{ "type": "practice-guide", "canonical": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation", "links": [ { "rel": "self", "href": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation.json", "type": "application/json" }, { "rel": "alternate", "href": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation", "type": "text/html" }, { "rel": "alternate", "href": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation/markdown", "type": "text/markdown" }, { "rel": "alternate", "href": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation/json", "type": "application/json" }, { "rel": "license", "href": "https://creativecommons.org/licenses/by/4.0/", "type": "text/html", "external": true, "title": "CC BY 4.0" } ], "data": { "topic": "fund-formation", "state": "sharing-performance-compensation", "frontmatter": { "title": "Sharing Performance Compensation Between a Registered Adviser and a Fund Sponsor: Fees and Special Limited Partner Allocations", "description": "A guide for an SEC-registered investment adviser that shares in a private fund's performance compensation with the fund's sponsor, covering sub-advisory and direct advisory structures, counterparty risk, a measurement base protected from sponsor overhead, the tax differences between a cash incentive fee and a special limited partner allocation, the mechanics that protect an allocation, Advisers Act and disclosure rules, and public precedents.", "state": "United States", "lastReviewed": "2026-11-10", "license": "CC BY 4.0", "authors": [ "steven-obiajulu" ], "about": [ "Private fund performance compensation", "Sub-advisory agreements", "Special limited partner interests" ], "eyebrow": "Fund Formation Practice Guide", "coverage": "U.S. federal tax and securities law, with Delaware limited partnership law where the fund is a Delaware partnership, for an SEC-registered adviser that shares a private fund's performance compensation with the fund's sponsor; tax figures are top federal rates for tax year 2026 and SEC figures are as of November 10, 2026" }, "questions": [ { "slug": "sharing-performance-compensation-structures", "label": "Ways to share performance compensation", "heading": "How can a registered adviser share a private fund's performance compensation with the fund's sponsor?", "answerText": "There are three common routes in public filings: the sponsor pays the adviser part of its fee under a sub-advisory agreement, the fund pays the adviser directly under an advisory agreement to which the fund is a party, or the adviser holds a non-voting interest in the fund that receives an allocation of profits.", "sources": [ { "id": "pgim-subadviser-paid-by-manager", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "PGIM Private Credit Fund, Prospectus (Form 424B3, 2024), Sub-Advisory Fee", "citation": "PGIM Private Credit Fund, Prospectus, “Sub-Advisory Fee” (Apr. 29, 2024), filed on EDGAR.", "url": "https://www.sec.gov/Archives/edgar/data/1923622/000110465924064606/pgim-20240429xn2.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/1923622/000110465924064606/pgim-20240429xn2.htm#:~:text=The%20Manager%20will%20pay%20a%20portion%20of%20the%20Management%20Fee%20and%20Incentive%20Fee%20it%20receives%20from%20the%20Fund%20to%20the%20Subadviser.%20No%20advisory,Fund%20directly%20to%20the%20Subadviser.", "proposition": "A 2024 fund prospectus states that the manager pays the subadviser a portion of its management and incentive fees and the fund pays the subadviser nothing directly.", "verbatimQuote": "The Manager will pay a portion of the Management Fee and Incentive Fee it receives from the Fund to the Subadviser. No advisory fees will be paid by the Fund directly to the Subadviser.", "pullQuoteLocator": "The Manager will pay a portion of the Management Fee and Incentive Fee it receives from the Fund to the Subadviser. No advisory|Fund directly to the Subadviser.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-pgim-subadviser-paid-by-manager" }, { "id": "ceres-partnership-pays-advisor", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "Ceres Tactical Commodity L.P., Management Agreement with EMC Capital Advisors (2022), § 3(a)", "citation": "Management Agreement among Ceres Managed Futures LLC, Ceres Tactical Commodity L.P. and EMC Capital Advisors, LLC § 3(a) (Aug. 3, 2022), filed as Exhibit 10.1.", "url": "https://www.sec.gov/Archives/edgar/data/1325676/000089914022000693/c57155143c.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/1325676/000089914022000693/c57155143c.htm#:~:text=In%20consideration%20of%20and%20as,by%2012)%20(the%20%E2%80%9CManagement%20Fee%E2%80%9D).", "proposition": "In a three-party management agreement, the partnership itself pays the trading advisor its incentive fee and management fee.", "verbatimQuote": "In consideration of and as compensation for all of the services to be rendered by the Advisor to the Partnership under this Agreement, the Partnership shall pay the Advisor (i) an incentive fee payable annually equal to 20% of New Trading Profits (as such term is defined below) earned by the Advisor for the Partnership (the “Incentive Fee”) and (ii) a monthly fee for professional management services equal to 0.60% per year of the end of the month Net Asset Value of the Partnership allocated to the Advisor (computed monthly by multiplying the Net Asset Value of the Partnership allocated to the Advisor as of the last day of each month by 0.60% and dividing the result thereof by 12) (the “Management Fee”).", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-ceres-partnership-pays-advisor" }, { "id": "hatteras-subadviser-allocation-account", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "Hatteras Global Private Equity Partners Institutional Fund, LLC, Investment Sub-Advisory Agreement (2009), Schedule A", "citation": "Investment Sub-Advisory Agreement among Hatteras Global Private Equity Partners Institutional Fund, LLC, Hatteras Capital Investment Management, LLC and Capvent US Advisors LLC, Schedule A (form filed 2009 as Exhibit (g)(2)).", "url": "https://www.sec.gov/Archives/edgar/data/0001450148/000114420409018811/v145244_ex99-g2.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/0001450148/000114420409018811/v145244_ex99-g2.htm#:~:text=The%20Sub%2DAdviser%20holds%20non%2Dvoting%20interests,with%20respect%20to%20the%20Fund.", "proposition": "A filed sub-advisory agreement gives the sub-adviser its performance share as an incentive allocation credited to non-voting fund interests held solely for that purpose.", "verbatimQuote": "The Sub-Adviser holds non-voting interests of limited liability company interest in the Fund (“Interests”) in an incentive allocation account (“Incentive Allocation Account”) solely for the purpose of receiving the Incentive Allocation with respect to the Fund.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-hatteras-subadviser-allocation-account" }, { "id": "bacap-special-advisory-member-nonvoting", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "BACAP Opportunity Strategy, LLC, Form N-2/A (2002), Limited Liability Company Agreement § 2.8", "citation": "BACAP Opportunity Strategy, LLC, Limited Liability Company Agreement § 2.8, in Form N-2/A, Pre-Effective Amendment No. 1 (June 18, 2002).", "url": "https://www.sec.gov/Archives/edgar/data/0001168890/000095010902003409/dn2a.txt", "deepLink": "https://www.sec.gov/Archives/edgar/data/0001168890/000095010902003409/dn2a.txt#:~:text=The%20interest%20in%20the%20Fund,result%20of%20the%20Incentive%20Allocation.", "proposition": "A filed fund LLC agreement admits the adviser as a non-voting special advisory member that shares in profit only through the incentive allocation.", "verbatimQuote": "The interest in the Fund of the Special Advisory Member shall be non-voting and shall have no participation in the net profit or net loss of the Fund other than as a result of the Incentive Allocation.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-bacap-special-advisory-member-nonvoting" }, { "id": "nb-cmp-slp-professionals", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "NB Crossroads Private Markets Fund V (TE) LP, Form N-2 (2017), Alignment of Interests", "citation": "NB Crossroads Private Markets Fund V (TE) LP, Form N-2, “Alignment of Interests” (2017), filed on EDGAR.", "url": "https://www.sec.gov/Archives/edgar/data/1702537/000114036117014189/formn2.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/1702537/000114036117014189/formn2.htm#:~:text=In%20addition%20to%20investing%20in,interest%20of%20the%20Master%20Fund.", "proposition": "A filed registration statement states that the fund's key investment professionals share in the master fund's carried interest through ownership interests in its special limited partner.", "verbatimQuote": "In addition to investing in the Fund, all key investment professionals will participate, through ownership interests in the Special Limited Partner, in the carried interest of the Master Fund.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-nb-cmp-slp-professionals" } ] }, { "slug": "sub-advisory-or-direct-advisory-credit-risk", "label": "Sub-advisory or direct advisory", "heading": "Should the adviser be paid by the sponsor under a sub-advisory agreement or by the fund under a direct advisory agreement?", "answerText": "Under a sub-advisory agreement the adviser's claim runs against the sponsor, so its pay depends on the sponsor's solvency and on the sponsor passing the money on; public sub-advisory agreements manage that risk with short pay-through deadlines, direct-payment rights and limits on the sponsor's power to waive fees. Under a direct agreement the fund pays the adviser, which removes the sponsor as a credit risk but makes the adviser a party to the fund's own contract.", "sources": [ { "id": "xanthus-subadviser-paid-out-of-fee", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "Advantage Advisers Xanthus Fund, L.L.C., Proxy Statement (2011), Sub-Advisory Agreement § 8", "citation": "Advantage Advisers Xanthus Fund, L.L.C., Definitive Proxy Statement, form of Sub-Advisory Agreement § 8 (2011).", "url": "https://www.sec.gov/Archives/edgar/data/0001076673/000090266411001045/p11-1265def14a.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/0001076673/000090266411001045/p11-1265def14a.htm#:~:text=As%20compensation%20for%20the%20services,advisory%20fee%20from%20the%20Fund.", "proposition": "A filed sub-advisory agreement pays the sub-adviser out of the fee the investment adviser receives from the fund, within five business days of that receipt.", "verbatimQuote": "As compensation for the services rendered by the Sub-Adviser hereunder, the Investment Adviser agrees to pay the Sub-Adviser out of the fee it receives from the Fund pursuant to the investment advisory agreement between the Fund and the Investment Adviser a monthly fee computed at the annual rate of 0.30% of the net assets of the Fund, determined as of the start of business on the first business day of each month, after adjustment for any subscriptions effective on such day (the \"Sub-Advisory Fee\"). The Sub-Advisory Fee shall be payable monthly in arrears within five business days after the Investment Adviser's receipt of payment of its investment advisory fee from the Fund.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-xanthus-subadviser-paid-out-of-fee" }, { "id": "hms-fifty-percent-direct-pay", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "HMS Income Fund, Inc., Investment Sub-Advisory Agreement (2012), § 3", "citation": "Form of Investment Sub-Advisory Agreement among HMS Adviser, LP, Main Street Capital Partners, LLC, Main Street Capital Corporation and HMS Income Fund, Inc. § 3 (2012), filed as Exhibit (g)(2).", "url": "https://www.sec.gov/Archives/edgar/data/1535778/000119312512191835/d262573dex99g2.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/1535778/000119312512191835/d262573dex99g2.htm#:~:text=In%20consideration%20for%20the%20Sub%2DAdviser%E2%80%99s,written%20consent%20of%20the%20Sub%2DAdviser.", "proposition": "A filed BDC sub-advisory agreement gives the sub-adviser half of the adviser's base management and incentive fees within three business days of receipt, a right to direct payment from the fund, and a consent right over any waiver or deferral of its portion.", "verbatimQuote": "In consideration for the Sub-Adviser’s provision of the Sub-Advisory Services hereunder, the Adviser shall pay the Sub-Adviser fifty percent (50%) of the fees (including without limitation the Base Management Fee and Incentive Fee), payable to the Adviser pursuant to Section 3 of the Advisory Agreement, payable no later than three (3) business days after receipt of such amounts by the Adviser from the BDC. At the Sub-Adviser’s request, the Adviser shall arrange for the fees payable to the Sub-Adviser hereunder to be paid to the Sub-Adviser directly by the BDC on the same day the BDC pays (or is obligated to pay) the Adviser its fees (including without limitation the Base Management Fee and Incentive Fee) under the Advisory Agreement. Pursuant to Section 3 of the Advisory Agreement, the Adviser has retained the right to elect to waive or defer all or a portion of the fees that would otherwise be paid to it. The Adviser shall not make any such election with respect to the Sub-Adviser’s portion of such fees, without the prior written consent of the Sub-Adviser.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-hms-fifty-percent-direct-pay" }, { "id": "phillips-edison-assignment-direct-payment", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "Phillips Edison – ARC Shopping Center REIT Inc., First Amended and Restated Sub-advisory Agreement (2010), § 5.6", "citation": "First Amended and Restated Sub-advisory Agreement between American Realty Capital II Advisors, LLC and Phillips Edison NTR LLC § 5.6 (2010), filed as Exhibit 10.4.", "url": "https://www.sec.gov/Archives/edgar/data/1476204/000119312510152949/dex104.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/1476204/000119312510152949/dex104.htm#:~:text=Subordinated%20Incentive%20Fee.%20The%20Advisor,Shares%20or%20a%20promissory%20note).", "proposition": "A filed sub-advisory agreement assigns to the sub-advisor the advisor's right to receive direct payment from the company of a share of the incentive fee.", "verbatimQuote": "Subordinated Incentive Fee. The Advisor hereby assigns its right to receive direct payment from the Company of 85% of all Subordinated Incentive Fees payable pursuant to the Advisory Agreement, in whatever form payable by the Company (i.e., cash, Shares or a promissory note).", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-phillips-edison-assignment-direct-payment" }, { "id": "gbsp-waiver-consent", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "Griffin-Benefit Street Partners BDC Corp., Form N-2/A (2015), Sub-Advisory Fees", "citation": "Griffin-Benefit Street Partners BDC Corp., Form N-2/A, Pre-Effective Amendment No. 5, “Sub-Advisory Fees” (Jan. 20, 2015).", "url": "https://www.sec.gov/Archives/edgar/data/1609336/000119312515013604/d733722dn2a.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/1609336/000119312515013604/d733722dn2a.htm#:~:text=On%20an%20annualized%20basis%2C%20Benefit%20Street%20will%20be,written%20consent%20of%20Benefit%20Street.", "proposition": "A filed BDC registration statement gives the sub-adviser half of the adviser's fees and makes any deferral, reduction or waiver of the adviser's fees subject to the sub-adviser's prior written consent.", "verbatimQuote": "On an annualized basis, Benefit Street will be paid 50% of the fees payable to GBA under the investment advisory agreement with respect to each year, which fees are payable to Benefit Street quarterly in arrears. Except as required by applicable law, rule or regulation, any deferral, reduction, waiver or other modification of the fees to be paid to GBA (including, without limitation, the manner and timing by which such fees are paid or payable to GBA) will require the prior written consent of Benefit Street.", "pullQuoteLocator": "On an annualized basis, Benefit Street will be|written consent of Benefit Street.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-gbsp-waiver-consent" }, { "id": "ceres-direct-three-party", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "Ceres Tactical Commodity L.P., Management Agreement with EMC Capital Advisors (2022), parties", "citation": "Management Agreement among Ceres Managed Futures LLC, Ceres Tactical Commodity L.P. and EMC Capital Advisors, LLC, preamble (Aug. 3, 2022), filed as Exhibit 10.1.", "url": "https://www.sec.gov/Archives/edgar/data/1325676/000089914022000693/c57155143c.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/1325676/000089914022000693/c57155143c.htm#:~:text=THIS%20MANAGEMENT%20AGREEMENT%20(this%20%E2%80%9CAgreement%E2%80%9D),Company%20(%E2%80%9CEMC%E2%80%9D%20or%20the%20%E2%80%9CAdvisor%E2%80%9D).", "proposition": "The 2022 management agreement is made among the general partner, the partnership and the trading advisor.", "verbatimQuote": "THIS MANAGEMENT AGREEMENT (this “Agreement”) made as of August 3, 2022, by and among CERES MANAGED FUTURES LLC, a Delaware limited liability company (“CMF”), CERES TACTICAL COMMODITY L.P., a New York limited partnership (the “Partnership”) and EMC CAPITAL ADVISORS, LLC., an Illinois Limited Liability Company (“EMC” or the “Advisor”).", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-ceres-direct-three-party" }, { "id": "ceres-fee-payment-deadline", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "Ceres Tactical Commodity L.P., Management Agreement with EMC Capital Advisors (2022), § 3(d)", "citation": "Management Agreement among Ceres Managed Futures LLC, Ceres Tactical Commodity L.P. and EMC Capital Advisors, LLC § 3(d) (Aug. 3, 2022), filed as Exhibit 10.1.", "url": "https://www.sec.gov/Archives/edgar/data/1325676/000089914022000693/c57155143c.