Partners. This provides a clear structure with unified control and governance, and it helps to manage costs,...

Most VC firms set up the fund, the general partner and the management company in Delaware, including firms with foreign Managing Partners. This provides a clear structure with unified control and governance, and it helps to manage costs, which can escalate quickly when law firms in different jurisdictions need to coordinate. All of the Delaware companies are passthrough entities under US law, which means that profits and losses are passed directly to the owners of those entities without being taxed. The Managing Partners, who are the owners of the management company, traditionally take distributions to have passthrough treatment of management fees and other gains. They then pay taxes personally. With foreign Managing Partners, the tax treatment of passthrough gains distributed from the management company is governed by tax treaties. With some treaties, the ideal tax optimization strategy is to set up a blocker company or other entity in their local country or in an intermediary country. The best way to determine the tax strategy is to interview a few local tax specialists that are familiar with US venture and ask during the interview. With this said, aggressive tax optimization can be very expensive and time consuming, distracting Managing Partners from the core activities of fundraising and investing. Tax optimization can also be done closer to the time of an exit, when the proceeds and the details are clearer.

Hi Scott, unfortunately it is not ideal for you as a Canadian to domicile your entities in the US. The reason being is that Canada does not recognize US LLC's as an entity type. You end up getting hit at a much higher tax rate on both yo...

Hi Scott, unfortunately it is not ideal for you as a Canadian to domicile your entities in the US. The reason being is that Canada does not recognize US LLC's as an entity type. You end up getting hit at a much higher tax rate on both your management fee income and any carry as it would get hit at a corporate tax rate and again when you take a distribution.

Adeo: The Organizational Fees are for setup and have a cap, and there annual Fund Expenses that are not capped right now. I am speaking to the lawyers about a cap.

Adeo: The Organizational Fees are for setup and have a cap, and there annual Fund Expenses that are not capped right now. I am speaking to the lawyers about a cap.

This is driven by investment decisions, not by contractual language. I would not recommend including this unless explicitly asked.

This is driven by investment decisions, not by contractual language. I would not recommend including this unless explicitly asked.

Part of 1065 filing. Partner specific form which details distributive share of all income and expense items incurred by the partnership.

Part of 1065 filing. Partner specific form which details distributive share of all income and expense items incurred by the partnership.

A specific US federal tax exemption that allows investors in Qualified Small Business (defined as under $50M capitalization) for some capital gains tax exemption (up to 100%) based on how long the stock is held (minimum 5 years) up to $1...

A specific US federal tax exemption that allows investors in Qualified Small Business (defined as under $50M capitalization) for some capital gains tax exemption (up to 100%) based on how long the stock is held (minimum 5 years) up to $10mm. This provision is a frequent target of proposed tax law changes, though (as of January 2023) it is still in place.

Compare the price per share between your purchase price and the current price when acquired, and then record this differential as a markup. This assumes that you will have the same number of shares. If the share counts differ, then just ...

Compare the price per share between your purchase price and the current price when acquired, and then record this differential as a markup. This assumes that you will have the same number of shares. If the share counts differ, then just calculate the value of the ownership position before and after using the price that you paid as the value at the start. Technically, since it is an all stock acquisition, you have not exited, so I would not characterize this as an exit.

There are regulations against this in the US that need to be discussed with your counsel.

There are regulations against this in the US that need to be discussed with your counsel.

Cap adjusted projection

Cap adjusted projection

The long-term capital gains tax rate is 0%, 15% or 20% depending on your taxable income and filing status. Additionally investing in Section 1202 Qualified Small Business Stock could eliminate any tax burden for non-corporate LPs.

The long-term capital gains tax rate is 0%, 15% or 20% depending on your taxable income and filing status. Additionally investing in Section 1202 Qualified Small Business Stock could eliminate any tax burden for non-corporate LPs.

As a general rule, the fund reimburses fund formation expenses, which tend to be legal expenses, and the fund does not reimburse other setup expenses, such as marketing. Pre-marketing is also highly regulated in most jurisdictions, so fu...

As a general rule, the fund reimburses fund formation expenses, which tend to be legal expenses, and the fund does not reimburse other setup expenses, such as marketing. Pre-marketing is also highly regulated in most jurisdictions, so funds tend to avoid marketing until after the fund is fully closed with 100% of the capital committed.

The KPMG article is correct, capital gains are not sourced to the US and therefore will not be taxed in the US for your foreign LPs. To address your point about engaging in US trade or business, investment entities are not considered to ...

The KPMG article is correct, capital gains are not sourced to the US and therefore will not be taxed in the US for your foreign LPs. To address your point about engaging in US trade or business, investment entities are not considered to be engaged in a trade or business unless they are trading pretty much daily more like a hedge fund (venture capital and private equity do not take part in as many transactions). The income generated by the LP entity would not be considered ECI and they foreign LP would only need to pay tax in their home country.

Yeah, that’s market. However, our partner Spicer Jeffries will do much better. If you want an intro, ask Long That being said, you should avoid doing audit in Fund 1 It’s a small fund and it’s not justified.

Yeah, that’s market. However, our partner Spicer Jeffries will do much better. If you want an intro, ask Long That being said, you should avoid doing audit in Fund 1 It’s a small fund and it’s not justified.

You can learn about fund expenses here: https://govclab.com/2022/11/07/managing-fund-expenses-for-venture-capitalists/

You can learn about fund expenses here: https://govclab.com/2022/11/07/managing-fund-expenses-for-venture-capitalists/

You will not be able to warehouse the assets. If you’re going to warehouse, the assets must be startup equity.

You will not be able to warehouse the assets. If you’re going to warehouse, the assets must be startup equity.

Those are Org expenses so that fund will pay for them

Those are Org expenses so that fund will pay for them

You can _technically_ charge stuff like this as a fund expense, but some/most LPs would have a problem with that because that’s part of your job and they are commonly paid from management fees. So, typically those are done at the ManCo l...

You can _technically_ charge stuff like this as a fund expense, but some/most LPs would have a problem with that because that’s part of your job and they are commonly paid from management fees. So, typically those are done at the ManCo level.