When embarking on the journey of setting up a Special Purpose Vehicle (SPV), one of the fundamental decisions you'll face is whether to structure it as a Limited Liability Company (LLC) or a Limited Partnership (LP). Both offer unique advantages, including flexibility and pass-through tax treatment. However, understanding the key differences between these entities is vital for making an informed choice.
Differentiating LLCs and LPs
Structure:
LPs consist of general partners, responsible for day-to-day operations and decision-making, and limited partners. General partners bear unlimited personal liability for the SPV's debts and obligations. It's common to appoint an LLC as the general partner to mitigate this liability. In contrast, limited partners in LPs have no control over daily operations but enjoy protection from personal liability. LLCs, on the other hand, can be member-managed or managed by a designated manager. In both cases, members aren't personally liable for the SPV's debts and obligations, regardless of their level of involvement.
Jurisdictional Considerations:
The choice between LLCs and LPs may also depend on where you plan to conduct business. In some jurisdictions, like Canada, LPs are recognized, making them a suitable choice for cross-border ventures. Historically, LPs were preferred for venture and private equity funds. However, LLCs offer comparable benefits with added structural flexibility.
The SPV Landscape: LLCs Dominate
While venture capital and private equity funds often adopt the LP structure, SPVs, particularly in the realm of venture capital, overwhelmingly favor LLCs. SPVs, similar to real estate "single-purpose entities" (SPEs), serve a specific investment purpose. They make a single investment and are designed solely for that objective. Even when holding multiple investments, LLCs are the favored choice due to their universal acceptance across all 50 states and their capacity to extend limited liability protection to all members, not just limited partners.
In conclusion, the decision between forming your SPV as an LLC or an LP should align with your specific goals, investor preferences, and the jurisdiction in which you intend to operate. While both structures offer advantages, the widespread adoption of LLCs in SPVs makes them an attractive and flexible choice for many ventures.