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/1325676/000089914022000693/c57155143c.htm#:~:text=Incentive%20Fees%20and%20monthly%20Management,which%20such%20fee%20is%20payable.", "proposition": "The 2022 management agreement sets a payment deadline for the incentive fee and management fee the partnership pays.", "verbatimQuote": "Incentive Fees and monthly Management Fees shall be paid within twenty (20) business days following the end of the period for which such fee is payable.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-ceres-fee-payment-deadline" }, { "id": "custody-rule-custody-definition", "authorityType": "regulation", "tier": "primary-source-backed", "title": "17 CFR 275.206(4)-2(d)(2): Definition of custody", "citation": "17 C.F.R. § 275.206(4)-2(d)(2).", "url": "https://www.ecfr.gov/current/title-17/chapter-II/part-275/section-275.206(4)-2", "proposition": "The custody rule defines custody to include an arrangement authorizing the adviser to withdraw client funds or securities from a custodian on its instruction, and a capacity such as general partner that gives legal ownership of or access to client assets.", "verbatimQuote": "(2) Custody means holding, directly or indirectly, client funds or securities, or having any authority to obtain possession of them. You have custody if a related person holds, directly or indirectly, client funds or securities, or has any authority to obtain possession of them, in connection with advisory services you provide to clients. Custody includes: (i) Possession of client funds or securities (but not of checks drawn by clients and made payable to third parties) unless you receive them inadvertently and you return them to the sender promptly but in any case within three business days of receiving them; (ii) Any arrangement (including a general power of attorney) under which you are authorized or permitted to withdraw client funds or securities maintained with a custodian upon your instruction to the custodian; and (iii) Any capacity (such as general partner of a limited partnership, managing member of a limited liability company or a comparable position for another type of pooled investment vehicle, or trustee of a trust) that gives you or your supervised person legal ownership of or access to client funds or securities.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-custody-rule-custody-definition" } ] }, { "slug": "protecting-the-measurement-base", "label": "Gross measurement and audit rights", "heading": "How does the adviser keep the sponsor's overhead out of the profits its share is measured on?", "answerText": "By defining the measurement base in the agreement: the adviser's share is computed on the fund's investment profit before the sponsor's own fees and overhead, with verification and audit rights so the adviser can check the number. A filed commodity-pool agreement determines the net assets behind the advisor's fees with no adjustment for management, administrative, selling-agent or incentive fees, while still charging ongoing fund expenses against the advisor's share.", "sources": [ { "id": "risk-alert-adviser-expenses", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "SEC Office of Compliance Inspections and Examinations, Observations from Examinations of Investment Advisers Managing Private Funds (June 23, 2020)", "citation": "SEC Office of Compliance Inspections and Examinations, Risk Alert: Observations from Examinations of Investment Advisers Managing Private Funds § II.B (June 23, 2020).", "url": "https://www.sec.gov/files/Private%20Fund%20Risk%20Alert_0.pdf", "proposition": "SEC examination staff observed private fund advisers charging funds for adviser-related expenses that the fund documents did not permit.", "verbatimQuote": "Advisers charged private fund clients for expenses that were not permitted by the relevant fund operating agreements, such as adviser-related expenses like salaries of adviser personnel, compliance, regulatory filings, and office expenses, thereby causing investors to overpay expenses.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-risk-alert-adviser-expenses" }, { "id": "ceres-net-assets-gross-of-fees", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "Ceres Tactical Commodity L.P., Management Agreement with EMC Capital Advisors (2022), § 3(b)", "citation": "Management Agreement among Ceres Managed Futures LLC, Ceres Tactical Commodity L.P. and EMC Capital Advisors, LLC § 3(b) (Aug. 3, 2022), filed as Exhibit 10.1.", "url": "https://www.sec.gov/Archives/edgar/data/1325676/000089914022000693/c57155143c.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/1325676/000089914022000693/c57155143c.htm#:~:text=%E2%80%9CNet%20Assets%20of%20the%20Partnership%E2%80%9D,the%20date%20of%20such%20determination.", "proposition": "The 2022 management agreement determines the net assets on which the advisor's fees are measured without adjusting for management, administrative, selling-agent or incentive fees.", "verbatimQuote": "“Net Assets of the Partnership” shall have the meaning set forth in Section 7(d)(2) of the Partnership Agreement without regard to further amendments thereto, provided that in determining the Net Assets of the Partnership on any date, no adjustment shall be made to reflect any distributions, redemptions, management fees, administrative fees, ongoing selling agent fees, or incentive fees accrued or payable as of the date of such determination.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-ceres-net-assets-gross-of-fees" }, { "id": "ceres-ongoing-expenses-attributed", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "Ceres Tactical Commodity L.P., Management Agreement with EMC Capital Advisors (2022), New Trading Profits", "citation": "Management Agreement among Ceres Managed Futures LLC, Ceres Tactical Commodity L.P. and EMC Capital Advisors, LLC § 3(c) (Aug. 3, 2022), filed as Exhibit 10.1.", "url": "https://www.sec.gov/Archives/edgar/data/1325676/000089914022000693/c57155143c.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/1325676/000089914022000693/c57155143c.htm#:~:text=Ongoing%20expenses%20shall%20be%20attributed,organizational%20expenses%20of%20the%20Partnership.", "proposition": "The 2022 management agreement attributes ongoing fund expenses, including offering and organizational expenses, to the assets the advisor manages, but excludes litigation not involving the advisor's activities.", "verbatimQuote": "Ongoing expenses shall be attributed to the assets managed by the Advisor (but shall be paid by the Partnership) based on the Advisor’s proportionate share of Net Assets of the Partnership. Ongoing expenses shall not include expenses of litigation not involving the activities of the Advisor on behalf of the Partnership. Ongoing expenses include offering and organizational expenses of the Partnership.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-ceres-ongoing-expenses-attributed" }, { "id": "ceres-litigation-excluded", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "Ceres Tactical Commodity L.P., Management Agreement with EMC Capital Advisors (2022), § 3(c)", "citation": "Management Agreement among Ceres Managed Futures LLC, Ceres Tactical Commodity L.P. and EMC Capital Advisors, LLC § 3(c) (Aug. 3, 2022), filed as Exhibit 10.1.", "url": "https://www.sec.gov/Archives/edgar/data/1325676/000089914022000693/c57155143c.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/1325676/000089914022000693/c57155143c.htm#:~:text=Ongoing%20expenses%20shall%20not%20include,on%20behalf%20of%20the%20Partnership.", "proposition": "The 2022 management agreement excludes litigation expenses not involving the advisor from the ongoing expenses charged against the advisor's base.", "verbatimQuote": "Ongoing expenses shall not include expenses of litigation not involving the activities of the Advisor on behalf of the Partnership.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-ceres-litigation-excluded" }, { "id": "hatteras-net-profits-definition", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "Hatteras Global Private Equity Partners Institutional Fund, LLC, Investment Sub-Advisory Agreement (2009), Schedule A", "citation": "Investment Sub-Advisory Agreement among Hatteras Global Private Equity Partners Institutional Fund, LLC, Hatteras Capital Investment Management, LLC and Capvent US Advisors LLC, Schedule A (form filed 2009 as Exhibit (g)(2)).", "url": "https://www.sec.gov/Archives/edgar/data/0001450148/000114420409018811/v145244_ex99-g2.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/0001450148/000114420409018811/v145244_ex99-g2.htm#:~:text=Capvent%20US%20Advisors%20LLC%20(the%20%E2%80%9CSub%2DAdviser%E2%80%9D)%20will,distributions)%20for%20such%20allocation%20period.", "proposition": "The 2009 sub-advisory agreement measures the incentive allocation on net profits including unrealized appreciation, without giving effect to items not charged ratably to all members, over a loss recovery account and subject to a hurdle.", "verbatimQuote": "Capvent US Advisors LLC (the “Sub-Adviser”) will receive an Incentive Allocation as of the last day of each allocation period (as defined below) with respect to the Fund, of 5% of the net profits of the Fund (taking into account any unrealized appreciation or depreciation of investments, but without giving effect to the Incentive Allocation and any item not charged ratably to all persons who are admitted as members of the Fund (each a “Member”), if any, over the then balance of the Fund’s Loss Recovery Account (as defined below), appropriately adjusted for any partial repurchases, partial distributions or partial transfers; provided that the net profits of the Fund equals or exceeds an annualized return of at least a 6% (adjusted for contributions, repurchases and distributions) for such allocation period.", "pullQuoteLocator": "Capvent US Advisors LLC (the “Sub-Adviser”) will|distributions) for such allocation period.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-hatteras-net-profits-definition" }, { "id": "risk-alert-valuation", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "SEC Office of Compliance Inspections and Examinations, Observations from Examinations of Investment Advisers Managing Private Funds (June 23, 2020)", "citation": "SEC Office of Compliance Inspections and Examinations, Risk Alert: Observations from Examinations of Investment Advisers Managing Private Funds § II.B (June 23, 2020).", "url": "https://www.sec.gov/files/Private%20Fund%20Risk%20Alert_0.pdf", "proposition": "SEC examination staff observed that valuations inconsistent with the disclosed process led to overcharged management fees and carried interest.", "verbatimQuote": "In some cases, the staff observed that this failure to value a private fund’s holdings in accordance with the disclosed valuation process led to overcharging management fees and carried interest because such fees were based on inappropriately overvalued holdings.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-risk-alert-valuation" }, { "id": "torys-auditor-certification", "authorityType": "law-firm-commentary", "tier": "lawyer-judgment-backed", "title": "Torys LLP, Overview of ILPA Principles 3.0 and Model LPA (2020)", "citation": "Torys LLP, Overview of ILPA Principles 3.0 and Model LPA (Mar. 2020).", "url": "https://www.torys.com/our-latest-thinking/publications/2020/03/overview-of-ilpa-principles-3-0-and-model-lpa", "proposition": "Law-firm commentary summarizes ILPA Principles 3.0 as calling for fees and expenses to be disclosed regularly and subject to LPAC review and independent auditor certification.", "verbatimQuote": "Fees and expenses should be regularly disclosed and subject to LPAC review and independent auditor certification.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-torys-auditor-certification" }, { "id": "disguised-payment-gross-income-presumption", "authorityType": "regulation", "tier": "primary-source-backed", "title": "Disguised Payments for Services, Proposed Treas. Reg. § 1.707-2(c)(1), 80 Fed. Reg. 43652 (July 23, 2015)", "citation": "Disguised Payments for Services, 80 Fed. Reg. 43652 (proposed July 23, 2015) (Prop. Treas. Reg. § 1.707-2(c)(1)), REG-115452-14.", "url": "https://www.govinfo.gov/content/pkg/FR-2015-07-23/pdf/2015-17828.pdf", "proposition": "The 2015 proposed regulations list an allocation of gross income among the facts that create a presumption that an arrangement lacks significant entrepreneurial risk and is a disguised payment for services.", "verbatimQuote": "(1) The arrangement lacks significant entrepreneurial risk. Whether an arrangement lacks significant entrepreneurial risk is based on the service provider’s entrepreneurial risk relative to the overall entrepreneurial risk of the partnership. Paragraphs (c)(1)(i) through (v) of this section provide facts and circumstances that create a presumption that an arrangement lacks significant entrepreneurial risk and will be treated as a disguised payment for services unless other facts and circumstances establish the presence of significant entrepreneurial risk by clear and convincing evidence: (i) Capped allocations of partnership income if the cap is reasonably expected to apply in most years; (ii) An allocation for one or more years under which the service provider’s share of income is reasonably certain; (iii) An allocation of gross income;", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-disguised-payment-gross-income-presumption" }, { "id": "irc-707-a-2-a", "authorityType": "primary-law", "tier": "primary-source-backed", "title": "26 U.S.C. § 707(a)(2)(A): Treatment of certain services and transfers of property", "citation": "26 U.S.C. § 707(a)(2)(A).", "url": "https://www.law.cornell.edu/uscode/text/26/707", "deepLink": "https://www.law.cornell.edu/uscode/text/26/707#:~:text=(A)%20Treatment%20of%20certain%20services,transaction%20described%20in%20paragraph%20(1).", "proposition": "Section 707(a)(2)(A) treats a related allocation and distribution to a partner who performs services as a transaction with a non-partner when the two, viewed together, are properly so characterized.", "verbatimQuote": "(A) Treatment of certain services and transfers of propertyIf— (i) a partner performs services for a partnership or transfers property to a partnership, (ii) there is a related direct or indirect allocation and distribution to such partner, and (iii) the performance of such services (or such transfer) and the allocation and distribution, when viewed together, are properly characterized as a transaction occurring between the partnership and a partner acting other than in his capacity as a member of the partnership, such allocation and distribution shall be treated as a transaction described in paragraph (1).", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-irc-707-a-2-a" } ] }, { "slug": "fee-or-allocation-tax-character", "label": "Tax character of a fee and an allocation", "heading": "Is a share of a performance allocation taxed differently from a share of a performance fee?", "answerText": "Often, yes. An allocation keeps the character of the fund's income as it passes through the partnership, so long-term capital gain can reach the adviser's owners at capital-gain rates; for gain subject to the carried-interest rule in section 1061, that generally means gain on assets the fund held more than three years. A fee is ordinary income. At top 2026 federal rates, that is roughly 23.8 percent against about 40 percent on gain that qualifies, and much less difference on gain that does not.", "sources": [ { "id": "mazars-character-retained", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "Mazars USA, How the President's Tax Reform Has Changed the Compensation Structures of Hedge and Private Equity Funds (via Legal 500)", "citation": "Mazars USA LLP, How the President's Tax Reform Has Changed the Compensation Structures of Hedge and Private Equity Funds, Legal 500 Intelligence (May 31, 2019).", "url": "https://www.legal500.com/intelligence/united-states/corporate-commercial-law/how-the-president%27s-tax-reform-has-changed-the-compensation-structures-of-hedge-and-private-equity-funds", "proposition": "Accounting-firm commentary says a profit reallocation through a pass-through entity retains the character of the fund's income and keeps unrealized gains unrealized for the manager.", "verbatimQuote": "The most salient being that the portion of current income attributable to unrealized gains remains unrealized for the manager because the character of the income (ordinary, long-term capital gain, portfolio deduction) is retained when passed through a partnership to its partners.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-mazars-character-retained" }, { "id": "irc-1061-api-definition", "authorityType": "primary-law", "tier": "primary-source-backed", "title": "26 U.S.C. § 1061(c)(1): Applicable partnership interest", "citation": "26 U.S.C. § 1061(c)(1).", "url": "https://www.law.cornell.edu/uscode/text/26/1061", "deepLink": "https://www.law.cornell.edu/uscode/text/26/1061#:~:text=Except%20as%20provided%20in%20this,any%20applicable%20trade%20or%20business.", "proposition": "Section 1061 defines an applicable partnership interest as a partnership interest transferred to or held by the taxpayer in connection with substantial services in an applicable trade or business.", "verbatimQuote": "Except as provided in this paragraph or paragraph (4), the term “applicable partnership interest” means any interest in a partnership which, directly or indirectly, is transferred to (or is held by) the taxpayer in connection with the performance of substantial services by the taxpayer, or any other related person, in any applicable trade or business.