Introduction
When it comes to launching a real estate fund, choosing the right legal structure is as important as finding the right deals. The structure you select will impact everything—how you raise capital, your liability, how profits are divided, and your compliance with regulations. Understanding these options will help you set up your fund for both growth and protection.
Why Legal Structure Matters
The legal entity you form for your fund will determine:
- Who controls decision-making and operations
- How investors participate and share in profits
- What is your personal liability is as the fund manager
- Your ability to scale and bring in new investors
- How is your fund taxed
Getting it right from the start can save you from costly legal headaches and make your offering more attractive to savvy investors.
Common Legal Structures for Real Estate Funds
- Limited Partnership (LP)
A Limited Partnership is one of the most widely used structures for real estate funds. Here’s why:
- General Partner (GP): You (and possibly your management team) serve as the GP, overseeing fund operations and making key decisions.
- Limited Partners (LPs): Your investors, who provide capital but don’t participate in day-to-day management.
- Liability: LPs have limited liability, while the GP bears more responsibility.
- Profit Splits: Clearly defined in the partnership agreement.
Why choose an LP?
It’s familiar to investors, simple to set up, and provides a clear division between management and passive backers.
- Limited Liability Company (LLC)
LLCs offer flexibility and liability protection. In this model:
- Managers run the fund (similar to the GP in an LP).
- Members are your investors (akin to LPs).
- Operating Agreement: Outlines the rights, responsibilities, and profit splits.
Why choose an LLC?
You get strong liability protection and flexible management options, which can be attractive as your fund grows.
- Corporation (C-Corp or S-Corp)
While less common for real estate funds, some managers use a corporation structure for specific tax or operational reasons. However, double taxation and lack of flexibility often make LPs and LLCs more appealing.
Choosing the Right Structure for Your Fund
When deciding, consider:
- Your investor profile: Are they used to LPs, or do they prefer LLCs?
- Your fundraising goals: Will you scale nationally or stay regional?
- Tax implications: LLCs and LPs are often more tax-efficient for real estate.
- Regulatory compliance: Make sure your structure fits your SEC exemption and filing strategy.
Pro tip: Always consult with a securities attorney who specializes in real estate funds. Learn what questions to ask your attorney in my free training.
Key Legal Documents You’ll Need
No matter which structure you choose, these documents are essential:
- Operating Agreement or Partnership Agreement: Governs how your fund operates, including voting rights and profit splits.
- Private Placement Memorandum (PPM): Discloses risks and terms to investors, keeping you compliant with securities laws.
- Subscription Agreement: Signed by each investor, confirming their commitment.
How Legal Structure Impacts Fundraising
A clear, investor-friendly structure inspires confidence and makes it easier to raise capital. Ambiguity or complexity can scare off serious investors, so make sure your legal documents are rock-solid and easy to understand.
Looking for a simple, step-by-step process? My free on-demand training breaks down fund setup and legal structuring in plain English.
Conclusion
Choosing the right legal structure for your real estate fund is the foundation for everything that follows—investor trust, compliance, and long-term growth. Don’t leave it to chance.
Register for my free “21 Days to Launch Your Fund” training to see exactly how successful fund managers set up their funds—and how you can do the same.