When launching and managing a venture capital (VC) fund, choosing the right structure is crucial to achieving your goals. In Australia, two of the most commonly used structures are Managed Investment Schemes (MIS), typically a unit trust, and the Early-Stage Venture Capital Limited Partnership (ESVCLP) or Venture Capital Limited Partnership (VCLP).
These structures vary in key areas such as time to market, costs, complexity, and tax treatment. This article compares both options to help you determine which is best suited for your fund’s objectives.
MIS (Unit Trusts)
Time to Market:
- Quick Setup: One of the primary advantages of the MIS structure is its rapid setup time. A Unit Trust can usually be established within a few weeks, enabling the fund to quickly raise capital and start operations.
Cost – Setup & Operations:
- Lower Setup Costs: Setting up an MIS is cost-effective, especially in comparison to more complex structures like ESVCLPs. Generally these funds are set up as wholesale funds. Legal and regulatory costs for establishing a unit trust are typically lower.
- Cost-Effective to Administer: Ongoing operational costs for an MIS are generally lower, making it a preferred choice for smaller funds or proof-of-concept ventures.
Complexity:
- Straightforward Operation: The MIS structure is relatively simple to manage, offering flexibility in how the fund is run. There are no significant restrictions on the types of investments the fund can pursue, provided the Offer Document allows for such strategies.
Tax Treatment & Benefits:
- Flow-Through Tax Treatment: Like other similar structures, MIS funds benefit from flow-through tax treatment, meaning income generated by the fund is passed directly to investors, who are taxed at their individual rates. This eliminates the risk of double taxation.
- Limited Additional Tax Benefits: While the flow-through tax treatment is advantageous, there are fewer additional tax incentives offered to investors under an MIS structure compared to other options like ESVCLPs.
ESVCLP/VCLP (Partnership)
Time to Market:
- Longer Setup Time: ESVCLPs and VCLPs are more complex to establish and can take several months to set up, primarily due to the registration process required for these structures.
Cost – Setup & Operations:
- Higher Initial Costs: The costs associated with setting up an ESVCLP or VCLP are significantly higher. Legal fees, registration, and other regulatory-related expenses make the initial setup more costly than an MIS.
- Higher Operational Costs: The complexity of managing an ESVCLP or VCLP means higher ongoing operational costs. These funds require more extensive regulatory reporting and management oversight.
Complexity:
- Highly Complex: The ESVCLP and VCLP structures are more intricate and require significant management due to their regulatory and operational complexities.
Tax Treatment & Benefits:
- Flow-Through Tax Treatment: Just like the MIS structure, ESVCLPs and VCLPs benefit from flow-through tax treatment, passing the fund’s income directly to investors, who are taxed at individual rates.
- Substantial Tax Incentives: The most significant advantage of ESVCLP/VCLP structures lies in the tax incentives they offer to investors, including:
- Tax Exemption: Investors may be eligible for tax exemptions on income and capital gains derived from qualifying investments.
- Tax Deductions: Investors may also qualify for tax deductions on their investments, which can substantially reduce their taxable income.