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-irc-1061-api-definition" }, { "id": "irc-1061-applicable-trade-or-business", "authorityType": "primary-law", "tier": "primary-source-backed", "title": "26 U.S. Code § 1061(c)(2), Applicable trade or business", "citation": "26 U.S.C. § 1061(c)(2).", "url": "https://www.law.cornell.edu/uscode/text/26/1061", "deepLink": "https://www.law.cornell.edu/uscode/text/26/1061#:~:text=(2)%20Applicable%20trade%20or%20businessThe,or%20(ii)%20developing%20specified%20assets.", "proposition": "Section 1061(c)(2) defines an applicable trade or business as a regular, continuous and substantial activity consisting of raising or returning capital and investing in or developing specified assets.", "verbatimQuote": "(2) Applicable trade or businessThe term “applicable trade or business” means any activity conducted on a regular, continuous, and substantial basis which, regardless of whether the activity is conducted in one or more entities, consists, in whole or in part, of— (A) raising or returning capital, and (B) either— (i) investing in (or disposing of) specified assets (or identifying specified assets for such investing or disposition), or (ii) developing specified assets.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-irc-1061-applicable-trade-or-business" }, { "id": "irs-1061-three-years", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "IRS, Section 1061 Reporting Guidance FAQs", "citation": "IRS, Section 1061 Reporting Guidance FAQs, Purpose of reporting guidance (page last reviewed Aug. 21, 2026).", "url": "https://www.irs.gov/businesses/partnerships/section-1061-reporting-guidance-faqs", "proposition": "The IRS states that section 1061 generally requires a capital asset to be held more than three years for gain allocated to an applicable partnership interest to be long-term.", "verbatimQuote": "The provision generally requires that a capital asset be held for more than three years for capital gain allocated with respect to any applicable partnership interest (API) to be treated as long-term capital gain.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-irs-1061-three-years" }, { "id": "reg-1061-4-excluded-items", "authorityType": "regulation", "tier": "primary-source-backed", "title": "26 CFR § 1.1061-4(b)(7), Items not taken into account for purposes of section 1061", "citation": "Treas. Reg. § 1.1061-4(b)(7).", "url": "https://www.law.cornell.edu/cfr/text/26/1.1061-4", "deepLink": "https://www.law.cornell.edu/cfr/text/26/1.1061-4#:~:text=(7)%20Items%20not%20taken%20into,purposes%20of%20section%201(h)(11)(B)%3B%20and", "proposition": "The section 1061 regulations exclude section 1231 gain and loss, section 1256 gain and loss and qualified dividends from the amounts recharacterized under the three-year rule.", "verbatimQuote": "(7) Items not taken into account for purposes of section 1061. The following items of long-term capital gain and loss are excluded from the calculation of the API One Year Distributive Share Amount in paragraph (a)(3)(i) of this section and the API Three Year Distributive Share Amount in paragraph (a)(3)(ii) of this section— (i) Long-term capital gain and long-term capital loss determined under section 1231; (ii) Long-term capital gain and long-term capital loss determined under section 1256; (iii) Qualified dividends included in net capital gain for purposes of section 1(h)(11)(B); and", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-reg-1061-4-excluded-items" }, { "id": "mazars-hedge-funds-1061", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "Mazars USA, How the President's Tax Reform Has Changed the Compensation Structures of Hedge and Private Equity Funds (via Legal 500)", "citation": "Mazars USA LLP, How the President's Tax Reform Has Changed the Compensation Structures of Hedge and Private Equity Funds, Legal 500 Intelligence.", "url": "https://www.legal500.com/intelligence/united-states/corporate-commercial-law/how-the-president%27s-tax-reform-has-changed-the-compensation-structures-of-hedge-and-private-equity-funds", "proposition": "Accounting-firm commentary says the three-year rule diminishes the benefit of carry for hedge fund partners whose income rarely comes from long holding periods.", "verbatimQuote": "Now that carry interests can only receive the beneficial tax rate on long term capital gains if the holding period exceeds three years, the benefit of being a partner in a hedge fund has slightly diminished as less of their income is likely to be generated by such a longer holding period unless that's the strategy the fund employs.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-mazars-hedge-funds-1061" }, { "id": "irs-2026-top-rate", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "IRS, IRS releases tax inflation adjustments for tax year 2026, including amendments from the One, Big, Beautiful Bill", "citation": "IRS, IRS releases tax inflation adjustments for tax year 2026, including amendments from the One, Big, Beautiful Bill (IRS newsroom).", "url": "https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2026-including-amendments-from-the-one-big-beautiful-bill", "proposition": "The IRS states that the top individual income tax rate for 2026 remains 37 percent.", "verbatimQuote": "Marginal Rates: For tax year 2026, the top tax rate remains 37% for individual single taxpayers with incomes greater than $640,600 ($768,700 for married couples filing jointly).", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-irs-2026-top-rate" }, { "id": "irs-topic-409-capital-gains-rate", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "IRS Tax Topic 409, Capital gains and losses", "citation": "IRS, Topic No. 409, Capital Gains and Losses.", "url": "https://www.irs.gov/taxtopics/tc409", "proposition": "The IRS states that a 20 percent capital gains rate applies above the 15 percent rate thresholds.", "verbatimQuote": "However, a capital gains rate of 20% applies to the extent that your taxable income exceeds the thresholds set for the 15% capital gain rate.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-irs-topic-409-capital-gains-rate" }, { "id": "irs-niit-rate", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "IRS, Questions and Answers on the Net Investment Income Tax", "citation": "IRS, Questions and Answers on the Net Investment Income Tax.", "url": "https://www.irs.gov/newsroom/questions-and-answers-on-the-net-investment-income-tax", "proposition": "The IRS states that the net investment income tax applies at 3.8 percent and that investment income includes capital gains.", "verbatimQuote": "The NIIT applies at a rate of 3.8% to certain net investment income of individuals, estates and trusts that have income above the statutory threshold amounts.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-irs-niit-rate" }, { "id": "mazars-fees-self-employment-income", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "Mazars USA, How the President's Tax Reform Has Changed the Compensation Structures of Hedge and Private Equity Funds (via Legal 500)", "citation": "Mazars USA LLP, How the President's Tax Reform Has Changed the Compensation Structures of Hedge and Private Equity Funds, Legal 500 Intelligence (May 31, 2019).", "url": "https://www.legal500.com/intelligence/united-states/corporate-commercial-law/how-the-president%27s-tax-reform-has-changed-the-compensation-structures-of-hedge-and-private-equity-funds", "proposition": "Accounting-firm commentary says management fees flowing to an individual are self-employment income, and that fees paid to a New York City non-corporate entity are subject to the city's unincorporated business tax.", "verbatimQuote": "Management fees, generally sourced as sales to a specific state (which will be discussed further below), are self-employment income subject to that tax if flowing to an individual, and, when paid to a New York City-based non-corporate entity, subject to the 4% Unincorporated Business Tax (UBT).", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-mazars-fees-self-employment-income" }, { "id": "irs-niit-capital-gains-included", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "IRS, Questions and Answers on the Net Investment Income Tax", "citation": "IRS, Questions and Answers on the Net Investment Income Tax, Q&A 8.", "url": "https://www.irs.gov/newsroom/questions-and-answers-on-the-net-investment-income-tax", "proposition": "The IRS states that investment income for the net investment income tax includes capital gains and income from businesses trading financial instruments.", "verbatimQuote": "In general, investment income includes, but is not limited to: interest, dividends, capital gains, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial instruments or commodities and businesses that are passive activities to the taxpayer (within the meaning of section 469).", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-irs-niit-capital-gains-included" }, { "id": "irc-1411-c-6-se-income", "authorityType": "primary-law", "tier": "primary-source-backed", "title": "26 U.S. Code § 1411(c)(6)", "citation": "26 U.S.C. § 1411(c)(6).", "url": "https://www.law.cornell.edu/uscode/text/26/1411", "deepLink": "https://www.law.cornell.edu/uscode/text/26/1411#:~:text=(6)%20Special%20rule%20Net%20investment,is%20imposed%20by%20section%201401(b).", "proposition": "Section 1411(c)(6) excludes from net investment income any item taken into account in determining self-employment income on which the section 1401(b) tax is imposed.", "verbatimQuote": "(6) Special rule Net investment income shall not include any item taken into account in determining self-employment income for such taxable year on which a tax is imposed by section 1401(b).", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-irc-1411-c-6-se-income" }, { "id": "irc-1402-a-3", "authorityType": "primary-law", "tier": "primary-source-backed", "title": "26 U.S.C. § 1402(a)(3): Exclusion of capital gain from net earnings from self-employment", "citation": "26 U.S.C. § 1402(a)(3).", "url": "https://www.law.cornell.edu/uscode/text/26/1402", "deepLink": "https://www.law.cornell.edu/uscode/text/26/1402#:~:text=(3)%20there%20shall%20be%20excluded,of%20the%20trade%20or%20business%3B", "proposition": "Section 1402(a)(3) excludes gain or loss from the sale or exchange of a capital asset from net earnings from self-employment.", "verbatimQuote": "(3) there shall be excluded any gain or loss— (A) which is considered as gain or loss from the sale or exchange of a capital asset, (B) from the cutting of timber, or the disposal of timber, coal, or iron ore, if section 631 applies to such gain or loss, or (C) from the sale, exchange, involuntary conversion, or other disposition of property if such property is neither— (i) stock in trade or other property of a kind which would properly be includible in inventory if on hand at the close of the taxable year, nor (ii) property held primarily for sale to customers in the ordinary course of the trade or business;", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-irc-1402-a-3" }, { "id": "irc-1401-b-medicare", "authorityType": "primary-law", "tier": "primary-source-backed", "title": "26 U.S.C. § 1401(b): Hospital insurance tax on self-employment income", "citation": "26 U.S.C. § 1401(b)(1); see id. § 1401(b)(2) (additional 0.9 percent tax).", "url": "https://www.law.cornell.edu/uscode/text/26/1401", "deepLink": "https://www.law.cornell.edu/uscode/text/26/1401#:~:text=In%20addition%20to%20the%20tax,income%20for%20such%20taxable%20year.", "proposition": "Section 1401(b) imposes a 2.9 percent tax on self-employment income and a 0.9 percent additional tax above a threshold.", "verbatimQuote": "In addition to the tax imposed by the preceding subsection, there shall be imposed for each taxable year, on the self-employment income of every individual, a tax equal to 2.9 percent of the amount of the self-employment income for such taxable year.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-irc-1401-b-medicare" }, { "id": "irc-1401-b-2-additional-tax", "authorityType": "primary-law", "tier": "primary-source-backed", "title": "26 U.S. Code § 1401(b)(2), Additional tax", "citation": "26 U.S.C. § 1401(b)(2)(A).", "url": "https://www.law.cornell.edu/uscode/text/26/1401", "deepLink": "https://www.law.cornell.edu/uscode/text/26/1401#:~:text=(A)%20In%20generalIn%20addition%20to,in%20any%20other%20case%2C%20%24200%2C000.", "proposition": "Section 1401(b)(2) imposes an additional 0.9 percent tax on self-employment income above $200,000, or $250,000 on a joint return.", "verbatimQuote": "(A) In generalIn addition to the tax imposed by paragraph (1) and the preceding subsection, there is hereby imposed on every taxpayer (other than a corporation, estate, or trust) for each taxable year beginning after December 31, 2012, a tax equal to 0.9 percent of the self-employment income for such taxable year which is in excess of— (i) in the case of a joint return, $250,000, (ii) in the case of a married taxpayer (as defined in section 7703) filing a separate return, ½ of the dollar amount determined under clause (i), and (iii) in any other case, $200,000.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-irc-1401-b-2-additional-tax" }, { "id": "irc-164-f-half-se-tax", "authorityType": "primary-law", "tier": "primary-source-backed", "title": "26 U.S. Code § 164(f)", "citation": "26 U.S.C. § 164(f)(1).", "url": "https://www.law.cornell.edu/uscode/text/26/164", "deepLink": "https://www.law.cornell.edu/uscode/text/26/164#:~:text=(1)%20In%20general%20In%20the,1401(b)(2))%20for%20such%20taxable%20year.", "proposition": "Section 164(f) allows an individual an income tax deduction for one-half of the section 1401 self-employment taxes, other than the additional 0.9 percent tax.", "verbatimQuote": "(1) In general In the case of an individual, in addition to the taxes described in subsection (a), there shall be allowed as a deduction for the taxable year an amount equal to one-half of the taxes imposed by section 1401 (other than the taxes imposed by section 1401(b)(2)) for such taxable year.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-irc-164-f-half-se-tax" }, { "id": "irc-1402-a-12-13", "authorityType": "primary-law", "tier": "primary-source-backed", "title": "26 U.S.C. § 1402(a)(12)–(13): Self-employment deduction and limited partner exclusion", "citation": "26 U.S.C. § 1402(a)(12)–(13).", "url": "https://www.law.cornell.edu/uscode/text/26/1402", "deepLink": "https://www.law.cornell.edu/uscode/text/26/1402#:~:text=(12)%20in%20lieu%20of%20the,of%20remuneration%20for%20those%20services%3B", "proposition": "Section 1402(a)(12) allows a deduction in computing net earnings from self-employment, and section 1402(a)(13) excludes a limited partner's distributive share other than guaranteed payments for services.", "verbatimQuote": "(12) in lieu of the deduction provided by section 164(f) (relating to deduction for one-half of self-employment taxes), there shall be allowed a deduction equal to the product of— (A) the taxpayer’s net earnings from self-employment for the taxable year (determined without regard to this paragraph), and (B) one-half of the sum of the rates imposed by subsections (a) and (b) of section 1401 for such year (determined without regard to the rate imposed under paragraph (2) of section 1401(b)); (13) there shall be excluded the distributive share of any item of income or loss of a limited partner, as such, other than guaranteed payments described in section 707(c) to that partner for services actually rendered to or on behalf of the partnership to the extent that those payments are established to be in the nature of remuneration for those services;", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-irc-1402-a-12-13" }, { "id": "rsm-sirius-substituted", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "RSM US, Fifth Circuit withdraws and replaces January 2026 Sirius Solutions opinion (2026)", "citation": "RSM US LLP, Fifth Circuit withdraws and replaces January 2026 Sirius Solutions opinion (tax alert, 2026).", "url": "https://www.rsmus.com/insights/tax-alerts/2026/fifth-circuit-sirius-opinion", "proposition": "Accounting-firm commentary reports that on August 12, 2026 the Fifth Circuit withdrew its January 2026 Sirius Solutions opinion and substituted a management-and-control test for the limited partner exclusion.", "verbatimQuote": "On Aug. 12, 2026, the Fifth Circuit granted rehearing, withdrew the January opinion in its entirety, and issued a substitute opinion. While the new opinion continues to reject the Tax Court's functional analysis test, it abandons the limited-liability standard that drove the original decision—meaning that limited liability itself does not determine whether a limited partner qualifies for the exception.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-rsm-sirius-substituted" }, { "id": "ca5-k-alain-limited-partner-meaning", "authorityType": "primary-law", "tier": "primary-source-backed", "title": "K Alain, L.L.L.P. v. Commissioner, No. 24-60240 (5th Cir. Aug. 12, 2026) (substituted opinion)", "citation": "K Alain, L.L.L.P. v. Commissioner, No. 24-60240, slip op. at 1 (5th Cir. Aug. 12, 2026) (per curiam), withdrawing and substituting for Sirius Solutions, L.L.L.P. v. Commissioner, 165 F.4th 374 (5th Cir. 2026).", "url": "https://www.ca5.uscourts.gov/opinions/pub/24/24-60240-CV1.pdf", "proposition": "The Fifth Circuit's substituted opinion holds that a limited partner, for the self-employment tax exclusion, is a partner who plays no significant role in managing or running a business.", "verbatimQuote": "This case concerns the meaning of the term “limited partner” in 26 U.S.C. § 1402(1)(13). Today, we hold its original public meaning is a partner who plays no significant role in managing or running a business.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-ca5-k-alain-limited-partner-meaning" }, { "id": "irc-199a-d-1-qualified-business", "authorityType": "primary-law", "tier": "primary-source-backed", "title": "26 U.S. Code § 199A(d)(1)", "citation": "26 U.S.C. § 199A(d)(1).", "url": "https://www.law.cornell.edu/uscode/text/26/199A", "deepLink": "https://www.law.cornell.edu/uscode/text/26/199A#:~:text=(1)%20In%20generalThe%20term%20%E2%80%9Cqualified,performing%20services%20as%20an%20employee.", "proposition": "Section 199A(d)(1) excludes a specified service trade or business from the qualified trades or businesses eligible for the deduction.", "verbatimQuote": "(1) In generalThe term “qualified trade or business” means any trade or business other than— (A) a specified service trade or business, or (B) the trade or business of performing services as an employee.