How to set up a VC fund in the UK

A venture fund is a simple bargain wrapped up in a fairly simple structure.  A group of investors commit capital for a fixed term of around ten years, although final liquidation may take another four to six years.  The fund manager draws the funds down over the first five years or so as it finds companies to back — holding on to a reserve of around a quarter of the fund for follow-on investments — and spends the later years supporting and realising those positions.

In return, the manager receives an annual management amount — in a UK limited partnership, often structured as a priority profit share rather than a fee — and keeps a share of the profits, conventionally 20%, once investors have had their money back, often with a preferred return on top.

Those numbers are market conventions, rather than legal rules.  And the rest of what is covered in this Guide from the HLaw funds team — the limited partnership, the general partner company, the FCA permission, the constitutional documents, and so on — exists to make that bargain enforceable, operational, tax-efficient and acceptable to those institutions writing the cheques.

It is written for the first-time UK onshore manager — often an exited founder, an angel with a track record, or a team spinning out of an established house — who is commercially literate but has never had to look inside a fund structure.  It starts where the decision actually starts: with the threshold questions that determine whether to launch at all.  It then explains why the fund sits where it sits, what the structure consists of, how the plumbing works, the order of play generally, and the build in sequence — the regulatory permission, the rules on who you may talk to while raising, the tax, the documents, the operational work, the clock and the costs.

It assumes a closed-ended venture or growth fund structured as a limited partnership, because that is what most first onshore venture capital funds are, but the architecture is common to closed-ended private capital funds generally.

• Answer five threshold questions before spending anything: is the track record attributable; does the fee arithmetic support a firm; can you bridge the build and the GP commitment; is there genuine anchor demand; and is a fund the right vehicle yet.
• Onshore UK is the default where the team is UK-based and the raise is not predominantly EU-institutional.
• Five moving parts: the fund (an English or Scottish PFLP), a special purpose general partner company, an FCA-authorised manager (or a regulatory host), a carry partner, and the team’s own commitment.
• The plumbing: commitments flow in largely as loans; the management amount is usually a priority profit share, advanced against future profits in the early years.
• Pick the regulatory lane first. Small authorised UK AIFM is the usual own-permission route — the FCA must determine a complete application within six months — and a hosted appointed representative arrangement compresses the build to a few months.
• Marketing is regulated before the fund exists: section 21 FSMA and the FPO exemptions govern who you may approach and how, and a different regime applies once an authorised firm promotes.
• Tax: the fund is transparent for investors. From 6 April 2026 carry is taxed as deemed trading profits — an effective c. 34.1% if qualifying under the average holding period rules, up to 47% if not — and the salaried member rules are a launch-day design question on which the Supreme Court has just raised the stakes.
• The documents: a hundred-page LPA negotiated clause by clause, a PPM consistent with it, subscription packs and side letters — with a whole-of-fund waterfall the institutional preference.
• Plan on nine to twelve months and £50,000–£150,000 of legal costs to first close (our planning assumptions as at July 2026), with establishment costs usually recouped at first close up to a cap.
• If the answers are thin: raise your first fund second — deal-by-deal vehicles and hosted arrangements exist for exactly that.

The rest of this guide is those ten lines, unpacked in the order you will meet them.

The most expensive mistakes in fund formation are made before a lawyer is ever instructed, by teams who commit to a build that was never going to close.  Five questions sort most of them out.

First: is your track record attributable?
Investors in a first fund are underwriting you, and what they need is evidence — deals you can show you sourced, won and returned money on.  Deals led at a previous firm count if the attribution is clean and referenceable.  An angel portfolio counts if the entry prices, markups and exits are documented.

A company built and exited counts for founder-managers, though investors will still ask who picks the next ten.  If the honest answer is thin, the fund is not dead — it is early, and the deal-by-deal route discussed below exists for exactly this stage.

Second: does the fee arithmetic support a firm?
Take a £20m first fund charging 2% — the customary reference point, and an illustration rather than a rule: that is £400,000 a year.  Be clear what that money is for.  Fund-level expenses — administration, audit, the fund’s own legal and tax costs — are usually borne by the fund within the categories and caps negotiated in the LPA.  The manager’s own overheads, authorisation costs and ongoing firm-level compliance are a manager expense, paid out of the management fee or priority profit share that it receives from the funds that it manages.

Even so, £400,000 does not go far once a small team is paid: on a first fund the management amount is runway, not reward.  Work backwards from what the management company genuinely costs to the minimum fund size that carries it, and then ask whether that size is honestly raisable on your track record.  If the two numbers do not meet, the plan needs changing before the spending starts.

Third: can you fund the build, and the commitment?As a planning assumption, the costs of structuring, authorisation and fundraising land six to twelve months before any fee income arrives.  The fund’s establishment costs are usually recouped from the fund at first close, up to a cap and where the LPA and subscription terms so provide — but they must be bridged in the meantime, and they are yours to bear if the fund never closes.

Investors will also expect the team to commit its own capital alongside them — as an illustration, convention puts the ‘GP commitment’ at around 1% to 2% of the fund, though what investors in a first fund actually test is whether the number is meaningful to you rather than whether it hits a percentage.  Both need a funding plan that does not depend on the fund closing on schedule.

Fourth: do you have anchor demand, or just encouragement?
Everyone you pitch to will be polite.  A first close needs one or more cornerstone investors prepared to commit real money on your terms, and the difference between warm words and a cornerstone is only discovered by asking the closing question early — within the marketing rules covered below — and before the heavy spending starts.

Fifth: is a fund the right vehicle — or the right vehicle yet?
A fund is a ten-year plus commitment to a strategy, with key person obligations attached to named individuals; it is a firm, not a project.  The alternatives are respectable.  Investing deal-by-deal through special purpose vehicles or syndicates can help build the attributable track record a new manager needs — though investors may distinguish that selected deal history from a record of deploying and managing a blind-pool fund — and avoids the decade-long lock-in; the regulatory treatment, meanwhile, is structure- and activity-specific, and collective investment scheme, AIF, arranging, advising and financial promotion questions can all still arise, so the ‘lighter’ route still needs a perimeter analysis.

