Choosing the Right Structure for Your VC Fund: MIS vs. ESVCLP/VCLP
When launching and operating a venture capital (VC) fund, choosing the right structure is a critical decision. In Australia, two prominent structures are the Managed Investment Scheme (MIS), often in the form of a Unit Trust, and the Early-Stage Venture Capital Limited Partnership (ESVCLP) or Venture Capital Limited Partnership (VCLP).
These structures differ significantly in terms of time to market, cost, complexity, and tax treatment. This article compares both structures across key factors to help you decide which one is best suited for your fund.
MIS (Unit Trust)
Time to Market:
• Quick to Establish: One of the key advantages of the MIS structure is its fast setup time. A Unit Trust can generally be established within a few weeks, allowing funds to quickly mobilise capital and begin operations.
Cost – Setup & Operations: to Market:
• Lower Setup Costs: The MIS structure is relatively cost-effective to establish, especially compared to more complex structures like ESVCLPs. The legal and regulatory costs involved in setting up a Unit Trust are significantly lower.
• Cheaper to Administer: The ongoing operational costs are also lower, making it an attractive option for smaller funds or proof-of-concept funds.
Complexity:
• Simple to Operate: The Unit Trust structure is straightforward to manage, offering flexibility in how the fund is run. There are no restrictions on the types of investments the fund can make, subject to the Offer Document, allowing for a broader investment strategy.
Tax Treatment & Benefits:
• Flow-Through Tax Treatment: MIS structures benefit from flow-through tax treatment, meaning income generated by the fund is passed directly to the investors, who are taxed at their individual rates. This avoids double taxation.
• Limited Tax Benefits: While the tax treatment is favourable in terms of avoiding double taxation, there are limited additional tax benefits offered to investors through an MIS structure.
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. This is due to the need for registration.
Cost – Setup & Operations: to Market:
• Higher Initial Setup Costs: The setup costs for an ESVCLP or VCLP are significantly higher than those of an MIS. Legal fees, registration processes, and other associated costs can add up quickly.
• Expensive to Administer: Managing an ESVCLP or VCLP incurs higher ongoing costs due to complexity and additional regulatory reporting requirements.
Complexity:
• Highly Complex: The ESVCLP and VCLP structures are more complex to manage due to their intricate structures.
Tax Treatment & Benefits:
• Flow-Through Tax Treatment: Like an MIS, ESVCLPs and VCLPs benefit from flow-through tax treatment, where the fund's income is passed to the investors, who are taxed at their individual rates.
o Significant Tax Incentives: The primary advantage of the ESVCLP/VCLP structure is the substantial tax benefits it offers to investors. These include:
o Tax Exemption: Investors may be eligible for a tax exemption on income and capital gains on eligible investments.
o Tax Deductions: Investors may also receive tax deductions for their investments, which can significantly reduce their taxable income.
