When starting to invest, emerging investors must decide if they will create a management company for their investments. Rather than taking on the management responsibilities as an individual, an investor can form a management company to keep their investment activity in a separate entity. While it may sound intimidating to create an entity, the process is straightforward, allows cleaner record keeping, and protects investors from many liabilities. 

What is a management company?

A management company is an entity (typically an LLC) that is created for the purpose of managing the operations of a venture capital fund. This includes collecting management fees, paying out and accounting for operational expenses (i.e., marketing or business travel), organizing employment or other business agreements, and handling regulatory filings. 

Facilitating these activities through a management company protects fund managers from complete liability when it comes to the fund’s activities.

How does a management company operate?

The management company is typically owned by one or multiple partners of a venture capital fund. This is referred to as a single-member or multi-member LLC. A venture capital fund typically charges a management fee to fund investors, which covers the cost of operating the fund. This includes employee salaries, office space, administrative expenses, marketing and business-related travel, and other ad hoc costs of running a business. 

A standard management fee is 2% of the fund’s assets under management (AUM) annually. In some cases, a fund manager will choose to front-load management fees in order to cover some of the upfront costs of running a fund, so they may charge 2.5% for the first half of the fund’s life and 1.5% for the second half. This is particularly common for first-time fund managers who have not experienced many exits and therefore rely on management fees as their primary form of income. More tenured investors who have already received carried interest on their investments may be less concerned with front-loading management fees. 

Why should a fund manager create a management company?

Having a management company is not a legal requirement for managing a venture capital fund. A solo fund manager may choose to take on the advisory and management responsibilities of the fund individually. However, many fund managers prefer the legal protections and separations of using an LLC. It may also be easier to use a separate LLC to manage the many operating expenses of a fund and keep records cleaner for tax and accounting purposes. Finally, if you are not a solo fund manager, setting up a management company allows for more than one member to have rights and benefits of the fund. 

How do you create a management company?

Setting up a management company is a fairly straightforward process that can be completed online using a variety of different services, such as the Delaware Registered Agent website, you can create a management company and pay out annual registration fees. If you take this route, you'll need to set up a separate bank account for your management company as well.

We recommend consulting with a legal, tax, and/or accounting professional to understand all of the nuances of running a management company.