A venture partner seat at an established house does something similar.  Evergreen and rolling structures exist too — open-ended vehicles that reinvest rather than wind down, and funds raised in annual or quarterly tranches — but both remain unusual choices for a first institutional raise, and both trade simplicity for liquidity questions that illiquid venture assets answer badly.

And, as covered below, a regulatory hosting arrangement lets a team run fund economics under an established manager’s authorisation before committing to its own.  Plenty of good managers should raise their first fund second.

The reflex to look offshore is older than the reasons for it.  Choosing a domicile is really three questions: where are your investors, where is your team, and what will the structure cost to run.

An EU domicile — Luxembourg being the usual candidate — buys one thing of particular value: an EU manager of an EU fund can use the AIFMD marketing passport to reach professional investors across the EEA, subject to the Directive’s conditions and local requirements.

If you will raise extensively from EU institutions, that can justify the cost.  If you will not, the additional cost and complexity may not be justified: EU fund regimes are more heavily regulated, slower and costlier to establish and run; having an EU fund manager appointed is costly and will reduce the fund’s IRR and the management fee/priority profit share that investors will be willing to fund that is ultimately payable to the UK adviser/manager; and a UK fund can often still be marketed into particular EEA states under national private placement regimes — though availability and pre-marketing rules vary by state and should be checked, never assumed.

The Channel Islands and the Isle of Man remain established fund centres, but they are less of a default than they once were.  Licensing, designated service provider, substance and governance requirements vary by jurisdiction and by how the fund is classified, and typically mean engaging licensed local providers and holding governance offshore — this is recurring cost and friction for a team that lives in the UK.  Any detailed comparison is a matter for local counsel rather than a universal rule.

The UK’s quiet advantage is that the fund vehicle itself is generally not authorised or regulated by the FCA — the regulatory burden attaches to the manager and to the marketing, as covered below.  The UK does not generally require a prescribed suite of locally based service providers for this type of small, closed-ended onshore fund, although the AIFM’s regulatory, delegation and operational obligations still shape the appointments it can make.  Establishment is fast and comparatively cheap, on familiar English-law documents.  Transparency means the vehicle adds no layer of tax of its own, though domicile is never wholly tax-neutral: treaty access, withholding, VAT and investor-specific treatment can all differ.  Where the team is UK-based and the investor base is not predominantly EU-institutional, onshore is now the default answer rather than the brave one.

Start with why the vehicle is what it is.  An English limited partnership does three things at once that no other domestic vehicle manages as cleanly: it is transparent for tax, so the partnership’s income and gains are computed and attributed to the partners, each taxed under the rules applicable to them; it limits investors’ exposure, broadly, to what they agreed to put in (typically the greater of what they have contributed and the amounts that have actually be distributed back to them); and it leaves almost everything else to contract, so the bargain described at the top of this piece can be written exactly as negotiated.

Add the fact that institutional investors the world over have seen a thousand of them, and the limited partnership has seen off every attempted replacement.  But a ‘fund’ is not one entity — a standard onshore structure has five parts, and it pays to understand what each is for before the structure chart is drawn.

The fund itself is a UK limited partnership registered under the Limited Partnerships Act 1907 and designated as a private fund limited partnership (a PFLP) under the Legislative Reform (Private Fund Limited Partnerships) Order 2017.  Investors participate as limited partners.  In a PFLP, a limited partner is under no statutory obligation to contribute capital unless the partners agree otherwise and, to the extent it has not contributed capital, is not liable for the firm’s debts and obligations — though it remains contractually bound to fund its commitment, and it can lose the protection for obligations incurred while it takes part in managing the firm outside the statutory ‘white list’ (sections 4, 6 and 6A of the 1907 Act).

The white list matters for exactly that reason — it sets out things a limited partner may do (sit on an advisory committee, vote on amendments, approve valuations and so on) without being treated as managing the business.  One genuine choice sits inside the vehicle: registration in England and Wales or in Scotland (Northern Ireland is also available, though rarely used in this market).  The principal practical legal distinction is that a Scottish limited partnership has separate legal personality, so it can hold assets, contract and sue in its own name rather than through its general partner.

That is why Scottish partnerships have long been favoured for carried interest vehicles, and why some funds themselves are formed there; English limited partnerships remain the more common choice for the fund — and Scottish partnerships carry transparency obligations of their own, including persons-with-significant-control reporting.  Both English and Scottish limited partnerships can be designated as PFLPs.

The general partner is the partner with unlimited liability for the fund’s obligations.  For that reason it is almost always a private limited company incorporated for the purpose, holding no other assets and doing nothing else — and one fund, one general partner is the market norm rather than a legal requirement: HMRC’s own manual describes a new general partner company for each fund as standard.

The manager is the entity that actually makes investment decisions, and — unless the hosted route below is used — it is the entity the FCA authorises.  It can be a private limited company or a limited liability partnership, and both appear in practice.  A LLP offers flexibility that companies struggle to match: members’ profit shares can be varied year to year by agreement, without share transfers or formality, and a genuine member’s profit share does not attract employer’s national insurance at 15% — though that treatment holds only member by member, and only where the salaried member rules (below) do not deem the member an employee.  The trade-offs are real too: members are taxed on the LLP’s profits as they arise, distributed or not, which makes an LLP a poor vehicle for retaining reserves.

A limited company is simpler, better at retaining profits and perfectly serviceable — plenty of first-time advisory vehicles are companies — with founder remuneration planned around salary and dividends instead.

