Corporate Organisation of VC Firms in the US
Most mainstream firms or wealthy individual investors invest their capital through funds organized as limited partnerships.

Exiting a Venture Capital Investment
Exit routes consist of an IPO (initial public offering), trade sale of shareholdings, merger or acquisition.

The US Tax Regime for Venture Capital
The overall tax regime for venture capital investment in the US is reasonably benign.

Corporate Organisation of VC Firms in the US

There are several types of venture capital firms, but most mainstream firms or wealthy individual investors invest their capital through funds organized as limited partnerships in which the venture capital firm serves as the general partner.

A limited partnership is a partnership that requires only one partner to assume personal liability for the business's liabilities (the general partner). There may be more than one general partner. However, there may also be other partners (limited partners) who are passive investors and do not incur personal liability.

Formation of a limited partnership requires compliance with state law; otherwise most states will treat all partners as general partners for purposes of personal liability for the business's obligations.

A limited partnership encourages contributions from investors who might be reluctant to assume the personal liability associated with a general partnership. A limited partner is merely an investor; he or she supplies the capital but is not involved in the day-to-day management of the business. In fact, limited partners are prohibited from becoming actively involved in the on-going management of the business or they forfeit their limited liability. The business must have at least one general partner who is responsible for overseeing operations and for making daily management decisions.

Sale of ownership interests in a limited partnership may be treated as a sale of securities, and state and federal securities laws must be consulted.

The most common type of venture capital firm is an private, independent venture that has no affiliations with any other financial institution. Venture capital firms may also be affiliates or subsidiaries of a commercial bank, investment bank or insurance company and make investments on behalf of outside investors or the parent firm's clients. Still other firms may be subsidiaries of non-financial, industrial corporations making investments on behalf of the parent itself. These latter firms are typically called "direct investors" or "corporate venture investors."

Other organizations may include government affiliated investment programs that help start up companies either through state, local or federal programs. One common vehicle is the Small Business Investment Company or SBIC program administered by the Small Business Administration, in which a venture capital firm may augment its own funds with federal funds and leverage its investment in qualified investee companies.

While the predominant form of organization is the limited partnership, in recent years the tax code has allowed the formation of either Limited Liability Partnerships, ("LLPs"), or Limited Liability Companies ("LLCs"), as alternative forms of organization. However, the limited partnership is still the predominant organizational form. The advantages and disadvantages of each has to do with liability, taxation issues and management responsibility.

The venture capital firm will organize its partnership as a pooled fund; that is, a fund made up of the general partner and the investors or limited partners. These funds are typically organized as fixed life partnerships, usually having a life of ten years. Each fund is capitalized by commitments of capital from the limited partners. The venture fund will have from a few to almost 100 limited partners depending on the target size of the fund. Once the partnership has reached its target size, the partnership is closed to further investment from new investors or even existing investors so the fund has a fixed capital pool from which to make its investments.

Making investments in portfolio companies requires the venture firm to start "calling" its limited partners' commitments. The firm will collect or "call" the needed investment capital from the limited partner in a series of tranches commonly known as "capital calls". These capital calls from the limited partners to the venture fund are sometimes called "takedowns" or "paid-in capital." Some years ago, the venture firm would "call" this capital down in three equal installments over a three year period. More recently, venture firms have synchronized their funding cycles and call their capital on an as-needed basis for investment.

Although the classical, fixed-term limited partnership fund has emerged as the dominant form for venture capital investment, it is illiquid during the term of the partnership. Difficulties of valuation have probably been the main reason preventing the emergence of a secondary market in partnership shares, although just recently the sheer size of the venture capital sector, plus perhaps the woes of the high technology industry, have been factors tending to encourage the development of secondary liquidity. Investors locked into partnerships with many basket-case investments may want to rescue what little they can from the mess.

Some types of "secondary" partnership have emerged that specialize in purchasing the portfolios of investments of existing venture capital firms. These secondary partnerships, expecting a large return but taking high risks, invest in what they consider to be undervalued companies.

As in the mutual fund sector, the choice of investment targets is often delegated to specialist advisors or management agencies. In some cases, the investor will provide liquidity to an advisor, or 'gatekeeper', which pools the assets of its various clients and invest these proceeds as a limited partner into a venture or buyout fund currently raising capital. Alternatively, an investor may invest in a "fund of funds," which is a partnership organized to invest in other partnerships, thus providing the limited partner investor with added diversification and the ability to invest smaller amounts into a variety of funds.

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Corporate Organisation of VC Firms in the US
Most mainstream firms or wealthy individual investors invest their capital through funds organized as limited partnerships.

Exiting a Venture Capital Investment
Exit routes consist of an IPO (initial public offering), trade sale of shareholdings, merger or acquisition.

The US Tax Regime for Venture Capital
The overall tax regime for venture capital investment in the US is reasonably benign.