LLC vs. LP: What Investors Actually Want？

One of the first questions that comes up when structuring an investment fund or deal vehicle is deceptively simple: Should this be an LLC or a limited partnership?

In U.S. venture financing, both structures are widely used, and capable of supporting sophisticated economics. Yet the choice between an Limited Liability Company ("LLC") and an Limited Partnership ("LP") often shapes how investors perceive the fund, how decisions get made, and how smoothly the fund operates over time. While there is no universal answer, understanding the practical differences between LLCs and LPs can help sponsors and investors avoid misalignment as a fund evolves.

If you would like support with fund formation or vehicle structuring, please contact Aurora Shao, Esq. at aurora.shao@consultils.com. We work with sponsors and investors to design structures that align with fundraising goals, regulatory requirements, and long-term strategy.

Overview of LLCs and LPs

LP:

• Parties: At least one General Partner (GP) and one or more Limited Partners (LPs)

• Core split: Clear separation between management and capital

  • GP: Runs the fund (operations + investment decisions) and owes fiduciary duties

  • LPs: Passive investors with limited liability

• Governing document: Limited Partnership Agreement (LPA)

• Market norm: The dominant structure for traditional venture capital and private equity funds

LLC:

• Core feature: Built for flexibility

• Management options: Can be member-managed or manager-managed

• Governing document: Operating Agreement, which can be heavily customized

• Customizable terms often include:

  • Governance rights

  • Voting thresholds

  • Distribution mechanics

  • Transfer restrictions

• Tradeoff: Flexibility is appealing, but it increases the need for careful, precise drafting

  
  

Governance and Control

In an LP, the structure reflects a familiar hierarchy. The general partner controls day-to-day operations, investment decisions, and exits, while limited partners generally have narrow consent rights over major actions such as amendments, dissolution, or removal of the general partner for cause. This structure aligns closely with institutional investors’ expectations and long-standing market practice.

LLCs, on the other hand, allow far more variation. Management authority can sit with a managing member, a non-member manager, a board of managers, or be allocated among members in tailored ways. Voting thresholds, protective provisions, and economic waterfalls can be heavily customized. This flexibility is attractive for smaller funds, special purpose vehicles (SPVs), or situations where investors want more direct governance involvement.

Tax Considerations

Both LLCs and LPs are generally treated as pass-through entities for U.S. federal income tax purposes, avoiding entity-level taxation. However, nuances matter.

LP (Tax Treatment & Market Practice)

• Benefits from decades of established tax practice and market-standard structuring.

• Key economics are widely understood by investors and tax advisors:

  • Carried interest allocations to the GP

  • Preferred returns

  • Distribution waterfalls

• LP interests are commonly used to support long-term capital gains treatment for carried interest, subject to applicable holding-period rules.

LLC (Tax Treatment & Structuring Nuances)

• Can achieve similar economic results to an LP, but certain areas often require more careful structuring.

• Common “nuance” areas that may require additional attention:

  • Tax treatment of certain allocations

  • Management fee waivers

  • Profits interests

Securities and Financing Considerations

LP (Securities Law Treatment & Compliance)

• Often treated as securities under U.S. law because limited partners are typically passive investors.

• As a result, transfers or foreclosures of LP interests usually must rely on securities-law exemptions.

• This is well understood in the market and rarely a deal-breaker, but it typically means:

  • Higher, and more predictable, securities-law compliance expectations in LP structures.

LLC (Securities Law Flexibility & Structuring)

• Treatment is more fact-specific and depends on how much control investors actually have.

  • If members have meaningful governance rights, LLC interests are less likely to be viewed as securities.

  • If investors are largely passive, the analysis can start to look like an LP.

• This flexibility can be helpful, but it increases the importance of:

  • Thoughtful structuring

  • Clear documentation (so the governance/control story matches the reality)

Why this matters (when it becomes “real”)

• These issues may not change day-to-day operations, but they can become critical in:

  • Financings

  • Restructurings

  • Stressed / enforcement situations

• LPs: benefit from established market norms that handle these scenarios efficiently.

• LLCs: offer greater design flexibility, but require careful planning to avoid surprises later.

Economics, Administration, and Cost

Both LLCs and LPs can support standard venture economics, including management fees, preferred returns, and performance-based incentives. LPs tend to rely on market-standard terms that are easily understood by investors. LLCs allow more creativity, but that freedom increases the importance of precise drafting.

From an administrative perspective, LPs often involve more upfront structuring, including the formation of a GP entity and more formal reporting practices. Over time, however, that standardization can reduce operational friction. LLCs may be faster and less expensive to launch, but extensive customization can increase legal and administrative costs as the investor base grows.

Choosing the Right Vehicle

There is no one-size-fits-all answer. As a general guideline:

• Choose an LP:  if you are forming a traditional venture fund, targeting institutional investors, or seeking market-standard governance and economics.

• Choose an LLC: if you are launching SPVs, co-investment vehicles, holding structures that might evolve into operating companies, or early-stage funds with a limited number of aligned investors and a need for flexibility.

Ultimately, the optimal structure depends on investor profile, fund size, tax considerations, and long-term strategy. Early legal and tax planning can prevent costly restructurings later and ensure the vehicle aligns with both regulatory requirements and market expectations.

If you would like support with fund formation or vehicle structuring, please contact Aurora Shao, Esq. at aurora.shao@consultils.com. We work with sponsors and investors to design structures that align with fundraising goals, regulatory requirements, and long-term strategy.

Disclaimer: The materials provided on this website are for general informational purposes only and do not, and are not intended to, constitute legal advice. You should not act or refrain from acting based on any information provided here. Please consult with your own legal counsel regarding your specific situation and legal questions.

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As Partner and Head of M&A at ILS, David advises technology companies on venture financings, M&A, and cross-border transactions—bringing top-tier legal expertise and deep technical insight. He has closed $3B+ across 100+ deals, supporting clients from early-stage startups to global enterprises across the full corporate lifecycle, with a dealmaking style that combines strategic judgment and crisp execution.

Previously, David was Head of Legal at Humane, Inc., an AI unicorn acquired by HP, and practiced at Wilson Sonsini, Latham & Watkins, Cooley, and Gibson Dunn. He is known as both legal counsel and strategic business partner on complex, high-stakes transactions across AI, clean energy, biotech, and software.

Email: david.liu@consultils.com | Phone: 626-344-8949

As Partner and Head of Transactions at ILS, Fiona delivers professional legal and strategic support to tech companies—with a focus on AI, medical devices, and fintech. Beyond full-spectrum technology law, she specializes in export control and compliance: supporting tech firms at all growth stages, aiding startups in scaling operations, and helping mature enterprises address regulatory challenges.

Previously, Fiona gained hands-on experience building legal frameworks from scratch. She advised unicorn companies on global expansion and regulatory hurdles, developing deep insight into clients’ growth challenges. Combining legal expertise with commercial judgment, she helps clients establish sustainable legal processes and provides clear guidance to advance their business.

Email: fiona.xu@consultils.com | Phone: 626-344-8949

Aurora specializes in corporate law, venture financing, and compliance, with extensive experience advising emerging growth companies throughout their lifecycle—from formation and corporate governance to employment compliance and fundraising.

With extensive cross-border experience in both China and the U.S., Aurora provides strategic counsel to clients navigating international transactions, corporate structuring, and market expansion. She brings valuable experience advising startups and managing complex corporate matters. Her background in the biotech sector and at leading Beijing law firms—where she focused on corporate compliance and cross-border transactions—equips her with strong insight into the regulatory and business environments of both jurisdictions.

Email: aurora.shao@consultils.com | Phone: 626-344-8949