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-irc-199a-d-1-qualified-business" }, { "id": "irc-199a-d-3-phase-in", "authorityType": "primary-law", "tier": "primary-source-backed", "title": "26 U.S. Code § 199A(d)(3), Exception for specified service businesses based on taxpayer's income", "citation": "26 U.S.C. § 199A(d)(3)(A).", "url": "https://www.law.cornell.edu/uscode/text/26/199A", "deepLink": "https://www.law.cornell.edu/uscode/text/26/199A#:~:text=(A)%20In%20generalIf%2C%20for%20any,purposes%20of%20applying%20this%20section.", "proposition": "Section 199A(d)(3) lets a taxpayer below the threshold amount plus a phase-in range count an applicable percentage of a specified service business's income.", "verbatimQuote": "(A) In generalIf, for any taxable year, the taxable income of any taxpayer is less than the sum of the threshold amount plus $75,000 ($150,000 in the case of a joint return), then— (i) any specified service trade or business of the taxpayer shall not fail to be treated as a qualified trade or business due to paragraph (1)(A), but (ii) only the applicable percentage of qualified items of income, gain, deduction, or loss, and the W–2 wages and the unadjusted basis immediately after acquisition of qualified property, of the taxpayer allocable to such specified service trade or business shall be taken into account in computing the qualified business income, W–2 wages, and the unadjusted basis immediately after acquisition of qualified property of the taxpayer for the taxable year for purposes of applying this section.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-irc-199a-d-3-phase-in" }, { "id": "irc-199a-sstb", "authorityType": "primary-law", "tier": "primary-source-backed", "title": "26 U.S.C. § 199A(d)(2): Specified service trade or business", "citation": "26 U.S.C. § 199A(d)(2).", "url": "https://www.law.cornell.edu/uscode/text/26/199A", "deepLink": "https://www.law.cornell.edu/uscode/text/26/199A#:~:text=(2)%20Specified%20service%20trade%20or,(as%20defined%20in%20section%20475(e)(2)).", "proposition": "Section 199A treats a business that performs investing and investment management services as a specified service trade or business.", "verbatimQuote": "(2) Specified service trade or businessThe term “specified service trade or business” means any trade or business— (A) which is described in section 1202(e)(3)(A) (applied without regard to the words “engineering, architecture,”) or which would be so described if the term “employees or owners” were substituted for “employees” therein, or (B) which involves the performance of services that consist of investing and investment management, trading, or dealing in securities (as defined in section 475(c)(2)), partnership interests, or commodities (as defined in section 475(e)(2)).", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-irc-199a-sstb" } ] }, { "slug": "fee-or-allocation-deferral-and-investors", "label": "Deferral and the fund's investors", "heading": "How does a fee or an allocation affect deferral of unrealized gains and the fund's investors?", "answerText": "An allocation can defer the adviser's tax on its share of unrealized gains until the fund realizes them, while a cash fee is taxed when the adviser receives or accrues it. For individual investors, an allocation reduces the income the fund allocates to them, while a fee paid by an investing (not trading) fund is a miscellaneous itemized deduction, which section 67(h), made permanent by Public Law 119-21, disallows for every taxable year beginning after 2017.", "sources": [ { "id": "mazars-unrealized-deferral", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "Mazars USA, How the President's Tax Reform Has Changed the Compensation Structures of Hedge and Private Equity Funds (via Legal 500)", "citation": "Mazars USA LLP, How the President's Tax Reform Has Changed the Compensation Structures of Hedge and Private Equity Funds, Legal 500 Intelligence.", "url": "https://www.legal500.com/intelligence/united-states/corporate-commercial-law/how-the-president%27s-tax-reform-has-changed-the-compensation-structures-of-hedge-and-private-equity-funds", "proposition": "Accounting-firm commentary says a profit reallocation through a partnership keeps the manager's share of unrealized gains unrealized.", "verbatimQuote": "The most salient being that the portion of current income attributable to unrealized gains remains unrealized for the manager because the character of the income (ordinary, long-term capital gain, portfolio deduction) is retained when passed through a partnership to its partners.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-mazars-unrealized-deferral" }, { "id": "hatteras-net-profits-unrealized-appreciation", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "Hatteras Global Private Equity Partners Institutional Fund, LLC, Investment Sub-Advisory Agreement (2009), Schedule A", "citation": "Investment Sub-Advisory Agreement among Hatteras Global Private Equity Partners Institutional Fund, LLC, Hatteras Capital Investment Management, LLC and Capvent US Advisors LLC, Schedule A (form filed 2009 as Exhibit (g)(2)).", "url": "https://www.sec.gov/Archives/edgar/data/0001450148/000114420409018811/v145244_ex99-g2.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/0001450148/000114420409018811/v145244_ex99-g2.htm#:~:text=Capvent%20US%20Advisors%20LLC%20(the%20%E2%80%9CSub%2DAdviser%E2%80%9D)%20will,distributions)%20for%20such%20allocation%20period.", "proposition": "The 2009 sub-advisory agreement measures the incentive allocation on net profits that take unrealized appreciation and depreciation into account.", "verbatimQuote": "Capvent US Advisors LLC (the “Sub-Adviser”) will receive an Incentive Allocation as of the last day of each allocation period (as defined below) with respect to the Fund, of 5% of the net profits of the Fund (taking into account any unrealized appreciation or depreciation of investments, but without giving effect to the Incentive Allocation and any item not charged ratably to all persons who are admitted as members of the Fund (each a “Member”), if any, over the then balance of the Fund’s Loss Recovery Account (as defined below), appropriately adjusted for any partial repurchases, partial distributions or partial transfers; provided that the net profits of the Fund equals or exceeds an annualized return of at least a 6% (adjusted for contributions, repurchases and distributions) for such allocation period.", "pullQuoteLocator": "Capvent US Advisors LLC (the “Sub-Adviser”) will|distributions) for such allocation period.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-hatteras-net-profits-unrealized-appreciation" }, { "id": "pgim-accrue-not-pay", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "PGIM Private Credit Fund, Prospectus (Form 424B3, 2024), Capital Gains Incentive Fee", "citation": "PGIM Private Credit Fund, Prospectus (Apr. 29, 2024), filed on EDGAR.", "url": "https://www.sec.gov/Archives/edgar/data/1923622/000110465924064606/pgim-20240429xn2.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/1923622/000110465924064606/pgim-20240429xn2.htm#:~:text=We%20will%20accrue%2C%20but%20will,and%20realize%20a%20capital%20gain.", "proposition": "A 2024 fund prospectus accrues, but does not pay, a capital gains incentive fee on unrealized appreciation.", "verbatimQuote": "We will accrue, but will not pay, a capital gains incentive fee with respect to unrealized appreciation because a capital gains incentive fee would be owed to the Manager if we were to sell the relevant investment and realize a capital gain.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-pgim-accrue-not-pay" }, { "id": "irc-67-h", "authorityType": "primary-law", "tier": "primary-source-backed", "title": "26 U.S.C. § 67(h): Suspension for taxable years beginning after 2017", "citation": "26 U.S.C. § 67(h) (as amended by Pub. L. 119-21, § 70110).", "url": "https://www.law.cornell.edu/uscode/text/26/67", "deepLink": "https://www.law.cornell.edu/uscode/text/26/67#:~:text=Notwithstanding%20subsection%20(a)%2C%20no%20miscellaneous,beginning%20after%20December%2031%2C%202017.", "proposition": "Section 67(h) disallows miscellaneous itemized deductions for any taxable year beginning after December 31, 2017.", "verbatimQuote": "Notwithstanding subsection (a), no miscellaneous itemized deduction shall be allowed for any taxable year beginning after December 31, 2017.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-irc-67-h" }, { "id": "plaw-119-21-70110", "authorityType": "primary-law", "tier": "primary-source-backed", "title": "Pub. L. 119-21, § 70110(a): Termination of miscellaneous itemized deductions other than educator expenses", "citation": "Pub. L. No. 119-21, § 70110(a), 139 Stat. 164 (2025).", "url": "https://www.govinfo.gov/content/pkg/PLAW-119publ21/html/PLAW-119publ21.htm", "proposition": "Section 70110(a) of Public Law 119-21 struck the 2026 end date from section 67(g) and retitled it to apply to taxable years beginning after 2017.", "verbatimQuote": "SEC. 70110. TERMINATION OF MISCELLANEOUS ITEMIZED DEDUCTIONS OTHER THAN EDUCATOR EXPENSES. (a) In General.--Section 67(g) is amended-- (1) by striking ``, and before January 1, 2026'', and (2) by striking ``2018 Through 2025'' in the heading and inserting ``Beginning After 2017''.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-plaw-119-21-70110" }, { "id": "plaw-119-21-70110-effective-date", "authorityType": "primary-law", "tier": "primary-source-backed", "title": "Public Law 119-21, § 70110(c), Effective Date", "citation": "Pub. L. No. 119-21, § 70110(c), 139 Stat. 164 (2025).", "url": "https://www.govinfo.gov/content/pkg/PLAW-119publ21/html/PLAW-119publ21.htm", "proposition": "Section 70110(c) of Public Law 119-21 makes its amendments to section 67 apply to taxable years beginning after December 31, 2025.", "verbatimQuote": "Effective Date.--The amendments made by this section shall apply to taxable years beginning after December 31, 2025.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-plaw-119-21-70110-effective-date" }, { "id": "irc-67-notes-70110", "authorityType": "primary-law", "tier": "primary-source-backed", "title": "26 U.S.C. § 67, Amendments and Effective Date notes (2025 amendment)", "citation": "26 U.S.C. § 67 note (2025 Amendments); see Pub. L. No. 119-21, § 70110(c) (effective for taxable years beginning after Dec. 31, 2025).", "url": "https://www.law.cornell.edu/uscode/text/26/67", "deepLink": "https://www.law.cornell.edu/uscode/text/26/67#:~:text=Subsec.%20(h).%20Pub.%20L.%20119%E2%80%9321%2C,redesignated%20subsec.%20(g)%20as%20(h).", "proposition": "The statutory notes to section 67 record that Public Law 119-21 redesignated subsection (g) as subsection (h) and that the amendments apply to taxable years beginning after December 31, 2025.", "verbatimQuote": "Subsec. (h). Pub. L. 119–21, § 70110(b)(2), redesignated subsec. (g) as (h).", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-irc-67-notes-70110" }, { "id": "irc-702-b-character", "authorityType": "primary-law", "tier": "primary-source-backed", "title": "26 U.S. Code § 702(b)", "citation": "26 U.S.C. § 702(b).", "url": "https://www.law.cornell.edu/uscode/text/26/702", "deepLink": "https://www.law.cornell.edu/uscode/text/26/702#:~:text=(b)%20Character%20of%20items%20constituting,as%20incurred%20by%20the%20partnership.", "proposition": "Section 702(b) determines the character of each item in a partner's distributive share as if the item were realized directly from the source from which the partnership realized it.", "verbatimQuote": "(b) Character of items constituting distributive share The character of any item of income, gain, loss, deduction, or credit included in a partner’s distributive share under paragraphs (1) through (7) of subsection (a) shall be determined as if such item were realized directly from the source from which realized by the partnership, or incurred in the same manner as incurred by the partnership.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-irc-702-b-character" }, { "id": "rev-proc-2001-43-profits-interest", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "IRS, Rev. Proc. 2001-43", "citation": "Rev. Proc. 2001-43, § 2, 2001-2 C.B. 191.", "url": "https://www.irs.gov/pub/irs-drop/rp-01-43.pdf", "proposition": "Rev. Proc. 2001-43 restates that under Rev. Proc. 93-27 the IRS does not treat receipt of a profits interest for services to a partnership as a taxable event, subject to the procedure's exceptions.", "verbatimQuote": "Rev. Proc. 93-27 provides that (except as otherwise provided in section 4.02 of the revenue procedure), if a person receives a profits interest for the provision of services to or for the benefit of a partnership in a partner capacity or in anticipation of being a partner, the Internal Revenue Service will not treat the receipt of the interest as a taxable event for the partner or the partnership.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-rev-proc-2001-43-profits-interest" }, { "id": "irc-704-b-substantial-economic-effect", "authorityType": "primary-law", "tier": "primary-source-backed", "title": "26 U.S. Code § 704(b)", "citation": "26 U.S.C. § 704(b).", "url": "https://www.law.cornell.edu/uscode/text/26/704", "deepLink": "https://www.law.cornell.edu/uscode/text/26/704#:~:text=(b)%20Determination%20of%20distributive%20shareA,not%20have%20substantial%20economic%20effect.", "proposition": "Section 704(b) determines a partner's distributive share by the partner's interest in the partnership when the agreement's allocation lacks substantial economic effect.", "verbatimQuote": "(b) Determination of distributive shareA partner’s distributive share of income, gain, loss, deduction, or credit (or item thereof) shall be determined in accordance with the partner’s interest in the partnership (determined by taking into account all facts and circumstances), if— (1) the partnership agreement does not provide as to the partner’s distributive share of income, gain, loss, deduction, or credit (or item thereof), or (2) the allocation to a partner under the agreement of income, gain, loss, deduction, or credit (or item thereof) does not have substantial economic effect.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-irc-704-b-substantial-economic-effect" }, { "id": "mazars-trader-investor", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "Mazars USA, How the President's Tax Reform Has Changed the Compensation Structures of Hedge and Private Equity Funds (via Legal 500)", "citation": "Mazars USA LLP, How the President's Tax Reform Has Changed the Compensation Structures of Hedge and Private Equity Funds, Legal 500 Intelligence.", "url": "https://www.legal500.com/intelligence/united-states/corporate-commercial-law/how-the-president%27s-tax-reform-has-changed-the-compensation-structures-of-hedge-and-private-equity-funds", "proposition": "Accounting-firm commentary says an investor fund's management fees flow to individuals as miscellaneous itemized deductions, which are no longer deductible.", "verbatimQuote": "If the fund holds onto investments and tries to benefit from long-term appreciation, it will be classified as an \"investor\" and the professional expenses and management fees will instead be classified as miscellaneous itemized deductions if flowing to an individual. Miscellaneous itemized deductions are no longer deductible at all under TCJA.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-mazars-trader-investor" }, { "id": "kitces-carry-reduces-lp-income", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "Kitces.com, Maximizing Pre-Tax Investment Advisory Fees After TCJA (2019)", "citation": "Kitces.com, Maximizing Pre-Tax Investment Advisory Fees After TCJA (Mar. 6, 2019).", "url": "https://www.kitces.com/blog/investment-advisory-fee-deduction-post-tcja-ira-expense-ratio-etf-limited-partnership/", "proposition": "Financial-planning commentary explains that a carried interest allocated at the partnership level reduces the gains allocated to and taxed to the limited partners.", "verbatimQuote": "The reason the carried interest payment has the potential to benefit limited partners from a tax perspective is because the carry is allocated to the general partner at the partnership level, and therefore reduces the amount of taxable gains that are attributable (and taxable) to the limited partners.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-kitces-carry-reduces-lp-income" } ] }, { "slug": "pass-through-or-c-corporation-recipient", "label": "Pass-through or C corporation adviser", "heading": "Does it matter whether the adviser receiving the allocation is a pass-through entity or a C corporation?", "answerText": "Yes. Section 1061 does not apply to a partnership interest held by a corporation, but a C corporation pays the same 21 percent rate whatever the character of its income, so a C corporation adviser gains little on rate from an allocation. An S corporation is not a corporation for this purpose and is subject to the three-year rule.", "sources": [ { "id": "reg-1061-3-corporation", "authorityType": "regulation", "tier": "primary-source-backed", "title": "Treas. Reg. § 1.1061-3(b): Partnership interest held by a corporation", "citation": "Treas. Reg. § 1.1061-3(b)(1); see id. § 1.1061-3(b)(2).", "url": "https://www.law.cornell.edu/cfr/text/26/1.1061-3", "deepLink": "https://www.law.cornell.edu/cfr/text/26/1.1061-3#:~:text=An%20API%20does%20not%20include%20any%20interest%20directly,indirectly%20held%20by%20a%20corporation.", "proposition": "The section 1061 regulations exclude interests held by a corporation from the definition of API, and treat S corporations and QEF-electing PFICs as not corporations for that purpose.", "verbatimQuote": "An API does not include any interest directly or indirectly held by a corporation.", "pullQuoteLocator": "An API does not include any interest directly|indirectly held by a corporation.