Fund managers and syndicators should consider forming a brand new entity rather than using an existing entity or managing the fund or syndication individually. Here’s why:
Liability Protection:
The primary and most important reason to form a new entity to manage your fund or syndication is for liability protection purposes. First, utilizing an entity (rather than managing individually) helps shield personal assets from liability in the event lawsuits or regulatory issues arise. Second, forming a new entity helps segregate fund or syndication liability from impacting other businesses, ventures, and investments you own. Similarly, a separate entity demonstrates a clearer separation between the fund or syndication’s operations and the management team’s personal assets.
Tailored Operating or Partnership Agreement:
Another important reason to form a new entity is to delineate clear and specific terms of the company in the company’s operating or partnership agreement. Rather than having a broad operating agreement for the management of several companies, the new entity can set forth specific terms relevant to specific managers, members, and partners for the fund or syndication. This includes provisions for distributions, management and decision-making, investor relations, and other specific duties or obligations. A tailored company agreement can also set forth clear procedures for if something happens to a member of the management team and helps ensure the continuity of the manager
Marketing and Professional Image:
Creating a separate entity for the management of the fund or syndication can convey a clearer structure and more professional image to investors. This can facilitate the marketing and branding of the fund or syndication.
Simplified Accounting and Financials:
Establishing a new entity to manage the fund syndication allows for easier tracking of the flow of financials from the fund or syndication to its manager or general partner. Additionally, the new entity’s operating or partnership agreement can specify how the management team allocates profits, losses, fees, and carried distributions which could be different for one fund or syndication and its other projects and can simplify tax and accounting processes.
Ultimately, forming a new entity for your fund or syndication helps shield personal and outside business assets from liability, allows for a company agreement tailored to the fund or syndication, helps establish a more professional image, and simplifies management accounting flowing from the fund or syndication.