The carried interest vehicle holds the team’s 15–20% share of the fund’s profits (above any preferred return) — the ‘carry’.  It is commonly a separate limited partnership — often Scottish, for the legal personality point above — which sits in the fund as a special limited partner and has its own special purpose general partner company, though the arrangements vary.  Keeping the carry in its own vehicle keeps the economics clean, allows the pot to be allocated and re-allocated as people join and leave, and lets vesting be applied to individuals without touching the fund’s own documents — with allocation, vesting and joiner-leaver mechanics all living in the carry documents and carrying their own tax and employment analysis.

Where the manager is an LLP it is sometimes possible for the LLP to hold the carry directly, though a separate vehicle keeps those mechanics away from the manager’s own constitution.

Finally, the team’s own money.  The GP commitment tested at the threshold stage sits inside the structure too, either as a direct limited partner interest or through the founder partner, and it is common for no management fee or priority profit share to be charged on the GP commitment.

As to how money flows the other way: the manager is typically remunerated by reference to around 2% of commitments each year during the investment period, stepping down to a percentage of the invested cost of investments still held thereafter, and the team’s upside is a carried interest of typically 20% of profits after investors have received their capital back — plus, where there is one, a preferred return, conventionally 6–8% a year.  Every one of those numbers is a convention, not a rule, and each is negotiated.

Put together, the standard structure looks like this:

The standard onshore GP/LP structure, where the manager holds its own FCA permission. Illustrative — entities, ownership and appointments vary.

Three pieces of plumbing make the structure work, and all three confuse first-timers.

First, commitments are mostly loans.  In many UK private-fund LPAs, an investor’s commitment is funded through a small capital contribution — often a nominal fraction — and a much larger partnership loan.  The structure developed partly because the 1907 Act restricted repayment of contributed capital during the life of an ordinary limited partnership; partnership loans sit outside that statutory restriction — though repayment remains subject to the LPA’s own terms, insolvency considerations and other applicable legal and contractual restrictions — so the market put almost everything into loan form.

The PFLP reforms removed the statutory need for a capital contribution, so the split is now a structuring choice rather than a requirement — one with accounting, tax, priority and drafting consequences that should be considered on each fund rather than assumed.

Second, the management fee is usually not a fee.  In many traditional UK LP structures it is delivered through a priority profit share — an allocation of the partnership’s profits, ranking first, out of which the manager is remunerated — rather than a contractual service fee.  The label does not decide the VAT treatment; the substance does, as covered below.  But the architecture matters, and it is how HMRC’s Investment Funds Manual itself describes the standard arrangement.

Third, in the early years the fund may not have sufficient realised profits or available cash to meet the priority profit share as it falls due.  A fund that is still deploying is yet to realise its investments, so the LPA commonly permits the partnership to advance the general partner money — funded by drawdowns — to meet the priority profit share payments as they fall due, matched against a guaranteed first-priority allocation of profits once profits arrive.  HMRC’s manual calls these the ‘advance profit share’ and the ‘guaranteed’ or ‘priority’ profit share.

Not every structure works this way, but most traditional ones do — and the effect for a first-time manager is practical: the management amount flows from month one, but as advances against the fund’s future profits rather than as income the fund has already earned.

The rest of this Guide follows the sequence of an actual launch.  In one view:

• Settle the strategy and the headline terms — size, fee, carry, hurdle, term — in a short fund term sheet.
• Choose the regulatory route, because everything else is sequenced around it.
• Incorporate the manager, investment adviser (if opting to go for the regulatory hosting route) and the general partners; begin the FCA application (or host onboarding).
• Draft the private placement memorandum and the limited partnership agreement.
• Raise — within the financial promotion rules — towards one or more cornerstones.
• Authorisation or appointed representative status lands; subscriptions and side letters complete; anti-money laundering checks clear.
• First close: the partnership has already been formed on registration — now the initial investors are admitted and their subscriptions take effect, so capital can be drawn and investing can begin once the AIFM, the bank account, AML and the other closing conditions are in place.
• Subsequent closes with equalisation, then a final close, typically within eighteen to twenty four months of the first.

Managing an unauthorised alternative investment fund is a regulated activity: before regulated fund management begins, the fund needs an appropriately authorised AIFM in place — and the separate financial promotion and marketing rules, covered next, can bite much earlier, while the fund is still being raised.  Which route you choose to the AIFM shapes the timetable, the cost base, the governance and the documents, which is why it is the first decision to settle, not the last.

For most first fund managers that seek their own FCA permission to manage an ‘unauthorised AIF’ — a market observation of ours, not a rule — the answer is authorisation as a small authorised UK AIFM under the Alternative Investment Fund Managers Regulations 2013.  The route is available while assets under management, calculated under the UK AIFM regime, stay below €100m — or below €500m where the funds managed are unleveraged and give investors no redemption rights exercisable during the first five years, which describes a classic closed-ended venture or growth fund.

A small authorised AIFM is a genuinely authorised firm — threshold conditions, the senior managers regime and anti-money laundering obligations all apply as applicable, with FCA supervision — but it escapes the heaviest full-scope machinery, including the requirement to appoint a depositary which would otherwise be an additional fund expense and therefore a drag on performance.

Above the thresholds, or by opting in, sits the full-scope UK AIFM: depositary, remuneration code, own-funds requirements and substantially heavier reporting.  Very few first funds start here, and few need to.

The third lane is to appoint an established FCA-authorised firm as the fund’s AIFM.  The founders’ UK investment advisory entity is typically appointed as the host’s appointed representative — able to advise, arrange and market within the precise scope of its appointment, but not to manage the AIF.  Management sits with the host, which carries genuine, regulated responsibility for it: founders or staff may be seconded to the host to perform functions on its behalf, under its supervision, including being part of an investment committee but the host cannot act as a rubber stamp and the advisory vehicle must not hold itself out as the fund manager.

The documents can provide a route for the founders’ vehicle to take over as manager once directly authorised — but any transition is subject to FCA processes, contractual novation and whatever consents the fund documents require.  This means the host will be the named investment manager in all documentation and a formal investment management agreement or alternative investment fund management agreement must be entered into between the host and the AIF.  The FCA has tightened its expectations of principal firms for their appointed representatives in recent years, so a good host will diligence you as carefully as your investors do.

