Investment Structures Every New Single Family Office Should Understand

A new single family office gains flexibility when it understands how an investment is held, who controls it, how cash moves, and where risks sit. The structure should follow the investment thesis, family objectives, liquidity needs, and governance process. This article explains several common structures in plain language so your team can ask better questions before committing capital.

Investment Structure Strategies 101 - LLC Share Classes, Co-GP Deals, Gross Revenue Royalties

Start with the holding company question

Before reviewing a deal, decide which entity will own the interest. A family may invest through a wholly owned investment LLC, a trust, a partnership, or a special purpose vehicle formed for one transaction. Each choice affects governance, reporting, liability separation, transfer rules, and tax administration.

A holding company can centralize records and approvals. A deal-specific entity can isolate one asset or group of assets. The right answer depends on the family’s existing legal and tax structure. Counsel and tax professionals should review the documents before money moves.

Keep the ownership map simple enough that every family decision-maker can explain it. Record the entity, ownership percentage, voting rights, capital commitments, distribution rules, signing authority, and exit provisions in one investment register.

Limited liability companies and share classes

An LLC is often used because its operating agreement can define economics and control with precision. Members may receive different classes of interests, such as voting and non-voting units, preferred return units, or incentive units. The agreement can set capital calls, distribution waterfalls, transfer restrictions, information rights, and removal procedures.

Separate classes can help align rights with the family’s intended role. For example, one class may carry governance rights while another receives an economic preference. Those terms must be written clearly. A label such as “preferred” does not explain when payment occurs, whether unpaid amounts accumulate, or how the preference ranks against debt and other equity.

The IRS explains that an unincorporated organization with two or more members that conducts a venture and divides profits is generally treated as a partnership for federal tax purposes. IRS Publication 541 also explains that partnership items generally pass through to partners. Confirm the classification and reporting obligations with your advisers.

Direct ownership versus a pooled fund

A direct investment gives the family a direct stake in an operating company, property, or other asset. The family can negotiate information rights, board access, consent rights, and sometimes a path to increase ownership. The tradeoff is concentration and a larger diligence burden.

A pooled fund combines capital from multiple investors. The SEC describes a private fund as an entity created to pool money from investors, with the adviser using that money to make investments for the fund. SEC, Private Funds The fund documents define the strategy, fees, carry, valuation process, liquidity limits, and investor reporting.

A fund can provide diversification and professional execution. It also adds another layer of fees, governance, and manager dependence. Compare the family’s expected control and reporting needs with the advantages of delegation before choosing.

Special purpose vehicles for one transaction

A special purpose vehicle, or SPV, is a separate entity formed to hold one deal or a narrow group of assets. An SPV can make ownership percentages, capital calls, and distributions easier to track. It may also allow several aligned investors to participate together while keeping the investment separate from unrelated family assets.

The documents should state who manages the SPV, what happens if an investor fails to fund, how expenses are allocated, and how a sale is approved. Review guarantees, indemnities, related-party transactions, and the possibility that the SPV may have liabilities beyond the initial investment.

Many SPV offerings are private placements. The SEC’s investor bulletin explains that private placements are unregistered offerings that rely on an exemption from registration and may provide an offering memorandum with information about the issuer and securities. SEC Investor Bulletin Treat the memorandum as a starting point for diligence, not a substitute for independent verification.

Co-GP and co-investment arrangements

In a co-GP arrangement, two or more parties share responsibility for sponsoring or managing an investment. One party may bring the opportunity, another may provide operating expertise, and the family office may contribute capital, relationships, or strategic support.

The economics should distinguish management fees, acquisition fees, development fees, carried interest, and reimbursement of expenses. Define who can sign contracts, approve budgets, replace a manager, settle disputes, and sell the asset. Include deadlock procedures before a disagreement occurs.

A co-investment can give the family access to a specific opportunity alongside a fund or sponsor. Ask whether the family receives the same information, fee terms, and allocation priority as the lead investor. Document conflicts and related-party transactions in the investment committee record.

Preferred equity and profits interests

Preferred equity sits ahead of common equity for specified distributions or liquidation proceeds. The term sheet should define the preferred return, whether it compounds, whether it is cumulative, and what happens after the preference is paid. Preferred equity can still lose money if the underlying asset value falls below the claims ahead of it.

A profits interest gives a service provider a right to future partnership profits without granting a current claim on existing capital, subject to applicable rules. The Treasury Department has described the general distinction between a capital interest and a profits interest in partnership taxation. U.S. Treasury testimony The IRS also discusses profits-interest exceptions and conditions in Publication 541. Obtain a current tax analysis for the specific facts.

Revenue royalties and contractual cash flows

A royalty structure pays the investor a defined amount tied to revenue, units sold, production, or another measurable metric. It can be useful when the family wants contractual cash flow without taking the same ownership position as common equity.

Read the payment definition carefully. Gross revenue, net revenue, adjusted revenue, and cash receipts can produce very different results. The agreement should address reporting, audit rights, payment dates, caps, minimums, refunds, chargebacks, changes in accounting policy, and what happens after a sale of the business.

A royalty is still exposed to business performance and contract enforcement. Review customer concentration, revenue recognition, termination rights, security interests, and the company’s ability to meet payments during a downturn.

Build a structure checklist before investing

Use a repeatable review for every structure:

1. What asset or cash flow supports the investment?
2. Who owns the entity and who controls decisions?
3. What rights come with each class or security?
4. When can the family receive cash, and what can delay it?
5. What additional capital may be required?
6. What information, audit, and inspection rights exist?
7. How can the family transfer or exit the position?
8. Which conflicts, fees, and related-party transactions are disclosed?
9. Which regulatory, tax, accounting, and reporting questions remain open?

The SEC’s accredited-investor materials explain that many Regulation D offerings limit participation to investors meeting Rule 501 standards. SEC, Accredited Investors Eligibility is only one question. Suitability, concentration, liquidity, governance, and diligence still require a documented decision.

A new single family office does not need the most complicated structure. It needs a structure that matches the investment, makes responsibilities visible, and gives the family enough information to govern the position over time.

FAQs

Sources

1. SEC, Private Funds
2. SEC, Private Placements Investor Bulletin
3. SEC, Assessing Accredited Investors under Regulation D
4. IRS Publication 541, Partnerships
5. U.S. Treasury, Taxation of Carried Interest

Part of Create Your Own Single Family Office: A Step by Step Guide. See also 3 Paths to Creating a Family Office.