I talk to first-time fund sponsors all the time, and it’s common for sponsors to insist that they want to start with the simplest possible structure (and “build out” as needed). 

Often, that means a chart with one box for the fund and another for the GP/Manager, which receives both the carried interest or promote and the management fees.

Historically, combining the GP and Manager in one entity was more common. But fund structures, tax rules, and sponsor economics have evolved. Adding a separate management company may feel like unnecessary complexity, but the modest up-front effort can produce a structure that better supports the intended economics and tax treatment and is ultimately easier to administer.

Why two sponsor entities?

The GP typically holds the carried interest, an interest in the fund’s future profits. The management company earns fees for operating the business.

Those two income streams can look very different for tax purposes. Management fees are ordinary service income. Carry generally takes its character from the fund’s underlying income. When that income is long-term capital gain, Section 1061 may require a holding period of more than three years to preserve long-term treatment.

Separate entities do not create that tax result by themselves. But separate agreements, bank accounts, and books make it much easier to preserve the intended economics and report each stream correctly.

The separation can also matter at the state and local level. In some jurisdictions, conducting the fee business and holding the carry in the same entity can affect how entity-level, franchise, or unincorporated-business taxes apply to income that otherwise appears investment-related. The consequences vary significantly by jurisdiction, which is one reason the structure should be considered at formation.

Structuring to protect your carry

Team members often receive their carry through profits interests in the GP. Properly structured, a profits-interest grant may qualify for IRS safe-harbor treatment and avoid tax at grant.

But timing and documentation matter. The grant terms, vesting, liquidation-value hurdle, and whether a protective Section 83(b) election is appropriate should be addressed at the start, not after value has accrued.

The tax result at exit is not automatic, either. It depends on the character of the fund’s income and rules including Section 1061.

The management company is also where most payroll and self-employment-tax questions arise.

The answer depends on the entity type, the owners’ roles, the compensation structure, and the applicable jurisdiction. If the management company is a partnership, or an LLC taxed as a partnership, the scope of the limited-partner exception from self-employment tax remains unsettled. The Tax Court and the Fifth Circuit have now taken different approaches.

Using an S corporation or C corporation can change that analysis, but it introduces its own compensation, payroll, and entity-level tax considerations. It is not simply a matter of selecting the entity with the lowest apparent tax rate.

For new managers, our goal is to choose the structure deliberately, document who does what, and avoid building a personal budget around the most aggressive possible result.

There are also plenty of boring but necessary considerations, including state franchise or gross-receipts taxes, payroll and benefits, expense-sharing arrangements, intercompany agreements, and fee-waiver mechanics.

Managers should consider at formation whether they want the flexibility to waive management fees for an interest in future fund profits. Management fee waivers were once a routine feature in fund documents. In my experience, they are now often afterthoughts added through amendments, which is possible but less than ideal.

A respected fee waiver does not simply convert ordinary income into capital gain. It replaces the right to a relatively fixed fee with a genuinely contingent interest in future fund profits. Timing, documentation, and genuine entrepreneurial risk are critical, and the ultimate tax character depends on the income the fund actually generates.

A 2025 amendment also clarified that Section 707’s disguised-payment rules can apply even without final regulations. Fee waivers remain possible, but they should be designed carefully and addressed before the relevant fees are earned.

I understand the allure of simple, fast fund documents. But the structure and mechanics of the GP and management company are critical to the sponsor’s economics.

Devoting even a moderate amount of tax attention to the sponsor entities at formation can be one of the highest-return investments in a fund launch.

This blog was written by Touchstone Strategic Law, PLLC, and published accordingly to Touchstone Strategic Law, PLLC

Touchstone Strategic Law is thrilled to share that Michael Perez (co-founder and Managing Partner) has been honored by the Boston Bar Association (“BBA”) with the 2025 “Mary K. Ryan Achievement in Pro Bono Award”. Mike, as well as six other honorees, was presented with the award on October 30, 2025 at the BBA’s “Spirit of the Bar” event – an inspirational evening celebrating service, leadership, inclusion and community.

The Mary K. Ryan Achievement in Pro Bono Award was established in memory of former BBA president Mary Ryan and is given annually to individuals who embody her legacy as a dedicated advocate and champion of legal aid and pro bono work.  Mike’s commitment to serving underserved and marginalized communities has been a hallmark of his legal career.  The BBA lauded Mike’s combination of “legal expertise, compassion, humility and humor to inspire others to serve.” While serving as a Managing Partner and chairing the corporate department at Touchstone Strategic Law, Mike has devoted hundreds of legal hours to pro bono immigration, housing, and pandemic-related advocacy.


Together, the team at Touchstone Strategic Law celebrates Mike’s accomplishments, and are excited to move forward in the same spirit of service, leadership and community.