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-reg-1061-3-corporation" }, { "id": "reg-1061-3-s-corporation-qef", "authorityType": "regulation", "tier": "primary-source-backed", "title": "26 CFR § 1.1061-3(b)(2), S corporations and qualified electing funds", "citation": "Treas. Reg. § 1.1061-3(b)(2).", "url": "https://www.law.cornell.edu/cfr/text/26/1.1061-3", "deepLink": "https://www.law.cornell.edu/cfr/text/26/1.1061-3#:~:text=(2)%20Treatment%20of%20interests%20held,under%20section%201295%20in%20effect.", "proposition": "The section 1061 regulations do not treat an S corporation, or a PFIC subject to a QEF election, as a corporation for the corporate exclusion.", "verbatimQuote": "(2) Treatment of interests held by an S corporation or a qualified electing fund. For purposes of this section, a corporation does not include an entity for which an election was made to treat the entity as a Passthrough Entity. Thus, the following entities are not treated as corporations for purposes of section 1061— (i) An S corporation for which an election under section 1362(a) is in effect; and (ii) A passive foreign investment company (PFIC) with respect to which the shareholder has a qualified electing fund (QEF) election under section 1295 in effect.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-reg-1061-3-s-corporation-qef" }, { "id": "irs-s-corp-reclassify-wages", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "IRS, S Corporation Compensation and Medical Insurance Issues", "citation": "IRS, S Corporation Compensation and Medical Insurance Issues.", "url": "https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues", "proposition": "The IRS describes non-wage distributions from an S corporation as not subject to employment taxes, and wages as subject to them.", "verbatimQuote": "The IRS has the authority to reclassify payments made to shareholders from non-wage distributions (which are not subject to employment taxes) to wages (which are subject to employment taxes).", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-irs-s-corp-reclassify-wages" }, { "id": "irs-s-corp-reasonable-compensation", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "IRS, S Corporation Compensation and Medical Insurance Issues, Reasonable compensation", "citation": "IRS, S Corporation Compensation and Medical Insurance Issues.", "url": "https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues", "proposition": "The IRS states that an S corporation must pay reasonable compensation to a shareholder-employee before making non-wage distributions.", "verbatimQuote": "S corporations must pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation before non-wage distributions may be made to the shareholder-employee.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-irs-s-corp-reasonable-compensation" }, { "id": "irc-11-b", "authorityType": "primary-law", "tier": "primary-source-backed", "title": "26 U.S.C. § 11(b): Corporate tax rate", "citation": "26 U.S.C. § 11(b).", "url": "https://www.law.cornell.edu/uscode/text/26/11", "deepLink": "https://www.law.cornell.edu/uscode/text/26/11#:~:text=The%20amount%20of%20the%20tax,21%20percent%20of%20taxable%20income.", "proposition": "Section 11(b) sets the corporate income tax at 21 percent of taxable income.", "verbatimQuote": "The amount of the tax imposed by subsection (a) shall be 21 percent of taxable income.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-irc-11-b" }, { "id": "mazars-corporate-indifferent", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "Mazars USA, How the President's Tax Reform Has Changed the Compensation Structures of Hedge and Private Equity Funds (via Legal 500)", "citation": "Mazars USA LLP, How the President's Tax Reform Has Changed the Compensation Structures of Hedge and Private Equity Funds, Legal 500 Intelligence.", "url": "https://www.legal500.com/intelligence/united-states/corporate-commercial-law/how-the-president%27s-tax-reform-has-changed-the-compensation-structures-of-hedge-and-private-equity-funds", "proposition": "Accounting-firm commentary says corporate partners are indifferent to the fund's trader or investor classification and to the holding period of its investments.", "verbatimQuote": "Corporate partners are not subject to similar deduction limitations and are indifferent to the fund's classification as a \"trader\" or \"investor,\" as they are indifferent to the holding period of the investments – setting up a potential conflict between different types of investors.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-mazars-corporate-indifferent" }, { "id": "mazars-c-corp-double-tax", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "Mazars USA, How the President's Tax Reform Has Changed the Compensation Structures of Hedge and Private Equity Funds (via Legal 500)", "citation": "Mazars USA LLP, How the President's Tax Reform Has Changed the Compensation Structures of Hedge and Private Equity Funds, Legal 500 Intelligence.", "url": "https://www.legal500.com/intelligence/united-states/corporate-commercial-law/how-the-president%27s-tax-reform-has-changed-the-compensation-structures-of-hedge-and-private-equity-funds", "proposition": "Accounting-firm commentary notes that a C corporation management company keeps a second layer of tax on dividends or on the sale of its shares.", "verbatimQuote": "C corporations will still have the double layer of taxation, first at the corporate rate on profits and then at the shareholder level on dividends (or capital gains upon disposition by the shareholder).", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-mazars-c-corp-double-tax" } ] }, { "slug": "special-interest-mechanics", "label": "Mechanics that protect an allocation", "heading": "What terms make a special limited partner allocation safe for the adviser?", "answerText": "Unless the agreement turns a crystallized allocation into a fixed distribution obligation, an allocation stays in the adviser's capital account in the fund until it is withdrawn, so the protective terms are a right to withdraw promptly when the allocation crystallizes, true-up after the audit, tax distributions, a clawback that is limited and clearly defined, rules for what happens to the interest after the adviser's role ends, and an understanding of where the adviser ranks if the fund fails. One filed agreement lets the sub-adviser withdraw up to 95 percent on unaudited figures, with a true-up after the audit.", "sources": [ { "id": "hatteras-95-percent-true-up", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "Hatteras Global Private Equity Partners Institutional Fund, LLC, Investment Sub-Advisory Agreement (2009), Schedule A", "citation": "Investment Sub-Advisory Agreement among Hatteras Global Private Equity Partners Institutional Fund, LLC, Hatteras Capital Investment Management, LLC and Capvent US Advisors LLC, Schedule A (form filed 2009 as Exhibit (g)(2)).", "url": "https://www.sec.gov/Archives/edgar/data/0001450148/000114420409018811/v145244_ex99-g2.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/0001450148/000114420409018811/v145244_ex99-g2.htm#:~:text=After%20the%20close%20of%20an,be%20owed%20to%20the%20Fund.", "proposition": "The 2009 sub-advisory agreement allows withdrawal of up to 95 percent of the incentive allocation on unaudited data, with a true-up in either direction after the audit.", "verbatimQuote": "After the close of an allocation period with respect to a Member, and subject to certain limitations, the Sub-Adviser may withdraw up to 95% of the Incentive Allocation, computed on the basis of unaudited data, that was credited to its Incentive Allocation Account with respect to such allocation period. The Fund will pay any balance, subject to audit adjustments, as promptly as practicable after the completion of the audit of the Fund’s books. As promptly as practicable after the completion of the audit of the books of the Fund for the year in which allocations to the Incentive Allocation Account are made, the Fund shall allocate to the Incentive Allocation Account any additional amount of Incentive Allocation determined to be owed to the Sub-Adviser based on such audit, and the Sub-Adviser shall remit to the Fund any excess amount of Incentive Allocation determined to be owed to the Fund.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-hatteras-95-percent-true-up" }, { "id": "xanthus-100-percent", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "Advantage Advisers Xanthus Fund, L.L.C., Proxy Statement (2011), LLC Agreement § 5.8(b)", "citation": "Advantage Advisers Xanthus Fund, L.L.C., Definitive Proxy Statement, Appendix (L.L.C. Agreement § 5.8(b)) (2011).", "url": "https://www.sec.gov/Archives/edgar/data/0001076673/000090266411001045/p11-1265def14a.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/0001076673/000090266411001045/p11-1265def14a.htm#:~:text=(b)%20By%20the%20last%20business,be%20owed%20to%20the%20Company.", "proposition": "A filed LLC agreement lets the special advisory member withdraw up to 100 percent of the incentive allocation on unaudited data by the end of the following month.", "verbatimQuote": "(b) By the last business day of the month following the date on which an Incentive Allocation is made, the Special Advisory Member may withdraw up to 100% of the Incentive Allocation (computed on the basis of unaudited data) that was credited to the Special Advisory Account. Within 30 days after the completion of the audit of the books of the Company for the year in which allocations to the Special Advisory Account are made, the Company shall pay to the Special Advisory Member any additional amount of Incentive Allocation determined to be owed to the Special Advisory Member based on the audit, and the Special Advisory Member shall Appendix – 1 pay to the Company any excess amount of Incentive Allocation determined to be owed to the Company.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-xanthus-100-percent" }, { "id": "bacap-withdraw-any-time", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "BACAP Opportunity Strategy, LLC, Form N-2/A (2002), Limited Liability Company Agreement § 4.6(d)", "citation": "BACAP Opportunity Strategy, LLC, Limited Liability Company Agreement § 4.6(d), in Form N-2/A, Pre-Effective Amendment No. 1 (June 18, 2002).", "url": "https://www.sec.gov/Archives/edgar/data/0001168890/000095010902003409/dn2a.txt", "deepLink": "https://www.sec.gov/Archives/edgar/data/0001168890/000095010902003409/dn2a.txt#:~:text=The%20Adviser%20may%20withdraw%20any,the%20Incentive%20Allocation%20is%20made.", "proposition": "A filed fund LLC agreement lets the adviser withdraw its incentive allocation at any time after it is made.", "verbatimQuote": "The Adviser may withdraw any Incentive Allocation credited to the Special Advisory Account at any time following the date on which the Incentive Allocation is made.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-bacap-withdraw-any-time" }, { "id": "bessemer-90-percent-audit", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "Bessemer Funds Trust (Bessemer Sand Hill Investors Fund II), Form N-2 (2001), Accrual of Incentive Fee", "citation": "Bessemer Funds Trust, Form N-2 (Apr. 19, 2001), filed on EDGAR.", "url": "https://www.sec.gov/Archives/edgar/data/1138363/000092542101500044/0000925421-01-500044.txt", "deepLink": "https://www.sec.gov/Archives/edgar/data/1138363/000092542101500044/0000925421-01-500044.txt#:~:text=The%20Incentive%20Fee%20for%20the,that%20role%20for%20the%20Fund.", "proposition": "A 2001 registration statement pays 90 percent of the annual incentive fee within 30 days after fiscal year-end and the balance after the audit, and states the manager's intention to assign the fee to the sub-adviser.", "verbatimQuote": "The Incentive Fee for the preceding fiscal year, if any, shall be paid by the Fund as follows: (i) 90% to be paid within 30 days after the Fund’s fiscal year-end; and (ii) the balance to be paid within 30 days after the completion of the Fund’s audit for the fiscal year. The Manager intends to assign the Incentive Fee to the Sub-Adviser so long as the Sub-Adviser acts in that role for the Fund.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-bessemer-90-percent-audit" }, { "id": "nb-cmp-tax-distribution", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "NB Crossroads Private Markets Fund V (TE) LP, Form N-2 (2017), Tax Distributions", "citation": "NB Crossroads Private Markets Fund V (TE) LP, Form N-2, “Tax Distributions” (2017), filed on EDGAR.", "url": "https://www.sec.gov/Archives/edgar/data/1702537/000114036117014189/formn2.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/1702537/000114036117014189/formn2.htm#:~:text=The%20Board%20of%20the%20Master,such%20an%20allocation%20is%20required.", "proposition": "A filed registration statement lets the master fund's board make tax distributions to the special limited partner.", "verbatimQuote": "The Board of the Master Fund may in its sole discretion cause the Master Fund to distribute to the Special Limited Partner (each, a “Tax Distribution”) an amount designed to assist the Special Limited Partner (or its direct and indirect investors) in satisfying any income tax liability attributable to allocations of taxable income and gains of the Master Fund in any fiscal year for which such an accrual or such an allocation is required.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-nb-cmp-tax-distribution" }, { "id": "torys-clawback-gross-of-taxes", "authorityType": "law-firm-commentary", "tier": "lawyer-judgment-backed", "title": "Torys LLP, Overview of ILPA Principles 3.0 and Model LPA (2020)", "citation": "Torys LLP, Overview of ILPA Principles 3.0 and Model LPA (Mar. 2020).", "url": "https://www.torys.com/our-latest-thinking/publications/2020/03/overview-of-ilpa-principles-3-0-and-model-lpa", "proposition": "Law-firm commentary summarizes ILPA Principles 3.0 as calling for clawbacks gross of taxes paid and repaid within two years.", "verbatimQuote": "Clawback should be gross of taxes paid, and repaid no later than two years following liability recognition.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-torys-clawback-gross-of-taxes" }, { "id": "torys-carried-interest-escrow", "authorityType": "law-firm-commentary", "tier": "lawyer-judgment-backed", "title": "Torys LLP, Overview of ILPA Principles 3.0 and Model LPA (2020)", "citation": "Torys LLP, Overview of ILPA Principles 3.0 and Model LPA (Mar. 2020).", "url": "https://www.torys.com/our-latest-thinking/publications/2020/03/overview-of-ilpa-principles-3-0-and-model-lpa", "proposition": "Law-firm commentary summarizes ILPA Principles 3.0 as calling for accrued carried interest to be escrowed with significant reserves.", "verbatimQuote": "Accrued carried interest should be held in escrow accounts with significant reserves (e.g., 30% of carry or more) and require additional reserves to cover potential clawback liabilities.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-torys-carried-interest-escrow" }, { "id": "hatteras-termination-period", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "Hatteras Global Private Equity Partners Institutional Fund, LLC, Investment Sub-Advisory Agreement (2009), Schedule A", "citation": "Investment Sub-Advisory Agreement among Hatteras Global Private Equity Partners Institutional Fund, LLC, Hatteras Capital Investment Management, LLC and Capvent US Advisors LLC, Schedule A (form filed 2009 as Exhibit (g)(2)).", "url": "https://www.sec.gov/Archives/edgar/data/0001450148/000114420409018811/v145244_ex99-g2.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/0001450148/000114420409018811/v145244_ex99-g2.htm#:~:text=An%20%E2%80%9Callocation%20period%E2%80%9D%20is%20a,by%20the%20Board%20of%20Managers.", "proposition": "The 2009 sub-advisory agreement ends an allocation period when the sub-adviser's status ends, but pays no allocation if the sub-adviser ends it voluntarily or the board ends it for gross negligence or willful misconduct.", "verbatimQuote": "An “allocation period” is a period commencing on commencement of operations of the Fund and, thereafter, each period commencing as of the day following the last day of the preceding allocation period and ending on the first to occur of (1) the last day of each calendar year, (2) the valuation date with respect to any repurchase of Interests or a portion of the Interests, or the day preceding the effective date of any redemption of Interests or portion of Interests or the complete withdrawal by a Member, (3) the day as of which the Adviser’s or Sub-Adviser’s status as an investment adviser or sub-adviser, respectively, is terminated (provided that no Incentive Allocation will be payable to the Adviser or Sub-Adviser if such status is terminated voluntarily by the Adviser or Sub-Adviser, as the case may be, or by the Board of Managers of the Fund due to gross negligence or willful misconduct), or (4) such other date as determined by the Board of Managers.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-hatteras-termination-period" }, { "id": "bessemer-termination-stub", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "Bessemer Funds Trust (Bessemer Sand Hill Investors Fund II), Form N-2 (2001), Sub-Advisory Agreement", "citation": "Bessemer Funds Trust, Form N-2, form of Sub-Advisory Agreement (Apr. 19, 2001), filed on EDGAR.", "url": "https://www.sec.gov/Archives/edgar/data/1138363/000092542101500044/0000925421-01-500044.txt", "deepLink": "https://www.sec.gov/Archives/edgar/data/1138363/000092542101500044/0000925421-01-500044.txt#:~:text=In%20the%20event%20that%20the%20Sub%2DAdviser,audit%20for%20the%20fiscal%20year.", "proposition": "A filed sub-advisory agreement pays a sub-adviser terminated mid-year an incentive fee through the termination date, 90 percent within 30 days and the balance after the audit.", "verbatimQuote": "In the event that the Sub-Adviser is terminated during a fiscal year, the Sub-Adviser will be entitled to receive an Incentive Fee calculated from January 1st through the termination date. Within thirty (30) days after the termination date, the Sub-Adviser will be paid 90% of the incentive fee calculated through the termination date; the balance will be paid within thirty (30) days after the completion of the Fund’s audit for the fiscal year.", "pullQuoteLocator": "In the event that the Sub-Adviser|audit for the fiscal year.