The hosted route looks like this:

The hosted route. The host is the AIFM, with genuine responsibility for managing the fund; the founders’ vehicle advises, arranges and markets as its appointed representative, with a contractual path to taking over once directly authorised.

On timing, the periods split by route.  For a small authorised UK AIFM the FCA must determine a complete application within six months of receiving it, and an incomplete one within twelve months of receipt (section 55V FSMA).  A full-scope application runs on the AIFM regime’s own clock — three months from a complete application, extendable by a further three (regulation 5, AIFM Regulations 2013).  Appointed representative onboarding is the host’s process rather than a statutory determination period — around three months or less from full submission is a fair working assumption.  Preparation — completing the authorisation pack or appointed representative forms and liaising with compliance consultants — sits in advance of all of those periods.

In practice a well-prepared application — coherent regulatory business plan, credible compliance arrangements, senior managers identified and ready for approval — is the single biggest determinant of the end-to-end time.  As a planning assumption (ours, as at July 2026, and not a statutory period): six to nine months from submission for a small authorised AIFM.  Hosting compresses time-to-market to a few months, at the price of the host’s fees, some loss of control and a conversation to be had with anchor investors about the arrangement and the exit from it.

For completeness: the regime itself is being rebuilt.  In April 2025 HM Treasury and the FCA consulted on replacing the euro-denominated thresholds with a more graduated regime scaled to the net asset value of funds under management — indicatively, small firms below £100m, mid-sized firms between £100m and £5bn, large firms above that.  Those figures are consultation proposals, not law; the FCA has said it plans to consult on detailed rules during 2026, with implementation timing to follow, and until final rules take effect the current regime continues to apply.

Do not wait for it.  The current small authorised regime already works for a first fund, and the reform is designed to remove the cliff edge that today punishes growth, not to lower the bar to entry.

The financial promotion regime can bite from the earliest fundraising communications.  Section 21 of the Financial Services and Markets Act 2000 prohibits an unauthorised person, in the course of business, from communicating an invitation or inducement to engage in investment activity unless an authorised person approves the communication or an exemption applies.

Contravention can be a criminal offence — and under section 30, an agreement made following an unlawful communication may be unenforceable against the investor, with money or property recoverable, subject to the court’s power to allow enforcement where just and equitable.  A ‘Fund I’ deck or a substantive fundraising email is a financial promotion; calling it a preliminary or soft conversation does not change that.

The working exemptions live in the Financial Promotion Order 2005.  The ones that matter for a first fundraise are: investment professionals (article 19) — authorised firms, institutions and others whose business involves the relevant investments; high net worth companies, trusts and the like (article 49); certified high net worth individuals (article 48); and self-certified sophisticated investors (article 50A).

The individual exemptions turn on statements signed by the investor: for article 48, income of at least £100,000 in the last financial year or net assets of at least £250,000 throughout it, excluding the primary residence and pension — thresholds that were briefly raised in January 2024 and restored on 27 March 2024, where they remain.  For article 50A, the criteria include having made two or more investments in unlisted companies in the previous two years, or having been a director of a company with £1m or more of turnover.

Each exemption has exact conditions — who may receive the communication, what statements must exist and when they expire, what the communication must contain and how the prescribed risk warnings must appear — and a promotion that fails the conditions fails the exemption.

Once an authorised firm or a host is promoting, the analysis changes shape rather than difficulty — because it changes regime.  A private fund limited partnership is likely to be an unregulated collective investment scheme, so section 238 of FSMA, the Promotion of Collective Investment Schemes exemptions and the FCA’s COBS 4.12B rules take over from the FPO analysis used by an unauthorised founder; in practice a first fund is aimed at professional clients and the categories those routes permit.

For money from outside the UK, marketing into the EU and EEA after Brexit runs country-by-country under national private placement regimes — availability and pre-marketing rules vary by state — and the United States brings its own securities law regime.  The practical rule is simple: before the deck crosses a border, take local advice.  Two practical filters complete the picture.  Many first funds simply exclude US persons, because taking US money brings US securities and tax machinery — Regulation D filings, ERISA analysis, US tax reporting — that a first-time fund rarely wants to carry.  And the minimum commitment — commonly a six-figure sum with the general partner keeping discretion to accept less — is a commercial and administrative filter; it does not by itself establish legal eligibility under the promotion rules.

The fund.  A UK limited partnership is generally transparent for UK income and capital gains tax: the partnership computes its results and the partners are taxed on their respective shares under the rules applicable to each of them.

For a non-UK investor the position depends on the nature and source of what the fund receives, the assets it holds, any UK permanent establishment and any applicable treaty.  For investment over a period of years in unlisted shares of operating companies, the general assumption is that the fund would be categorised as “investing” (thereby generating a return that is capital in nature) rather than “trading” (which typically generates an income return which is taxed at income tax rates).

Whether the fund is investing or trading remains the central classification question for everyone’s tax — investors, manager and carry alike — even though it is not a condition of the fund existing.  Rapid-turnover strategies are the hedge fund world, and it is why hedge fund cases and structures are largely beside the point for the funds this manual describes.

For decades, carried interest in a closed-ended investing fund could be taxed as capital gains under a long-standing understanding between HMRC and the industry — always hedged around by anti-avoidance (the disguised fee rules, income-based carried interest, the employment-related securities regime), and always a world away from hedge funds, whose trading returns were income.

From 6 April 2026 the Finance Act 2026 (Schedule 11) moved the mechanism wholesale, though for a well-designed fund the economics moved much less.  Carried interest arising on or after that date is taxed within the income tax framework as profits of a deemed trade, subject to income tax and Class 4 national insurance; where the carry is ‘qualifying’, 72.5% of it is brought into charge — an effective top rate of approximately 34.1% on current rates, deliberately close to the 32% capital gains rate it replaced — and non-qualifying carry is taxed in full, at up to 47%.  Those are top-rate illustrations, before individual reliefs, deductions and circumstances.

