SPV Entity Types: Limited Liability Companies and Limited Partnerships
This article briefly describes the differences between two common SPV entity types.
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LLCs |
LPs |
| General |
- Limited Liability Companies ("LLCs") provide the limited liability benefits of corporations with the flexible management of partnerships.
- LLCs are good vehicles for raising capital due to their ability to delegate management and passive duties between managers and members.
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- Limited Partnerships ("LPs") are subject to fewer formalities than corporations and case law around them is more developed than around LLCs, so they provide a higher degree of certainty.
- They are good vehicles for raising capital with silent investors because limited partners are prohibited from managing the LP.
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| Ownership |
- There are no broad restrictions on the types of persons who can own interests in LLCs.
- Single-member LLCs will be treated as corporations or sole proprietorships for most purposes.
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- There are no broad restrictions on the types of persons who can own interests in LPs.
- Single-member LPs are not permitted.
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| Equity |
- Divided into membership interests.
- A Member's capital contribution may be in cash or other in-kind contributions. Members may be admitted without making or promising to make a contribution.
- Different classes of interests can be created, including those with differences in rights and preferences related to distributions, liquidation, voting, etc.
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- Two classes of partners exist:
- General Partners.
- Limited Partners
- A Partner's capital contribution may be in cash or other in-kind contributions. Partners may be admitted without making or promising to make a contribution.
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| SPV Documents |
- Certificate of formation
- LLC agreement (multi-member and manager-managed), subscription agreement, private placement memorandum
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- Certificate of limited partnership
- Limited partnership agreement, subscription agreement, private placement memorandum
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| Tax considerations |
- As a general rule, LLCs are only taxed at the member level.
- SPV owes an annual franchise tax to the Delaware Secretary of State.
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- As a general rule, LPs are only taxed at the partner level.
- SPV owes an annual franchise tax to the Delaware Secretary of State.
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| Management and Investment Advice |
- Vested in the members unless otherwise provided in the LLC agreement.
- Members have a high degree of freedom to stipulate rules regarding management, but SPVs are generally passive investment vehicles and do not provide for broad member management and advisory participation.
- Members generally delegate management to a managing member or non-member manager for passive investment vehicles.
- Amendments that have a materially adverse economic impact on members or that limit or waive material duties the manager has with respect to the SPV or its members require consent from the partners.
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- Usually vested in the general partners.
- The powers of the general partners can be restricted in the LP agreement, but SPVs are generally passive investment vehicles and do not provide for broad limited partner management and advisory participation.
- General partners have the apparent authority to bind the LP in its ordinary course of business.
- General partners may delegate management and or designate officers to handle the day-to-day of the limited partnership.
- Amendments that have a materially adverse economic impact on partners or that limit or waive material duties the General Partner has with respect to the SPV or its partners require consent from the partners.
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| Liability and Fiduciary Duties |
- As a general rule, the members and managers are not liable for the LLC’s debts, obligations, and liabilities.
- Managing members owe the default fiduciary duties of care and loyalty under Delaware law unless otherwise provided in the LLC agreement.
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- General partners are jointly and severally liable for the LP’s obligations unless otherwise agreed upon.
- As a general rule, the limited partners are not liable for the LP’s obligations.
- General partners owe the default fiduciary duties of care and loyalty under Delaware law unless otherwise provided in the LP agreement.
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| Funding |
- LLCs raise capital to fund investments by issuing membership interests.
- SPVs generally do not incur debt obligations to fund investments.
- Membership interests are typically issued in private placements and are only traded publicly in certain industries such as energy.
- Membership interests can be structured to mirror the properties of stock, in some cases through multiple share class structures.
- There is no limit to how many interests can be issued but it is typical for LLC agreements to include provisions restricting the dilution of the current members’ interests.
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- LPs raise capital to fund investments by issuing partnership interests.
- SPVs generally do not incur debt obligations to fund investments.
- Partnership interests are typically issued in private placements and are only traded publicly in certain industries such as energy.
- There is no limit to how many interests can be issued but it is typical for LP agreements to include provisions restricting the dilution of the current members’ interests.
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Series LLCs and LPs:
Some states such as Delaware provide for the formation of master-series limited liability companies and limited partnerships ("Series SPVs") that segregate assets and liabilities of a "series" created (by drafting and signing an operating or partnership agreement) under the master. Only the master is required to be formed by filing a certificate of formation with the Secretary of State. Each series may have its own business purpose or defined general partner/manager or partner/member rights, powers, or duties, and with respect to the funding, maintenance, and disposition of the investment assets.
Series SPVs are becoming a more common cost-saving and efficient structure for passive investment funds because they require only one master entity formation with the secretary of state and generally only require one annual franchise tax filing per master.
One of their primary benefits is the more efficient management of multiple separate business activities within a single legal entity.
A potential downside of Series SPVs are that they do not have widely developed case law supporting their judicial treatment, so there is still some degree of uncertainty related to their usage. However, recent statutory developments in Delaware provide for ad hoc registration of series with the secretary of state to address issues related to obtaining certificates of good standing and UCC treatment.
Important:
The information provided on this website does not, and is not intended to, constitute legal, financial, tax, or investment advice on any matter; instead, all information, content, and materials available on this site are for general informational purposes only. Flow disclaims all liability with respect to actions taken or not taken based on any or all the contents on this website to the fullest extent permitted by law. No reader, user, or browser of this website should act or refrain from acting on the basis of information on this website without first seeking professional advice (legal, financial, tax, investment) in the relevant jurisdiction.
This article is based on Delaware law. Please be advised that the applicable laws and regulations applicable to entity choice and formation vary from state to state and internationally.
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