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-bessemer-termination-stub" }, { "id": "bacap-substitute-member", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "BACAP Opportunity Strategy, LLC, Form N-2/A (2002), Limited Liability Company Agreement § 2.8", "citation": "BACAP Opportunity Strategy, LLC, Limited Liability Company Agreement § 2.8, in Form N-2/A, Pre-Effective Amendment No. 1 (June 18, 2002).", "url": "https://www.sec.gov/Archives/edgar/data/0001168890/000095010902003409/dn2a.txt", "deepLink": "https://www.sec.gov/Archives/edgar/data/0001168890/000095010902003409/dn2a.txt#:~:text=If%20at%20any%20time%20the,requirements%20of%20the%201940%20Act.", "proposition": "A filed fund LLC agreement admits a substitute special advisory member when the investment advisory agreement terminates.", "verbatimQuote": "If at any time the Investment Advisory Agreement between the Fund and the person then serving as Adviser terminates, the Board of Managers shall admit as a substitute Special Advisory Member, upon its signing this Agreement, such person as may be retained by the Fund to provide investment advisory services pursuant to an Investment Advisory Agreement, subject to the due approval of such Investment Advisory Agreement with such person in accordance with the requirements of the 1940 Act.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-bacap-substitute-member" }, { "id": "del-17-606-creditor-status", "authorityType": "primary-law", "tier": "primary-source-backed", "title": "Delaware Revised Uniform Limited Partnership Act § 17-606(a), 6 Del. C. § 17-606(a)", "citation": "6 Del. C. § 17-606(a).", "url": "https://delcode.delaware.gov/title6/c017/sc06/index.html", "proposition": "6 Del. C. § 17-606(a) gives a partner entitled to a distribution the status and remedies of a creditor, subject to §§ 17-607 and 17-804.", "verbatimQuote": "(a) Subject to §§ 17-607 and 17-804 of this title, and unless otherwise provided in the partnership agreement, at the time a partner becomes entitled to receive a distribution, he or she has the status of, and is entitled to all remedies available to, a creditor of the limited partnership with respect to the distribution.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-del-17-606-creditor-status" }, { "id": "del-17-804-priority", "authorityType": "primary-law", "tier": "primary-source-backed", "title": "Delaware Revised Uniform Limited Partnership Act § 17-804(a), 6 Del. C. § 17-804(a)", "citation": "6 Del. C. § 17-804(a)(1)–(3).", "url": "https://delcode.delaware.gov/title6/c017/sc08/index.html", "proposition": "6 Del. C. § 17-804(a) sets the order of distribution in a winding up: creditors, then partners' distribution claims, then contributions and partnership interests.", "verbatimQuote": "(1) To creditors, including partners who are creditors, to the extent otherwise permitted by law, in satisfaction of liabilities of the limited partnership (whether by payment or the making of reasonable provision for payment thereof) other than liabilities for which reasonable provision for payment has been made and liabilities for distributions to partners and former partners under § 17-601 or § 17-604 of this title; (2) Unless otherwise provided in the partnership agreement, to partners and former partners in satisfaction of liabilities for distributions under § 17-601 or § 17-604 of this title; and (3) Unless otherwise provided in the partnership agreement, to partners first for the return of their contributions and second respecting their partnership interests, in the proportions in which the partners share in distributions.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-del-17-804-priority" }, { "id": "del-17-607-a-limit-test", "authorityType": "primary-law", "tier": "primary-source-backed", "title": "6 Del. C. § 17-607(a), Limitations on distribution", "citation": "6 Del. C. § 17-607(a).", "url": "https://delcode.delaware.gov/title6/c017/sc06/index.html", "proposition": "6 Del. C. § 17-607(a) bars a distribution to the extent that afterward the partnership's liabilities, other than liabilities to partners on account of their interests and non-recourse liabilities, exceed the fair value of its assets, and excludes reasonable compensation for services from the term distribution.", "verbatimQuote": "(a) A limited partnership shall not make a distribution to a partner to the extent that at the time of the distribution, after giving effect to the distribution, all liabilities of the limited partnership, other than liabilities to partners on account of their partnership interests and liabilities for which the recourse of creditors is limited to specified property of the limited partnership, exceed the fair value of the assets of the limited partnership, except that the fair value of property that is subject to a liability for which the recourse of creditors is limited shall be included in the assets of the limited partnership only to the extent that the fair value of that property exceeds that liability. For purposes of this subsection (a), the term “distribution” shall not include amounts constituting reasonable compensation for present or past services or reasonable payments made in the ordinary course of business pursuant to a bona fide retirement plan or other benefits program.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-del-17-607-a-limit-test" }, { "id": "del-17-607-limit", "authorityType": "primary-law", "tier": "primary-source-backed", "title": "Delaware Revised Uniform Limited Partnership Act § 17-607(b), 6 Del. C. § 17-607(b)", "citation": "6 Del. C. § 17-607(b).", "url": "https://delcode.delaware.gov/title6/c017/sc06/index.html", "proposition": "6 Del. C. § 17-607(b) makes a limited partner who knowingly receives a distribution in violation of § 17-607(a) liable for it.", "verbatimQuote": "(b) A limited partner who receives a distribution in violation of subsection (a) of this section, and who knew at the time of the distribution that the distribution violated subsection (a) of this section, shall be liable to the limited partnership for the amount of the distribution.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-del-17-607-limit" }, { "id": "del-17-607-c-three-years", "authorityType": "primary-law", "tier": "primary-source-backed", "title": "6 Del. C. § 17-607(c)", "citation": "6 Del. C. § 17-607(c).", "url": "https://delcode.delaware.gov/title6/c017/sc06/index.html", "proposition": "6 Del. C. § 17-607(c) ends a limited partner's liability for a distribution three years after the distribution unless otherwise agreed.", "verbatimQuote": "(c) Unless otherwise agreed, a limited partner who receives a distribution from a limited partnership shall have no liability under this chapter or other applicable law for the amount of the distribution after the expiration of 3 years from the date of the distribution.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-del-17-607-c-three-years" } ] }, { "slug": "performance-allocation-advisers-act", "label": "Advisers Act performance-fee rules", "heading": "Is a performance allocation still a performance fee under the Advisers Act?", "answerText": "Yes. Section 205(a)(1) reaches compensation based on a share of capital gains or appreciation, and the SEC describes carried interest as a form of performance-based compensation, so an allocation needs the same qualified-client exemption as a fee unless the fund relies on section 3(c)(7).", "sources": [ { "id": "advisers-act-205-a-1", "authorityType": "primary-law", "tier": "primary-source-backed", "title": "Investment Advisers Act of 1940 § 205(a)(1), 15 U.S.C. § 80b-5(a)(1)", "citation": "15 U.S.C. § 80b-5(a)(1).", "url": "https://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title15-section80b-5&num=0&edition=prelim", "proposition": "Section 205(a)(1) reaches advisory contracts that provide for compensation based on a share of capital gains or capital appreciation of the client's funds.", "verbatimQuote": "No investment adviser registered or required to be registered with the Commission shall enter into, extend, or renew any investment advisory contract, or in any way perform any investment advisory contract entered into, extended, or renewed on or after November 1, 1940, if such contract- (1) provides for compensation to the investment adviser on the basis of a share of capital gains upon or capital appreciation of the funds or any portion of the funds of the client;", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-advisers-act-205-a-1" }, { "id": "sec-carried-interest-performance-comp", "authorityType": "regulation", "tier": "primary-source-backed", "title": "SEC, Investment Adviser Performance-Based Compensation Modernization, Proposed Rule, Release No. IA-7022 (2026), n.243", "citation": "Investment Adviser Performance-Based Compensation Modernization, Release Nos. 33-11443; IA-7022, at n.243 (proposed 2026).", "url": "https://www.sec.gov/files/rules/proposed/2026/33-11443.pdf", "proposition": "The SEC describes carried interest as a form of performance-based compensation in which a portion of profits is allocated to a general partner.", "verbatimQuote": "Carried interest is a form of performance-based compensation where a portion of profits is allocated to a general partner before the remaining profits are distributed to limited partners.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-sec-carried-interest-performance-comp" }, { "id": "rule-205-3-a", "authorityType": "regulation", "tier": "primary-source-backed", "title": "17 CFR 275.205-3(a): Qualified-client exemption", "citation": "17 C.F.R. § 275.205-3(a).", "url": "https://www.ecfr.gov/current/title-17/chapter-II/part-275/section-275.205-3", "proposition": "Rule 205-3 permits a performance-based advisory contract when the client is a qualified client.", "verbatimQuote": "The provisions of section 205(a)(1) of the Act (15 U.S.C. 80b-5(a)(1)) will not be deemed to prohibit an investment adviser from entering into, performing, renewing or extending an investment advisory contract that provides for compensation to the investment adviser on the basis of a share of the capital gains upon, or the capital appreciation of, the funds, or any portion of the funds, of a client, Provided, That the client entering into the contract subject to this section is a qualified client, as defined in paragraph (d)(1) of this section.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-rule-205-3-a" }, { "id": "rule-205-3-d-1-qualified-client", "authorityType": "regulation", "tier": "primary-source-backed", "title": "17 CFR § 275.205-3(d)(1), Qualified client", "citation": "17 C.F.R. § 275.205-3(d)(1)(i)–(ii); see id. § 275.205-3(d)(1)(ii)(B) (qualified purchaser), (d)(1)(iii) (adviser personnel).", "url": "https://www.ecfr.gov/current/title-17/chapter-II/part-275/section-275.205-3", "proposition": "Rule 205-3(d)(1) defines a qualified client to include the assets-under-management and net-worth tests, with the primary residence excluded from a natural person's net worth, and a qualified purchaser.", "verbatimQuote": "(d) Definitions. For the purposes of this section: (1) The term qualified client means: (i) A natural person who, or a company that, immediately after entering into the contract has, under the management of the investment adviser, at least the applicable dollar amount specified in the most recent order; (ii) A natural person who, or a company that, the investment adviser entering into the contract (and any person acting on his behalf) reasonably believes, immediately prior to entering into the contract, either: (A) Has a net worth (together, in the case of a natural person, with assets held jointly with a spouse) of more than the applicable dollar amount specified in the most recent order. For purposes of calculating a natural person's net worth: (1) The person's primary residence must not be included as an asset;", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-rule-205-3-d-1-qualified-client" }, { "id": "rule-205-3-b", "authorityType": "regulation", "tier": "primary-source-backed", "title": "17 CFR 275.205-3(b): Identification of the client", "citation": "17 C.F.R. § 275.205-3(b).", "url": "https://www.ecfr.gov/current/title-17/chapter-II/part-275/section-275.205-3", "proposition": "Rule 205-3(b) treats each equity owner of a private investment company as the client, except the adviser and owners not charged performance compensation.", "verbatimQuote": "(b) Identification of the client. In the case of a private investment company, as defined in paragraph (d)(3) of this section, an investment company registered under the Investment Company Act of 1940, or a business development company, as defined in section 202(a)(22) of the Act (15 U.S.C. 80b-2(a)(22)), each equity owner of any such company (except for the investment adviser entering into the contract and any other equity owners not charged a fee on the basis of a share of capital gains or capital appreciation) will be considered a client for purposes of paragraph (a) of this section.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-rule-205-3-b" }, { "id": "ia-6961-thresholds", "authorityType": "regulation", "tier": "primary-source-backed", "title": "SEC Order IA-6961: 2026 qualified-client dollar thresholds", "citation": "Order Approving Adjustment for Inflation of the Dollar Amount Tests in Rule 205-3 Under the Investment Advisers Act of 1940, Advisers Act Release No. IA-6961, § IV (Apr. 28, 2026), 91 Fed. Reg. 23520 (May 1, 2026).", "url": "https://www.sec.gov/files/rules/ia/2026/ia-6961.pdf", "proposition": "SEC Order IA-6961 sets the qualified-client assets-under-management threshold at $1,400,000 and the net-worth threshold at more than $2,700,000.", "verbatimQuote": "IT IS HEREBY ORDERED that, for purposes of rule 205-3(d)(1)(i) under the Advisers Act [17 CFR 275.205-3(d)(1)], a qualified client means a natural person who, or a company that, immediately after entering into the contract has at least $1,400,000 under the management of the investment adviser; and IT IS FURTHER ORDERED that, for purposes of rule 205-3(d)(1)(ii)(A) under the Advisers Act [17 CFR 275.205-3(d)(1)(ii)(A)], a qualified client means a natural person who, or a company that, the investment adviser entering into the contract (and any person acting on his behalf) reasonably believes, immediately prior to entering into the contract, has a net worth (together, in the case of a natural person, with assets held jointly with a spouse) of more than $2,700,000.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-ia-6961-thresholds" }, { "id": "ia-6961-effective", "authorityType": "regulation", "tier": "primary-source-backed", "title": "SEC Order IA-6961: Effective date", "citation": "Advisers Act Release No. IA-6961, Effective Date of the Order (Apr. 28, 2026).", "url": "https://www.sec.gov/files/rules/ia/2026/ia-6961.pdf", "proposition": "SEC Order IA-6961 is effective June 29, 2026 and generally does not apply retroactively to contracts entered into before that date.", "verbatimQuote": "This Order is effective as of June 29, 2026.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-ia-6961-effective" }, { "id": "rule-205-3-c-1", "authorityType": "regulation", "tier": "primary-source-backed", "title": "17 CFR 275.205-3(c)(1): Transition rule for registered advisers", "citation": "17 C.F.R. § 275.205-3(c)(1).", "url": "https://www.ecfr.gov/current/title-17/chapter-II/part-275/section-275.205-3", "proposition": "Rule 205-3(c)(1) applies the conditions in effect when a new person, including a new equity owner of a private investment company, becomes a party.", "verbatimQuote": "(c) Transition rules—(1) Registered investment advisers. If a registered investment adviser entered into a contract and satisfied the conditions of this section that were in effect when the contract was entered into, the adviser will be considered to satisfy the conditions of this section; Provided, however, that if a natural person or company who was not a party to the contract becomes a party (including an equity owner of a private investment company advised by the adviser), the conditions of this section in effect at that time will apply with regard to that person or company.