Whether carry qualifies is governed by the average holding period rules: if the fund’s investments are held on average for 40 months or more, all of the carry qualifies; below 36 months, none of it does; between the two, a sliding scale applies.  The rules were built for the shape of fund this manual describes — deployed over five years, held for longer — but that is a modelling conclusion, not an automatic one: heavy recycling of proceeds, a strategy built on quick flips, and short-dated bridge positions all drag the average down, and the detailed calculation rules (including specific provisions for unwanted short-term investments) reward being tested early rather than assumed.  Three further points deserve a first-time manager’s attention.

The exclusion for carry held as employment-related securities has been removed from these rules — the ERS regime itself remains — so employee holders of carry now sit inside the average holding period analysis alongside members and partners.  Because carry is now income, payments on account can apply, with claims to reduce them where appropriate — the cash flow profile of a carry receipt is worse than the headline rate suggests, and holders should reserve accordingly.  And non-UK resident executives are within scope by reference to their UK workdays, with statutory limits for those with minimal UK presence, look-back rules and treaty considerations layered on top — territory for specific advice rather than a manual.

If the manager is a LLP, the salaried member rules deem a member an employee — with employer national insurance to match — only where all three statutory conditions are met: broadly, remuneration that is in substance disguised salary, no significant influence over the affairs of the LLP, and insufficient capital at risk.  The test runs member by member on the actual arrangements, which is why, for a founder team holding real governance rights and profit-linked interests, the rules are rarely a problem — and why they start to bite when the firm admits members on largely fixed allocations, with little say and little capital.

The LLP agreement, capital contributions and governance rights are launch-day design questions.  The result follows the statute and the substance, not the labels, and it is far easier to design than to retro-fit. Do have a read of our: Partner or pretender? The Supreme Court redraws the line for LLP members.

On VAT, briefly, a charge for investment management services is generally standard-rated unless a specific fund management exemption applies, and a fund making exempt or non-business supplies has limited or no recovery of the VAT it bears.  That is one reason the priority profit share described in the plumbing section is the customary architecture: distributing partnership profits is not consideration as a supply.  But the VAT result follows the substance of the arrangements — it cannot be secured by relabelling service remuneration as a profit share — which is exactly why the structure should be walked through with tax counsel before the documents are signed, not after.

The limited partnership agreement is the fund’s constitution.  You will not draft it yourself, but you must understand it, because your investors will negotiate it with you clause by clause.  A first-fund LPA will run to well over a hundred pages, but the negotiation concentrates on a familiar list — and everything below is illustrative market practice, negotiated fund by fund, not law:

• Commitments and drawdowns — investors commit capital at closing and advance it in tranches against drawdown notices as investments are made (ten business days’ notice is one common pattern); the mechanics and the default remedies all live here.
• Investment period and term — conventionally an investment period of around five years within a fund life of around ten, plus one or two one-year extensions, though both may be measured from first or from final close: check which. New investments stop when the investment period ends; a reserve — often of the order of a quarter of commitments — is typically earmarked for follow-on ‘top up’ allocations to existing portfolio companies thereafter.
• Management amount — fee or priority profit share, the basis (commitments, then invested cost), the rate, the step-down and what is set off against it.
• Fund expenses and establishment costs — what the fund bears as fund expenses (the administrator, the auditor, the fund’s own legal, tax and compliance costs, usually subject to caps) as distinct from the manager’s own overheads and regulatory compliance, which sit with the manager; and the cap on establishment costs, above which the excess falls to the manager.
• Borrowing — LPAs typically let the fund borrow pending drawdowns, commonly capped at around 20–25% of commitments, to bridge investments and expenses; guarantees or credit support for portfolio companies are often restricted or excluded, though some LPAs permit limited support subject to caps and approvals.
• The distribution waterfall — the order in which money comes back, illustrated below. A ‘whole-of-fund’ (European) waterfall pays carry only once investors have had all capital plus any preferred return back across the fund; a ‘deal-by-deal’ (American) waterfall pays carry earlier, investment by investment, balanced by escrow and clawback protections.  Whole-of-fund is the common institutional preference, and what a first fund should expect to be asked for.
• General partner clawback and escrow — the machinery that claws carry back if early distributions prove overweight once the fund winds up.
• Key person provisions — if named individuals stop devoting substantially all of their time during the investment period, drawdowns for new investments suspend; a common pattern gives a window for a replacement plan or an investor vote to resume, failing which the investment period ends. Time standards, thresholds and cure rights all vary materially.
• Removal — for cause (fraud, gross negligence and the like, often with materiality and cure conditions) on a supermajority vote; and, separately, no-fault removal, typically on a higher threshold and often only after an initial period, with compensation of the order of one to two years’ management amount and with carry crystallising for investments already made but not for the future. Thresholds and economics vary materially.
• Successor funds and allocation — when the team may raise Fund II (commonly not until the fund is substantially deployed, committed and reserved, or the investment period has ended), and the fund’s priority over deal flow ahead of the team’s personal or advisory-account interests.
• Investment restrictions — concentration limits (a cap of 15–20% of the fund in any one company is a common pattern), geography, stage, and whatever the strategy in the marketing materials promised.
• Transfers — LP interests are illiquid, eligible investors restricted by the rules applicable in their country of residence or domicile, and transfers are usually tightly restricted (consents, rights of first refusal), so this clause is about orderly exceptions rather than a ready exit;
• LP advisory committee – this will describe appointment mechanics, the number of members and the committee’s role on conflicts, valuations and consents to specific events.
• Reporting — many institutional investors will ask for reporting aligned to the templates published by the Institutional Limited Partners Association, and it is easier to promise that at the start than to bolt it on later.

The most expensive mistakes in fund formation are made before a lawyer is ever instructed, by teams who commit to a build that was never going to close.  Five questions sort most of them out.

