A question I often get asked is: "What do you think is the right fund structure for what we are trying to achieve?"
Always a tricky question to answer. 🤔
My usual response is to ask, "What are you trying to achieve?"
Is the fund investing in early-stage start-ups? Are they more mature companies? Are the investors based in the UK or offshore? Is the fund trying to raise money from individuals or institutions? Is tax relief an essential factor for investors?
Choosing the right structure for an investment fund in the UK can be crucial for the success of the fund, both to raise money and successfully invest in attractive companies.
In this article, I am trying to give you a basic (and brief) comparison between the different types of funds, including the Limited Partnership/General Partnership (LP/GP) model, the Enterprise Investment Scheme (EIS), and UK company structures such as Limited Liability Partnerships (LLP) and Private Companies Limited by Shares (Limited Companies). For more details, read our earlier article.
Below is a video summary of this article.
LP/GP Fund Structure: The Institutional Backbone
The LP/GP model is the standard for most UK private equity and venture capital funds. It is designed for institutional investors such as pension funds, family offices, endowments, and insurance companies. LP/GP funds can invest in a broad range of sectors and stages, from start-ups to mature businesses. Limited partners have liability capped at their investment, while general partners have unlimited liability for fund obligations. The structure is governed by the Limited Partnerships Act 1907 and offers significant flexibility in both strategy and governance.
The Enterprise Investment Scheme (EIS): Incentivising Early-Stage Investment
EIS is a UK government initiative to encourage investment in innovative, early-stage British companies. EIS is especially attractive to individual investors, including high-net-worth individuals, seeking tax-efficient opportunities. Companies can raise up to £12 million through EIS (and up to £20 million for a knowledge-intensive company), with strict requirements on company size, age, and sector. Investors benefit from up to 30% income tax relief, capital gains tax deferral, and loss relief. However, these investments are higher risk and often illiquid.
LLPs and Limited Companies: Flexible UK Corporate Structures
Limited Liability Partnerships (LLP) and Private Companies Limited by Shares (Limited Companies) offer flexible options for fund management entities and, in some cases, investment vehicles. Both are suitable for individuals and institutions. LLP members or Limited Company shareholders have limited liability. Governance is flexible, managed by members (LLP) or directors (Limited Company). LLPs benefit from pass-through taxation; Limited Companies pay corporation tax, with profits distributed as dividends.
Side-by-Side Comparison
| Feature | LP/GP Fund Structure (UK) | EIS Fund Structure (UK) | LLP/Limited Company (UK Equivalent) |
|---|---|---|---|
| Typical investors | Institutions | Individuals (seeking tax relief) | Individuals or institutions |
| Liability | LPs are limited to their fixed commitment, GP is unlimited | Limited to investment | Limited for all members/shareholders |
| Investment focus | Start-ups to mature businesses | Early-stage, high-growth UK companies | Flexible: depends on company rules |
| Regulatory restrictions | Strict (FCA regulations apply) | Strict (HMRC for EIS and FCA regulations apply) | Flexible. Varies by structure and sector (UK company law applies) |
| Tax efficiency | Pass-through for LPs | Generous personal tax reliefs | Pass-through for LLPs; corporation tax for Limited Companies |
| Management | GP-managed | Discretionary portfolio manager | Member/director-led |
| Minimum investment | High (institutional scale) | Lower (individual scale) | Varies |
| Holding period | Flexible | Long-term, patient capital | Flexible |
Key Considerations When Choosing a Fund Structure
What I believe is key to selecting a fund structure is to consider your investor profile and goals. Institutions may prefer LP/GP funds for their scale and flexibility, while individuals seeking tax incentives may choose EIS. EIS has strict eligibility and compliance requirements, while LP/GP and LLP/Limited structures offer more flexibility but less government support. EIS investments are riskier due to their early-stage focus, whereas LP/GP funds can diversify across company stages and sectors. EIS offers substantial tax reliefs for UK investors. LP/GP and LLPs provide pass-through taxation, while Limited companies are subject to corporation tax.
To give you a second opinion, I reached out to one of the highly respected legal firms we often work with, RW Blears and their senior partner, Roger Blears, to get his view on which fund structure he would advocate from his legal perspective.
“A SEIS or EIS fund makes sense for early stage investments. The risks are enormous and so the tax reliefs are important. When financing management succession in later stage companies a GP/LP fund makes more sense because they can finance cash outs for retiring founders, not an option for a SEIS/EIS fund, as well as capital for future growth and development. If a new manager wants to provide venture debt to entrepreneurial companies then an LLP structure for family office companies or Limited Companies within an AIFM or MiFID structure may make sense as they will offer investors business relief from inheritance tax up to the new 100% relief allowance proposed under Finance Bill 2025.”
Conclusion
Your fund structure determines your investment strategy, risk profile, and potential returns. The LP/GP model is the preferred choice for institutional private equity and venture capital in the UK, offering flexibility and clear role definitions. An EIS fund is the right option to attract individuals seeking tax-efficient access to innovative, early-stage UK companies. LLPs and Limited companies provide further flexibility and limited liability for a range of business purposes.
For a more detailed exploration, read our earlier article on this subject or contact me (Boyd Carson) at Sapphire for bespoke guidance tailored to your fund objectives.
If you would like to contact me to inquire more about how to set up an investment fund, pricing, and options, fill out this form, and I will be in touch right away.