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-rule-205-3-c-1" }, { "id": "advisers-act-205-b-4", "authorityType": "primary-law", "tier": "primary-source-backed", "title": "Investment Advisers Act of 1940 § 205(b)(4), 15 U.S.C. § 80b-5(b)(4)", "citation": "15 U.S.C. § 80b-5(b)(4).", "url": "https://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title15-section80b-5&num=0&edition=prelim", "proposition": "Section 205(b)(4) excludes from the performance-fee prohibition an advisory contract with a company excepted under section 3(c)(7).", "verbatimQuote": "Paragraph (1) of subsection (a) shall not- (1) be construed to prohibit an investment advisory contract which provides for compensation based upon the total value of a fund averaged over a definite period, or as of definite dates, or taken as of a definite date; (2) apply to an investment advisory contract with- (A) an investment company registered under subchapter I of this chapter, or (B) any other person (except a trust, governmental plan, collective trust fund, or separate account referred to in section 80a–3(c)(11) of this title), provided that the contract relates to the investment of assets in excess of $1 million, if the contract provides for compensation based on the asset value of the company or fund under management averaged over a specified period and increasing and decreasing proportionately with the investment performance of the company or fund over a specified period in relation to the investment record of an appropriate index of securities prices or such other measure of investment performance as the Commission by rule, regulation, or order may specify; (3) apply with respect to any investment advisory contract between an investment adviser and a business development company, as defined in this subchapter, if (A) the compensation provided for in such contract does not exceed 20 per centum of the realized capital gains upon the funds of the business development company over a specified period or as of definite dates, computed net of all realized capital losses and unrealized capital depreciation, and the condition of section 80a–60(a)(4)(B)(iii) of this title is satisfied, and (B) the business development company does not have outstanding any option, warrant, or right issued pursuant to section 80a–60(a)(4)(B) of this title and does not have a profit-sharing plan described in section 80a–56(n) of this title; (4) apply to an investment advisory contract with a company excepted from the definition of an investment company under section 80a–3(c)(7) of this title; or", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-advisers-act-205-b-4" }, { "id": "sec-2026-proposal-comment-dates", "authorityType": "regulation", "tier": "primary-source-backed", "title": "SEC, Investment Adviser Performance-Based Compensation Modernization, Proposed Rule (2026), Dates", "citation": "Investment Adviser Performance-Based Compensation Modernization, Release Nos. 33-11443; IA-7022 (proposed 2026), Dates.", "url": "https://www.sec.gov/files/rules/proposed/2026/33-11443.pdf", "proposition": "The SEC's 2026 qualified-client proposal was published in the Federal Register on October 6, 2026, with comments due by December 7, 2026.", "verbatimQuote": "DATES: This release was published in the Federal Register on October 6, 2026. Comments should be received on or before December 7, 2026.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-sec-2026-proposal-comment-dates" }, { "id": "sec-2026-proposal-accredited", "authorityType": "regulation", "tier": "primary-source-backed", "title": "SEC, Investment Adviser Performance-Based Compensation Modernization, Proposed Rule (2026)", "citation": "Investment Adviser Performance-Based Compensation Modernization, Release Nos. 33-11443; IA-7022 (proposed 2026), Summary.", "url": "https://www.sec.gov/files/rules/proposed/2026/33-11443.pdf", "proposition": "The SEC's 2026 proposal would add accredited investors to the qualified-client definition; it was published October 6, 2026 with comments due December 7, 2026.", "verbatimQuote": "The proposed rule amendments would also allow investment advisers to receive this compensation from additional clients by revising the rule’s “qualified client” definition to include investors that meet the “accredited investor” definition in Regulation D under the Securities Act of 1933.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-sec-2026-proposal-accredited" } ] }, { "slug": "disclosure-ppm-and-form-adv", "label": "Offering documents and Form ADV", "heading": "What must the fund's offering documents and the adviser's Form ADV say about shared performance compensation?", "answerText": "The offering documents must describe the arrangement accurately and consistently with the partnership agreement, because an adviser to a pooled vehicle may not make a materially misleading statement to an investor or prospective investor. On Form ADV, the adviser reports performance-based fees, describes the conflicts they create in its brochure, and reports its and its related persons' ownership of the private fund.", "sources": [ { "id": "rule-206-4-8", "authorityType": "regulation", "tier": "primary-source-backed", "title": "17 CFR 275.206(4)-8(a): Pooled investment vehicles", "citation": "17 C.F.R. § 275.206(4)-8(a).", "url": "https://www.ecfr.gov/current/title-17/chapter-II/part-275/section-275.206(4)-8", "proposition": "Rule 206(4)-8 prohibits an adviser to a pooled investment vehicle from making materially misleading statements or omissions to investors or prospective investors.", "verbatimQuote": "(a) Prohibition. It shall constitute a fraudulent, deceptive, or manipulative act, practice, or course of business within the meaning of section 206(4) of the Act (15 U.S.C. 80b-6(4)) for any investment adviser to a pooled investment vehicle to: (1) Make any untrue statement of a material fact or to omit to state a material fact necessary to make the statements made, in the light of the circumstances under which they were made, not misleading, to any investor or prospective investor in the pooled investment vehicle; or (2) Otherwise engage in any act, practice, or course of business that is fraudulent, deceptive, or manipulative with respect to any investor or prospective investor in the pooled investment vehicle.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-rule-206-4-8" }, { "id": "gim-ppm-lpa-inconsistent", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "In re Global Infrastructure Management, LLC, Advisers Act Release No. 5930 (Dec. 20, 2021)", "citation": "In re Global Infrastructure Mgmt., LLC, Advisers Act Release No. 5930, ¶ 9 (Dec. 20, 2021).", "url": "https://www.sec.gov/files/litigation/admin/2021/ia-5930.pdf", "proposition": "The SEC found that the adviser lacked reasonable policies to confirm that its LPAs and PPMs were consistent on key points, including how management fees were calculated after partial dispositions.", "verbatimQuote": "Global failed to have reasonable written policies and procedures in place to confirm that the LPA and PPM were consistent on key points, including in this instance regarding how management fees were calculated following a partial disposition of fund portfolio investments, and failed to have reasonable written policies and procedures addressing whether Global personnel were communicating accurate, consistent information to investors.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-gim-ppm-lpa-inconsistent" }, { "id": "sec-2021-266", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "SEC Press Release 2021-266, SEC Charges Private Equity Fund Adviser with Fee and Expense Disclosure Failures (Dec. 20, 2021)", "citation": "SEC Press Release No. 2021-266 (Dec. 20, 2021).", "url": "https://www.sec.gov/news/press-release/2021-266", "deepLink": "https://www.sec.gov/news/press-release/2021-266#:~:text=Global%20consented%20to%20the%20entry,pay%20a%20%244.5%20million%20penalty.", "proposition": "The SEC announced that Global Infrastructure Management agreed to a $4.5 million penalty and consented to findings that it violated Advisers Act sections 206(2) and 206(4) and Rules 206(4)-7 and 206(4)-8.", "verbatimQuote": "Global consented to the entry of the SEC’s order finding that the firm violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 and 206(4)-8. Without admitting or denying the SEC’s findings, Global agreed to a cease-and-desist order, and to pay a $4.5 million penalty.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-sec-2021-266" }, { "id": "risk-alert-financial-relationships", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "SEC Office of Compliance Inspections and Examinations, Observations from Examinations of Investment Advisers Managing Private Funds (June 23, 2020)", "citation": "SEC Office of Compliance Inspections and Examinations, Risk Alert: Observations from Examinations of Investment Advisers Managing Private Funds § II.A (June 23, 2020).", "url": "https://www.sec.gov/files/Private%20Fund%20Risk%20Alert_0.pdf", "proposition": "SEC examination staff observed inadequate disclosure of economic relationships between private fund advisers and select investors or clients.", "verbatimQuote": "The staff observed private fund advisers that did not provide adequate disclosure about economic relationships between themselves and select investors or clients.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-risk-alert-financial-relationships" }, { "id": "adv-1a-item-5e", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "Form ADV Part 1A, Item 5.E, Compensation Arrangements", "citation": "SEC Form ADV, Part 1A, Item 5.E (SEC 1707 (07-24)).", "url": "https://www.sec.gov/about/forms/formadv-part1a.pdf", "proposition": "Form ADV Part 1A, Item 5.E asks how the adviser is compensated and lists performance-based fees as one of the boxes to check.", "verbatimQuote": "E. You are compensated for your investment advisory services by (check all that apply): (1) A percentage of assets under your management (2) Hourly charges (3) Subscription fees (for a newsletter or periodical) (4) Fixed fees (other than subscription fees) (5) Commissions (6) Performance-based fees (7) Other (specify): Regulatory Assets Under Management F. (1) Do you provide continuous and regular supervisory or management services to Yes No securities portfolios?", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-adv-1a-item-5e" }, { "id": "adv-glossary-performance-based-fee", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "Form ADV General Instructions, Glossary of Terms: Performance-Based Fee", "citation": "SEC Form ADV, General Instructions, Glossary of Terms ¶ 48.", "url": "https://www.sec.gov/files/formadv-instructions.pdf", "proposition": "The Form ADV glossary defines a performance-based fee, a term used in Part 1A, Item 5 and Part 2A, Item 6, as a fee based on a share of capital gains on, or capital appreciation of, client assets.", "verbatimQuote": "48. Performance-Based Fee: An investment advisory fee based on a share of capital gains on, or capital appreciation of, client assets. A fee that is based upon a percentage of assets that you manage is not a performance-based fee.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-adv-glossary-performance-based-fee" }, { "id": "adv-2a-item-6", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "Form ADV, Part 2A, Item 6: Performance-Based Fees and Side-By-Side Management", "citation": "SEC Form ADV, Part 2A, Item 6.", "url": "https://www.sec.gov/files/formadv-part2.pdf", "proposition": "Form ADV Part 2A, Item 6 requires disclosure of performance-based fees and the conflicts of side-by-side management.", "verbatimQuote": "If you or any of your supervised persons accepts performance-based fees – that is, fees based on a share of capital gains on or capital appreciation of the assets of a client (such as a client that is a hedge fund or other pooled investment vehicle) – disclose this fact. If you or any of your supervised persons manage both accounts that are charged a performance-based fee and accounts that are charged another type of fee, such as an hourly or flat fee or an asset-based fee, disclose this fact. Explain the conflicts of interest that you or your supervised persons face by managing these accounts at the same time, including that you or your supervised persons have an incentive to favor accounts for which you or your supervised persons receive a performance-based fee, and describe generally how you address these conflicts.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-adv-2a-item-6" }, { "id": "adv-1a-item-7b-subadviser", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "Form ADV, Part 1A, Item 7.B: Private fund reporting", "citation": "SEC Form ADV, Part 1A, Item 7.B (SEC 1707 (07-24)).", "url": "https://www.sec.gov/about/forms/formadv-part1a.pdf", "proposition": "Form ADV Part 1A, Item 7.B directs an adviser not to complete Section 7.B.(1) for a private fund that another SEC-registered adviser or exempt reporting adviser reports there, as with a subadviser, and to complete Section 7.B.(2) instead.", "verbatimQuote": "If you are registered or applying for registration with the SEC or reporting as an SEC exempt reporting adviser, and another SEC-registered adviser or SEC exempt reporting adviser reports this information with respect to any such private fund in Section 7.B.(1) of Schedule D of its Form ADV (e.g., if you are a subadviser), do not complete Section 7.B.(1) of Schedule D with respect to that private fund. You must, instead, complete Section 7.B.(2) of Schedule D.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-adv-1a-item-7b-subadviser" }, { "id": "adv-schedule-d-ownership-questions", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "Form ADV, Part 1A, Schedule D, Section 7.B.(1), Questions 14 and 17", "citation": "SEC Form ADV, Part 1A, Schedule D, Section 7.B.(1), Questions 14–17 (SEC 1707 (07-24)).", "url": "https://www.sec.gov/about/forms/formadv-part1a.pdf", "proposition": "Schedule D, Section 7.B.(1) asks for the percentage of the private fund beneficially owned by the adviser and its related persons, whether sales of a 3(c)(1) fund are limited to qualified clients, and whether the adviser is a subadviser.", "verbatimQuote": "14. What is the approximate percentage of the private fund beneficially owned by you and your related persons: % 15. (a) What is the approximate percentage of the private fund beneficially owned (in the aggregate) by funds of funds: % 53 (b) If the private fund qualifies for the exclusion from the definition of investment company under section 3(c)(1) of the Investment Company Act of 1940, are sales of Yes No the fund limited to qualified clients? 16. What is the approximate percentage of the private fund beneficially owned by non-United States persons: % Your Advisory Services 17. (a) Are you a subadviser to this private fund?", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-adv-schedule-d-ownership-questions" } ] }, { "slug": "public-precedents-performance-sharing", "label": "Public precedents", "heading": "What do public filings show about how advisers share performance compensation?", "answerText": "Filed agreements show both routes in use: sub-advisers paid a share of the sponsor's fees, with direct-payment and anti-waiver protections, and advisers or sub-advisers holding non-voting special interests that receive incentive allocations, with prompt withdrawal and audit true-ups. These are mostly registered funds and business development companies, so they show drafting patterns rather than private-fund market frequency.", "sources": [ { "id": "hatteras-sub-allocation-table", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "Hatteras Global Private Equity Partners Institutional Fund, LLC, Investment Sub-Advisory Agreement (2009), § 4", "citation": "Investment Sub-Advisory Agreement among Hatteras Global Private Equity Partners Institutional Fund, LLC, Hatteras Capital Investment Management, LLC and Capvent US Advisors LLC § 4 (form filed 2009 as Exhibit (g)(2)).", "url": "https://www.sec.gov/Archives/edgar/data/0001450148/000114420409018811/v145244_ex99-g2.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/0001450148/000114420409018811/v145244_ex99-g2.htm#:~:text=The%20Adviser%20will%20pay%20the,Asset%20Value%20of%20the%20Fund.", "proposition": "The 2009 sub-advisory agreement has the adviser pay the sub-adviser an asset-based fee and gives the sub-adviser an incentive allocation or fee under the fund's governing documents.", "verbatimQuote": "The Adviser will pay the Sub-Adviser a quarterly advisory fee with respect to the Fund equal to 0.625% on an annualized basis of the Net Asset Value of the Fund.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-hatteras-sub-allocation-table" }, { "id": "hatteras-proxy-transfer-table", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "Hatteras Global Private Equity Partners Institutional, LLC, Definitive Proxy Statement (2013), Proposal 4", "citation": "Hatteras Global Private Equity Partners Institutional, LLC, Definitive Proxy Statement, Proposal 4 (2013).", "url": "https://www.sec.gov/Archives/edgar/data/0001450148/000110465913091001/a13-25596_5def14a.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/0001450148/000110465913091001/a13-25596_5def14a.htm#:~:text=The%20Fund's%20Board%20recommends%20that%20Members%20vote%20FOR%20the%20transfer,allocation%20account%20to%20the%20Purchaser.", "proposition": "A 2013 proxy statement put to members the transfer of the adviser's incentive allocation account to the purchaser of the adviser's business.", "verbatimQuote": "The Fund's Board recommends that Members vote FOR the transfer of Hatteras Capital Investment Management, LLC's incentive allocation account to the Purchaser.", "pullQuoteLocator": "The Fund's Board recommends that Members vote FOR the transfer|allocation account to the Purchaser.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-hatteras-proxy-transfer-table" }, { "id": "xanthus-withdraw-table", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "Advantage Advisers Xanthus Fund, L.L.C., Proxy Statement (2011), LLC Agreement § 5.8(b)", "citation": "Advantage Advisers Xanthus Fund, L.L.C., Definitive Proxy Statement, Appendix (L.L.C. Agreement § 5.8(b)) (2011).", "url": "https://www.sec.gov/Archives/edgar/data/0001076673/000090266411001045/p11-1265def14a.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/0001076673/000090266411001045/p11-1265def14a.htm#:~:text=(b)%20By%20the%20last%20business,the%20Special%20Advisory%20Member%20shall", "proposition": "A filed LLC agreement lets the special advisory member withdraw up to 100 percent of the incentive allocation on unaudited data, with a true-up after the audit.", "verbatimQuote": "(b) By the last business day of the month following the date on which an Incentive Allocation is made, the Special Advisory Member may withdraw up to 100% of the Incentive Allocation (computed on the basis of unaudited data) that was credited to the Special Advisory Account. Within 30 days after the completion of the audit of the books of the Company for the year in which allocations to the Special Advisory Account are made, the Company shall pay to the Special Advisory Member any additional amount of Incentive Allocation determined to be owed to the Special Advisory Member based on the audit, and the Special Advisory Member shall", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-xanthus-withdraw-table" }, { "id": "bacap-sub-fee-table", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "BACAP Opportunity Strategy, LLC, Form N-2/A (2002), Management of the Fund", "citation": "BACAP Opportunity Strategy, LLC, Form N-2/A, Pre-Effective Amendment No. 1 (June 18, 2002).", "url": "https://www.sec.gov/Archives/edgar/data/0001168890/000095010902003409/dn2a.txt", "deepLink": "https://www.sec.gov/Archives/edgar/data/0001168890/000095010902003409/dn2a.txt#:~:text=This%20fee%20is%20paid%20by,and%20not%20by%20the%20Fund.", "proposition": "A 2002 registration statement states that the sub-advisory fee is paid by the adviser and not by the fund.", "verbatimQuote": "This fee is paid by the Adviser and not by the Fund.