First: is your track record attributable?
Investors in a first fund are underwriting you, and what they need is evidence — deals you can show you sourced, won and returned money on.  Deals led at a previous firm count if the attribution is clean and referenceable.  An angel portfolio counts if the entry prices, markups and exits are documented.

A company built and exited counts for founder-managers, though investors will still ask who picks the next ten.  If the honest answer is thin, the fund is not dead — it is early, and the deal-by-deal route discussed below exists for exactly this stage.

Second: does the fee arithmetic support a firm?
Take a £20m first fund charging 2% — the customary reference point, and an illustration rather than a rule: that is £400,000 a year.  Be clear what that money is for.  Fund-level expenses — administration, audit, the fund’s own legal and tax costs — are usually borne by the fund within the categories and caps negotiated in the LPA.  The manager’s own overheads, authorisation costs and ongoing firm-level compliance are a manager expense, paid out of the management fee or priority profit share that it receives from the funds that it manages.

Even so, £400,000 does not go far once a small team is paid: on a first fund the management amount is runway, not reward.  Work backwards from what the management company genuinely costs to the minimum fund size that carries it, and then ask whether that size is honestly raisable on your track record.  If the two numbers do not meet, the plan needs changing before the spending starts.

Third: can you fund the build, and the commitment?As a planning assumption, the costs of structuring, authorisation and fundraising land six to twelve months before any fee income arrives.  The fund’s establishment costs are usually recouped from the fund at first close, up to a cap and where the LPA and subscription terms so provide — but they must be bridged in the meantime, and they are yours to bear if the fund never closes.

Investors will also expect the team to commit its own capital alongside them — as an illustration, convention puts the ‘GP commitment’ at around 1% to 2% of the fund, though what investors in a first fund actually test is whether the number is meaningful to you rather than whether it hits a percentage.  Both need a funding plan that does not depend on the fund closing on schedule.

Fourth: do you have anchor demand, or just encouragement?
Everyone you pitch to will be polite.  A first close needs one or more cornerstone investors prepared to commit real money on your terms, and the difference between warm words and a cornerstone is only discovered by asking the closing question early — within the marketing rules covered below — and before the heavy spending starts.

Fifth: is a fund the right vehicle — or the right vehicle yet?
A fund is a ten-year plus commitment to a strategy, with key person obligations attached to named individuals; it is a firm, not a project.  The alternatives are respectable.  Investing deal-by-deal through special purpose vehicles or syndicates can help build the attributable track record a new manager needs — though investors may distinguish that selected deal history from a record of deploying and managing a blind-pool fund — and avoids the decade-long lock-in; the regulatory treatment, meanwhile, is structure- and activity-specific, and collective investment scheme, AIF, arranging, advising and financial promotion questions can all still arise, so the ‘lighter’ route still needs a perimeter analysis.

A venture partner seat at an established house does something similar.  Evergreen and rolling structures exist too — open-ended vehicles that reinvest rather than wind down, and funds raised in annual or quarterly tranches — but both remain unusual choices for a first institutional raise, and both trade simplicity for liquidity questions that illiquid venture assets answer badly.

And, as covered below, a regulatory hosting arrangement lets a team run fund economics under an established manager’s authorisation before committing to its own.  Plenty of good managers should raise their first fund second.

The reflex to look offshore is older than the reasons for it.  Choosing a domicile is really three questions: where are your investors, where is your team, and what will the structure cost to run.

An EU domicile — Luxembourg being the usual candidate — buys one thing of particular value: an EU manager of an EU fund can use the AIFMD marketing passport to reach professional investors across the EEA, subject to the Directive’s conditions and local requirements.

If you will raise extensively from EU institutions, that can justify the cost.  If you will not, the additional cost and complexity may not be justified: EU fund regimes are more heavily regulated, slower and costlier to establish and run; having an EU fund manager appointed is costly and will reduce the fund’s IRR and the management fee/priority profit share that investors will be willing to fund that is ultimately payable to the UK adviser/manager; and a UK fund can often still be marketed into particular EEA states under national private placement regimes — though availability and pre-marketing rules vary by state and should be checked, never assumed.

The Channel Islands and the Isle of Man remain established fund centres, but they are less of a default than they once were.  Licensing, designated service provider, substance and governance requirements vary by jurisdiction and by how the fund is classified, and typically mean engaging licensed local providers and holding governance offshore — this is recurring cost and friction for a team that lives in the UK.  Any detailed comparison is a matter for local counsel rather than a universal rule.

The UK’s quiet advantage is that the fund vehicle itself is generally not authorised or regulated by the FCA — the regulatory burden attaches to the manager and to the marketing, as covered below.  The UK does not generally require a prescribed suite of locally based service providers for this type of small, closed-ended onshore fund, although the AIFM’s regulatory, delegation and operational obligations still shape the appointments it can make.  Establishment is fast and comparatively cheap, on familiar English-law documents.  Transparency means the vehicle adds no layer of tax of its own, though domicile is never wholly tax-neutral: treaty access, withholding, VAT and investor-specific treatment can all differ.  Where the team is UK-based and the investor base is not predominantly EU-institutional, onshore is now the default answer rather than the brave one.

Start with why the vehicle is what it is.  An English limited partnership does three things at once that no other domestic vehicle manages as cleanly: it is transparent for tax, so the partnership’s income and gains are computed and attributed to the partners, each taxed under the rules applicable to them; it limits investors’ exposure, broadly, to what they agreed to put in (typically the greater of what they have contributed and the amounts that have actually be distributed back to them); and it leaves almost everything else to contract, so the bargain described at the top of this piece can be written exactly as negotiated.

Add the fact that institutional investors the world over have seen a thousand of them, and the limited partnership has seen off every attempted replacement.  But a ‘fund’ is not one entity — a standard onshore structure has five parts, and it pays to understand what each is for before the structure chart is drawn.