This blog was written by Touchstone Strategic Law, PLLC, and published accordingly to Touchstone Strategic Law, PLLC

Hello, reader! Welcome to this series where we will discuss the legal side of turning your entrepreneurial dreams into reality. Everyone talks about being your own boss and starting your own business—being master of your own fate, an indomitable force, the captain of your soul. All of that is beautiful and fantastic! But how do you go from your 9-to-5 to your first day as CEO…while still owning your idea and being ready to catch fire?

Meet Morgan and Blake. They are  data scientists who work on coding and technology for a large tech company. They wake up every morning at 7 a.m., make a strong cup of coffee, and reheat their meal prep. Morgan knows they’re meant for bigger things, so Morgan is getting ready to start their own company (empowered by the new non-compete rule). 

But they have to ask themselves, “How do I start? Do I form a company now or later? How do I protect my IP? Do I need a lawyer for incorporation?” 

Let’s start from the beginning. Let’s start while our protagonists’ idea is still just a light bulb above their head. your first post. Edit or delete it, then start writing!

“My Boss is in My Head”

No, seriously. Morgan and Blake’s employer may own the ideas or at least control which ones they can talk about publicly. We aren’t talking about some X-men thing here. We are talking about ownership of intellectual property (IP). Let’s see how this impacts Morgan and Blake.

When they get in a flow with the right dose of single origin coffee they’re unstoppable, and they’ve written code at their job that reduced processing time of financial data by 70%. After work hours, on their work computer, they made notes about a way to reduce processing time even further. Over the weekend, on their own computer, they implemented a new version of the code that works on health data. To try it out, they wrangled a sleek data set for analyzing anonymized personal health data. (sweat emoji) 

Can they use any of this to launch their own business? There is a high chance that the answer is NO. It could be possible but risky, or maybe they’re lucky to be in the clear. Companies usually make you sign contracts that safeguard the intellectual property created by their employees, often called “Assignments of IP”. The scope could be narrow. The scope of the assignment could be broad. It’s a bit of a thicket. 

Look into your situation early in the process. Identify what you’re assigning to your employer and what you keep for yourself. Think about what will be considered competitive to your employer or what they might not care about if you pursue. This will affect how motivated they are to claim what they might think is theirs. 

Ready to Become a Real Business

The soon–to-be partners read through their employment agreements and are ready to start their own business. It’s time to decide whether to create a corporate entity, like an LLC or a corporation. 

This is usually a good idea. They would be owners and co-founders, but this separate entity would shield them from liability for their business activity and provide the basis for adding people and resources to their endeavor. If that million-dollar idea is already showing signs of life, maybe it’s time to start a real company that will own the idea, build brand recognition, and form the basis for growth. 

The reasons why forming an entity might not make sense are taxes and administrative burden. This separate entity will affect their tax filings, and it requires upkeep – accounting, annual fees paid to the government, and plenty of forms to fill out to go with the fees. If they aren’t sure what the growth plan is – maybe they are just tinkering with the new idea – then maybe it’s not time to form the company.

In future posts, we’ll dive into entity choices and how to create the entity of your choice. (Spoiler Alert! It’s totally feasible to DIY this step.) 

What’s in a Name?

A lot. Too much. Morgan and Blake have a bunch of names they like for their new company. They can’t decide which to go with. It seems crazy to dwell on this. It’s just the name. It’s the product that should matter, right? I mean “Google” is a nonsense word. Here’s why Morgan and Blake are worrying about the name of his company so much. 

Choosing a name can be a thicket of interdependent considerations, legal and otherwise. This is possibly the one thing we, as lawyers, recommend spending the most time analyzing before you move forward. Here’s a few of the legitimate questions to mull:

• Will the state you’re incorporating in allow the name?
• Can it be trademarked?
• Will someone else object?
• Is it easy to say? Will it be mispronounced?
• Is it easy to write? Fit on a website?
• Does it help identify what your company does?
• Does it help with SEO?

Changing the company name later will be a pain. You won’t want to, even if you know you need to. Pause, do your research, and sleep on it, before rolling with your name choice.

Sharing is Caring, but Don’t Overshare. 

All the sleepless nights writing code and a business plan are about to pay off. Now there’s the delicate topic of Morgan and Blake’s business partnership. Morgan and Blake know each other well as colleagues at this point, but they’ve never argued over more than semicolons and commas in the code. They’ve got to decide how to divide up ownership and responsibility for their company.

A business partnership is like a marriage. So, Morgan and Blake date, so to speak. They discuss their notions and feelings. They let it marinate. They talk to trusted friends and advisors. It’s ok to end a coffee meeting without a decision. 

When they’re ready to commit, they should write down what the deal is going to be. The agreement doesn’t need to resolve every detail, but it should get the important stuff in black and white to rely on later, under stress. 

Don’t let assumptions prevail over a true shared understanding with your prospective partner. 

This is just the beginning in a series in which we will talk you through the legal side of this painful, sleepless, stressful but incredibly beautiful and satisfying journey that is creating your own business. 

This blog was written by Touchstone Strategic Law, PLLC, and published accordingly to Touchstone Strategic Law, PLLC