The fund itself is a UK limited partnership registered under the Limited Partnerships Act 1907 and designated as a private fund limited partnership (a PFLP) under the Legislative Reform (Private Fund Limited Partnerships) Order 2017.  Investors participate as limited partners.  In a PFLP, a limited partner is under no statutory obligation to contribute capital unless the partners agree otherwise and, to the extent it has not contributed capital, is not liable for the firm’s debts and obligations — though it remains contractually bound to fund its commitment, and it can lose the protection for obligations incurred while it takes part in managing the firm outside the statutory ‘white list’ (sections 4, 6 and 6A of the 1907 Act).

The white list matters for exactly that reason — it sets out things a limited partner may do (sit on an advisory committee, vote on amendments, approve valuations and so on) without being treated as managing the business.  One genuine choice sits inside the vehicle: registration in England and Wales or in Scotland (Northern Ireland is also available, though rarely used in this market).  The principal practical legal distinction is that a Scottish limited partnership has separate legal personality, so it can hold assets, contract and sue in its own name rather than through its general partner.

That is why Scottish partnerships have long been favoured for carried interest vehicles, and why some funds themselves are formed there; English limited partnerships remain the more common choice for the fund — and Scottish partnerships carry transparency obligations of their own, including persons-with-significant-control reporting.  Both English and Scottish limited partnerships can be designated as PFLPs.

The general partner is the partner with unlimited liability for the fund’s obligations.  For that reason it is almost always a private limited company incorporated for the purpose, holding no other assets and doing nothing else — and one fund, one general partner is the market norm rather than a legal requirement: HMRC’s own manual describes a new general partner company for each fund as standard.

The manager is the entity that actually makes investment decisions, and — unless the hosted route below is used — it is the entity the FCA authorises.  It can be a private limited company or a limited liability partnership, and both appear in practice.  A LLP offers flexibility that companies struggle to match: members’ profit shares can be varied year to year by agreement, without share transfers or formality, and a genuine member’s profit share does not attract employer’s national insurance at 15% — though that treatment holds only member by member, and only where the salaried member rules (below) do not deem the member an employee.  The trade-offs are real too: members are taxed on the LLP’s profits as they arise, distributed or not, which makes an LLP a poor vehicle for retaining reserves.

A limited company is simpler, better at retaining profits and perfectly serviceable — plenty of first-time advisory vehicles are companies — with founder remuneration planned around salary and dividends instead.

The carried interest vehicle holds the team’s 15–20% share of the fund’s profits (above any preferred return) — the ‘carry’.  It is commonly a separate limited partnership — often Scottish, for the legal personality point above — which sits in the fund as a special limited partner and has its own special purpose general partner company, though the arrangements vary.  Keeping the carry in its own vehicle keeps the economics clean, allows the pot to be allocated and re-allocated as people join and leave, and lets vesting be applied to individuals without touching the fund’s own documents — with allocation, vesting and joiner-leaver mechanics all living in the carry documents and carrying their own tax and employment analysis.

Where the manager is an LLP it is sometimes possible for the LLP to hold the carry directly, though a separate vehicle keeps those mechanics away from the manager’s own constitution.

Finally, the team’s own money.  The GP commitment tested at the threshold stage sits inside the structure too, either as a direct limited partner interest or through the founder partner, and it is common for no management fee or priority profit share to be charged on the GP commitment.

As to how money flows the other way: the manager is typically remunerated by reference to around 2% of commitments each year during the investment period, stepping down to a percentage of the invested cost of investments still held thereafter, and the team’s upside is a carried interest of typically 20% of profits after investors have received their capital back — plus, where there is one, a preferred return, conventionally 6–8% a year.  Every one of those numbers is a convention, not a rule, and each is negotiated.

Put together, the standard structure looks like this:

The standard onshore GP/LP structure, where the manager holds its own FCA permission. Illustrative — entities, ownership and appointments vary.

The distribution waterfall deserves its own picture, because it is where all of the economics meet:

An illustrative whole-of-fund waterfall. The general partner’s priority profit share sits at fund level, before the distribution waterfall; definitions and ordering depend on the LPA.

Around the LPA sit the private placement memorandum — the fund’s disclosure document and, in practice, its principal financial promotion.  It does not usually contain the binding constitutional terms (those sit in the LPA), but the two must be prepared consistently: a material inconsistency creates regulatory disclosure, misrepresentation, contractual and investor-relations risk all at once.

Then the subscription agreements and investor questionnaires, which carry the eligibility, anti-money laundering and tax reporting confirmations; the management and advisory agreements; the carried interest partnership deed; and, inevitably, side letters.

Cornerstone investors will ask for side letters, and most favoured nation clauses will govern whether or not other investors will get to elect terms that the cornerstones received — subject to the usual carve-outs for commitment size, timing and regulatory or tax-specific terms.

Side letters are manageable if the process for them is designed at the start, and a source of chaos if it is not.

First time fund managers will typically want to set their standard early and stay close to it.

A fund is also an operating business, and investors diligence the operations.  The standing cast — engaged for the fund and typically paid as fund expenses rather than out of the management amount: a fund administrator to run the drawdowns, distributions, partner registers, accounts and investor onboarding — though delegation does not move the legal responsibility for financial-crime systems and controls off the AIFM and the other obliged entities; an auditor; tax compliance for the fund; and a bank.

Choose the administrator as if investors will ask about it, because they will: capability on drawdowns and AML, reporting technology, and — given the Companies House reforms below — access within your provider group to an authorised corporate service provider (the administrator itself need not be one) all belong on the checklist.

Open the bank account early: onboarding a newly formed limited partnership with a newly formed general partner is exactly the profile that makes bank compliance teams slow, and a first closing without a bank account is destined not to occur.  Add to the list an LEI where the fund’s counterparties and reporting require one (they usually will), HMRC partnership registration, and FATCA and CRS classification, with registration and reporting to the extent the applicable rules require.  A depositary is only required if you are full-scope.

Then there is Companies House.  The Economic Crime and Corporate Transparency Act 2023 contains substantial reforms for limited partnerships, but as at July 2026 they have not been implemented and further secondary legislation is required; Companies House’s implementation plan currently indicates the limited partnership changes by the end of 2026, and the government’s guidance on the reforms provides for a six-month transitional period for existing partnerships once they land.

When they land, every limited partnership — PFLPs included — will need a registered office in its jurisdiction of registration and a SIC code; filings will have to be made through an authorised corporate service provider; a corporate general partner will have to name a registered officer whose identity is verified; information on all partners will have to be filed, with changes notified within 14 days; and an annual confirmation statement will be due.

The detail — commencement dates, identity verification and the notification mechanics — must be re-checked immediately before publication and again at launch.  For a fund launching now, the sensible course is to keep partner data in filing-ready shape from day one and make sure the provider group includes an authorised corporate service provider.

These changes may push some first-time managers towards Channel Islands structures, which currently expose less information about the underlying investors to public inspection.

Timelines vary with the team’s readiness and the market’s appetite, but a realistic first-fund build assuming that the team opts for a FCA small AIFM application, run properly in parallel, looks something like this.

Months one to two: settle the strategy and the fund’s headline terms in a short term sheet; decide the regulatory lane; incorporate the fund manager and begin the FCA application in earnest; engage counsel and shortlist administrators.

Months two to four: submit the FCA application; draft the private placement memorandum and the limited partnership agreement; begin soft conversations with prospective anchors strictly within the exemptions described above.

Months four to nine: the FCA case work runs — within the statutory periods described above — while cornerstone negotiations and side letters progress; investor onboarding and anti-money laundering checks grind forward; any deals being ‘warehoused’ by the team pending the fund’s launch are structured so they can be transferred cleanly into the fund at first close.

First close — commonly at some sensible fraction of target — lets the fund start investing; later closes follow, with incoming investors equalised so that everyone bears the fund’s costs and investments as if they had been there from the start; and the LPA will usually impose a long-stop of twelve to eighteen months from first to final close.

Call it nine to twelve months, end to end, for a well-run first-time launch — our planning assumption as at July 2026, not a statutory period — less with a regulatory host, more if the FCA application goes in half-baked or the bank account is left to last.

Indicative timeline
Here is the above set out on one page:

An illustrative launch timeline — HLaw planning assumptions as at July 2026; workstreams run in parallel, not in sequence.

What it costs

Numbers vary with complexity, but a first-time manager should budget in broad terms as follows — these are our planning estimates as at July 2026, not quotations, and they assume a straightforward fund without seed-investor arrangements or heavy side-letter negotiation.

Legal costs for structuring and launching a straightforward first fund — the partnership, the general partners, the carry vehicle, the LPA, the PPM and the subscription pack — typically run in the tens of thousands of pounds to first close; call it £50,000 to £150,000 at time of writing depending on how hard the cornerstones negotiate, with side letters and any seed-investor arrangements extra.

The hosted route keeps the founders’ own regulatory build modest but adds the host’s ongoing fees; a direct FCA application adds the FCA’s application fee and the cost of the compliance build.  Set against all of that, one mitigation covered earlier: establishment costs are usually recouped from the fund at first close, up to the agreed cap and where the documents so provide.

The bigger number is time: every month of the build is a month of salaries, rent and momentum funded from the answer to threshold question three.

A short word on the name, because it goes on every entity, every document and every letterhead.  Registering a company name at Companies House, or buying a domain, confers no trade mark rights.  A trade mark registration gives exclusionary rights in its territory for its goods and services — but registration is not the same as freedom to use, because earlier rights can still bite.  So two separate questions, both answered before you commit: is the name distinctive enough to register and enforce, and does it clear against earlier registered and unregistered rights in every territory where the fund and the manager will operate?

Launching under a name and rebranding after a letter from someone with prior rights is at best embarrassing and at worst expensive.  Note that ‘Fund’ is a sensitive word for naming purposes: expect to need the FCA’s letter of non-objection before Companies House will register a company or business name containing it.

Five traps account for most of the avoidable pain we see.

• Marketing before understanding the perimeter. The financial promotion regime applies to the coffee-meeting deck, not just the glossy PPM, and a contravention of section 21 by an unauthorised person can be criminal — with the separate authorised-person regime waiting on the other side. Map who you may approach, under which exemption, with which warnings, before the first email goes out.
• Treating the manager entity as an afterthought. The LLP agreement, capital contributions, governance rights and carry allocations are launch-day design questions with decade-long tax consequences — and the result follows the statutory conditions, the documents and the substance of the arrangements, all of which are easiest to get right at the start.
• Setting economics that damage qualifying carry. Short holds, heavy recycling and bridge-heavy deployment can cut the proportion of carry that qualifies under the average holding period rules — the effect is tapered between 36 and 40 months and subject to detailed calculation rules — and turn a c. 34.1% outcome into a 47% one. Model it when the strategy and the recycling provisions are set, not when the first exit lands.
• Underestimating the boring dependencies. The FCA clock, the bank account and investor onboarding are the long poles in the tent.
• Bespoke everything. Institutional investors underwrite a first-time team by reading the structure as a proxy for judgement. A market-standard set of documents with two or three deliberate, well-explained divergences is easier for investors to diligence — and, in our experience, raises more money than a clever one.

A first fund is a company-building exercise with a regulator, a tax regime and a hundred-page constitution attached. The teams that launch well are the ones that treat the build as seriously as the strategy. The HLaw funds team advises onshore managers on every part of it — the work we do tells the story of why we are here, on our Deals page.

All the thoughts and commentary that HLaw publishes on this website, including those set out above, are subject to the terms and conditions of use of this website. None of the above constitutes legal advice and is not to be relied upon. Much of the above will no doubt fall out of date and conflict with future law and practice one day. None of the above should be relied upon. Always seek your own independent professional advice.