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-bacap-sub-fee-table" }, { "id": "bacap-2003-table", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "BACAP Opportunity Strategy, LLC, Prospectus (Form 497, Dec. 29, 2003)", "citation": "BACAP Opportunity Strategy, LLC, Prospectus (Form 497) (Dec. 29, 2003).", "url": "https://www.sec.gov/Archives/edgar/data/0001168890/000090266403001970/srz9547162v4.txt", "deepLink": "https://www.sec.gov/Archives/edgar/data/0001168890/000090266403001970/srz9547162v4.txt#:~:text=This%20fee%20is%20paid%20by,and%20not%20by%20the%20Fund.", "proposition": "The 2003 prospectus repeats that the sub-advisory fee is paid by the adviser and not by the fund.", "verbatimQuote": "This fee is paid by the Adviser and not by the Fund.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-bacap-2003-table" }, { "id": "nb-cmp-deferral-table", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "NB Crossroads Private Markets Fund V (TE) LP, Form N-2 (2017), Distributions", "citation": "NB Crossroads Private Markets Fund V (TE) LP, Form N-2, “Distributions” (2017), filed on EDGAR.", "url": "https://www.sec.gov/Archives/edgar/data/1702537/000114036117014189/formn2.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/1702537/000114036117014189/formn2.htm#:~:text=The%20Special%20Limited%20Partner%20will%20not,Investor%E2%80%99s%20repurchase%20of%20its%20Interest.", "proposition": "A filed registration statement defers distribution of the special limited partner's carried interest until after the fourth anniversary of the final closing.", "verbatimQuote": "The Special Limited Partner will not receive any of the carried interest that it may have earned until after the fourth anniversary of the final closing (the anticipated time frame in which all, or substantially all, of the Commitments that the Fund intends to invest will have been drawn), except in respect of an Investor’s repurchase of its Interest.", "pullQuoteLocator": "The Special Limited Partner will not|Investor’s repurchase of its Interest.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-nb-cmp-deferral-table" }, { "id": "hms-split-table", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "HMS Income Fund, Inc., Investment Sub-Advisory Agreement (2012), § 3", "citation": "Form of Investment Sub-Advisory Agreement among HMS Adviser, LP, Main Street Capital Partners, LLC, Main Street Capital Corporation and HMS Income Fund, Inc. § 3 (2012), filed as Exhibit (g)(2).", "url": "https://www.sec.gov/Archives/edgar/data/1535778/000119312512191835/d262573dex99g2.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/1535778/000119312512191835/d262573dex99g2.htm#:~:text=In%20consideration%20for%20the%20Sub%2DAdviser%E2%80%99s,written%20consent%20of%20the%20Sub%2DAdviser.", "proposition": "A filed BDC sub-advisory agreement gives the sub-adviser half of the adviser's base management and incentive fees.", "verbatimQuote": "In consideration for the Sub-Adviser’s provision of the Sub-Advisory Services hereunder, the Adviser shall pay the Sub-Adviser fifty percent (50%) of the fees (including without limitation the Base Management Fee and Incentive Fee), payable to the Adviser pursuant to Section 3 of the Advisory Agreement, payable no later than three (3) business days after receipt of such amounts by the Adviser from the BDC. At the Sub-Adviser’s request, the Adviser shall arrange for the fees payable to the Sub-Adviser hereunder to be paid to the Sub-Adviser directly by the BDC on the same day the BDC pays (or is obligated to pay) the Adviser its fees (including without limitation the Base Management Fee and Incentive Fee) under the Advisory Agreement. Pursuant to Section 3 of the Advisory Agreement, the Adviser has retained the right to elect to waive or defer all or a portion of the fees that would otherwise be paid to it. The Adviser shall not make any such election with respect to the Sub-Adviser’s portion of such fees, without the prior written consent of the Sub-Adviser.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-hms-split-table" }, { "id": "gbsp-fee-waiver-consent-table", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "Griffin-Benefit Street Partners BDC Corp., Form N-2/A (2015), Sub-Advisory Fees", "citation": "Griffin-Benefit Street Partners BDC Corp., Form N-2/A, Pre-Effective Amendment No. 5 (Jan. 20, 2015).", "url": "https://www.sec.gov/Archives/edgar/data/1609336/000119312515013604/d733722dn2a.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/1609336/000119312515013604/d733722dn2a.htm#:~:text=On%20an%20annualized%20basis%2C%20Benefit%20Street%20will%20be,written%20consent%20of%20Benefit%20Street.", "proposition": "A filed BDC registration statement requires the sub-adviser's consent to any deferral, reduction or waiver of the adviser's fees.", "verbatimQuote": "On an annualized basis, Benefit Street will be paid 50% of the fees payable to GBA under the investment advisory agreement with respect to each year, which fees are payable to Benefit Street quarterly in arrears. Except as required by applicable law, rule or regulation, any deferral, reduction, waiver or other modification of the fees to be paid to GBA (including, without limitation, the manner and timing by which such fees are paid or payable to GBA) will require the prior written consent of Benefit Street.", "pullQuoteLocator": "On an annualized basis, Benefit Street will be|written consent of Benefit Street.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-gbsp-fee-waiver-consent-table" }, { "id": "ceres-net-assets-table", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "Ceres Tactical Commodity L.P., Management Agreement with EMC Capital Advisors (2022), § 3(b)", "citation": "Management Agreement among Ceres Managed Futures LLC, Ceres Tactical Commodity L.P. and EMC Capital Advisors, LLC § 3(b) (Aug. 3, 2022), filed as Exhibit 10.1.", "url": "https://www.sec.gov/Archives/edgar/data/1325676/000089914022000693/c57155143c.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/1325676/000089914022000693/c57155143c.htm#:~:text=%E2%80%9CNet%20Assets%20of%20the%20Partnership%E2%80%9D,the%20date%20of%20such%20determination.", "proposition": "The 2022 management agreement determines net assets with no adjustment for management, administrative, selling-agent or incentive fees.", "verbatimQuote": "“Net Assets of the Partnership” shall have the meaning set forth in Section 7(d)(2) of the Partnership Agreement without regard to further amendments thereto, provided that in determining the Net Assets of the Partnership on any date, no adjustment shall be made to reflect any distributions, redemptions, management fees, administrative fees, ongoing selling agent fees, or incentive fees accrued or payable as of the date of such determination.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-ceres-net-assets-table" }, { "id": "pgim-unrealized-accrual-table", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "PGIM Private Credit Fund, Prospectus (Form 424B3, 2024)", "citation": "PGIM Private Credit Fund, Prospectus (Apr. 29, 2024), filed on EDGAR.", "url": "https://www.sec.gov/Archives/edgar/data/1923622/000110465924064606/pgim-20240429xn2.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/1923622/000110465924064606/pgim-20240429xn2.htm#:~:text=We%20will%20accrue%2C%20but%20will,and%20realize%20a%20capital%20gain.", "proposition": "A 2024 fund prospectus pays the subadviser through the manager and accrues but does not pay a capital-gains incentive fee on unrealized appreciation.", "verbatimQuote": "We will accrue, but will not pay, a capital gains incentive fee with respect to unrealized appreciation because a capital gains incentive fee would be owed to the Manager if we were to sell the relevant investment and realize a capital gain.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-pgim-unrealized-accrual-table" }, { "id": "phillips-edison-table", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "Phillips Edison – ARC Shopping Center REIT Inc., First Amended and Restated Sub-advisory Agreement (2010), § 5.6", "citation": "First Amended and Restated Sub-advisory Agreement between American Realty Capital II Advisors, LLC and Phillips Edison NTR LLC § 5.6 (2010), filed as Exhibit 10.4.", "url": "https://www.sec.gov/Archives/edgar/data/1476204/000119312510152949/dex104.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/1476204/000119312510152949/dex104.htm#:~:text=Subordinated%20Incentive%20Fee.%20The%20Advisor,Shares%20or%20a%20promissory%20note).", "proposition": "A filed sub-advisory agreement assigns to the sub-advisor the right to direct payment from the company of a share of the incentive fee.", "verbatimQuote": "Subordinated Incentive Fee. The Advisor hereby assigns its right to receive direct payment from the Company of 85% of all Subordinated Incentive Fees payable pursuant to the Advisory Agreement, in whatever form payable by the Company (i.e., cash, Shares or a promissory note).", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-phillips-edison-table" }, { "id": "mevc-carried-interest-split", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "meVC Draper Fisher Jurvetson Fund I, Inc., Form N-2/A (2000)", "citation": "meVC Draper Fisher Jurvetson Fund I, Inc., Form N-2/A (Mar. 28, 2000).", "url": "https://www.sec.gov/Archives/edgar/data/1099941/000091205700013917/0000912057-00-013917.txt", "deepLink": "https://www.sec.gov/Archives/edgar/data/1099941/000091205700013917/0000912057-00-013917.txt#:~:text=As%20payment%20for%20its%20services,payment%20it%20receives%20from%20us.", "proposition": "A 2000 registration statement for a venture fund corporation has the adviser pay the sub-adviser part of the management fee and 90 percent of the carried interest the adviser receives.", "verbatimQuote": "As payment for its services as our investment sub-adviser, meVC Advisers has agreed to pay Draper Advisers 40% of the management fee, or an annual fee equal to 1.0% of our average weekly net assets, payable in monthly installments. meVC Advisers has also agreed to pay Draper Advisers additional compensation equal to 90% of any carried interest payment it receives from us.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-mevc-carried-interest-split" }, { "id": "bessemer-incentive-fee-schedule", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "Bessemer Funds Trust (Bessemer Sand Hill Investors Fund II), Form N-2 (2001)", "citation": "Bessemer Funds Trust, Form N-2 (Apr. 19, 2001), filed on EDGAR.", "url": "https://www.sec.gov/Archives/edgar/data/1138363/000092542101500044/0000925421-01-500044.txt", "deepLink": "https://www.sec.gov/Archives/edgar/data/1138363/000092542101500044/0000925421-01-500044.txt#:~:text=The%20Incentive%20Fee%20for%20the,audit%20for%20the%20fiscal%20year.", "proposition": "A 2001 registration statement pays 90 percent of the incentive fee after year-end and the balance after the audit, and pays a terminated sub-adviser on the same schedule.", "verbatimQuote": "The Incentive Fee for the preceding fiscal year, if any, shall be paid by the Fund as follows: (i) 90% to be paid within 30 days after the Fund’s fiscal year-end; and (ii) the balance to be paid within 30 days after the completion of the Fund’s audit for the fiscal year.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-bessemer-incentive-fee-schedule" }, { "id": "hatteras-withdrawal-true-up-table", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "Hatteras Global Private Equity Partners Institutional Fund, LLC, Investment Sub-Advisory Agreement (2009), Schedule A", "citation": "Investment Sub-Advisory Agreement among Hatteras Global Private Equity Partners Institutional Fund, LLC, Hatteras Capital Investment Management, LLC and Capvent US Advisors LLC, Schedule A (form filed 2009 as Exhibit (g)(2)).", "url": "https://www.sec.gov/Archives/edgar/data/0001450148/000114420409018811/v145244_ex99-g2.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/0001450148/000114420409018811/v145244_ex99-g2.htm#:~:text=After%20the%20close%20of%20an,be%20owed%20to%20the%20Fund.", "proposition": "The 2009 sub-advisory agreement allows withdrawal of up to 95 percent of the incentive allocation on unaudited data, with a true-up in either direction after the audit.", "verbatimQuote": "After the close of an allocation period with respect to a Member, and subject to certain limitations, the Sub-Adviser may withdraw up to 95% of the Incentive Allocation, computed on the basis of unaudited data, that was credited to its Incentive Allocation Account with respect to such allocation period. The Fund will pay any balance, subject to audit adjustments, as promptly as practicable after the completion of the audit of the Fund’s books. As promptly as practicable after the completion of the audit of the books of the Fund for the year in which allocations to the Incentive Allocation Account are made, the Fund shall allocate to the Incentive Allocation Account any additional amount of Incentive Allocation determined to be owed to the Sub-Adviser based on such audit, and the Sub-Adviser shall remit to the Fund any excess amount of Incentive Allocation determined to be owed to the Fund.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-hatteras-withdrawal-true-up-table" }, { "id": "hatteras-allocation-account-table", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "Hatteras Global Private Equity Partners Institutional Fund, LLC, Investment Sub-Advisory Agreement (2009), Schedule A", "citation": "Investment Sub-Advisory Agreement among Hatteras Global Private Equity Partners Institutional Fund, LLC, Hatteras Capital Investment Management, LLC and Capvent US Advisors LLC, Schedule A (form filed 2009 as Exhibit (g)(2)).", "url": "https://www.sec.gov/Archives/edgar/data/0001450148/000114420409018811/v145244_ex99-g2.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/0001450148/000114420409018811/v145244_ex99-g2.htm#:~:text=The%20Sub%2DAdviser%20holds%20non%2Dvoting%20interests,with%20respect%20to%20the%20Fund.", "proposition": "A filed sub-advisory agreement gives the sub-adviser its performance share as an incentive allocation credited to non-voting fund interests held solely for that purpose.", "verbatimQuote": "The Sub-Adviser holds non-voting interests of limited liability company interest in the Fund (“Interests”) in an incentive allocation account (“Incentive Allocation Account”) solely for the purpose of receiving the Incentive Allocation with respect to the Fund.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-hatteras-allocation-account-table" }, { "id": "hatteras-termination-forfeiture-table", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "Hatteras Global Private Equity Partners Institutional Fund, LLC, Investment Sub-Advisory Agreement (2009), Schedule A", "citation": "Investment Sub-Advisory Agreement among Hatteras Global Private Equity Partners Institutional Fund, LLC, Hatteras Capital Investment Management, LLC and Capvent US Advisors LLC, Schedule A (form filed 2009 as Exhibit (g)(2)).", "url": "https://www.sec.gov/Archives/edgar/data/0001450148/000114420409018811/v145244_ex99-g2.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/0001450148/000114420409018811/v145244_ex99-g2.htm#:~:text=An%20%E2%80%9Callocation%20period%E2%80%9D%20is%20a,by%20the%20Board%20of%20Managers.", "proposition": "The 2009 sub-advisory agreement ends an allocation period when the sub-adviser's status ends, but pays no allocation if the sub-adviser ends it voluntarily or the board ends it for gross negligence or willful misconduct.", "verbatimQuote": "An “allocation period” is a period commencing on commencement of operations of the Fund and, thereafter, each period commencing as of the day following the last day of the preceding allocation period and ending on the first to occur of (1) the last day of each calendar year, (2) the valuation date with respect to any repurchase of Interests or a portion of the Interests, or the day preceding the effective date of any redemption of Interests or portion of Interests or the complete withdrawal by a Member, (3) the day as of which the Adviser’s or Sub-Adviser’s status as an investment adviser or sub-adviser, respectively, is terminated (provided that no Incentive Allocation will be payable to the Adviser or Sub-Adviser if such status is terminated voluntarily by the Adviser or Sub-Adviser, as the case may be, or by the Board of Managers of the Fund due to gross negligence or willful misconduct), or (4) such other date as determined by the Board of Managers.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-hatteras-termination-forfeiture-table" }, { "id": "xanthus-subadviser-fee-table", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "Advantage Advisers Xanthus Fund, L.L.C., Proxy Statement (2011), Sub-Advisory Agreement § 8", "citation": "Advantage Advisers Xanthus Fund, L.L.C., Definitive Proxy Statement, form of Sub-Advisory Agreement § 8 (2011).", "url": "https://www.sec.gov/Archives/edgar/data/0001076673/000090266411001045/p11-1265def14a.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/0001076673/000090266411001045/p11-1265def14a.htm#:~:text=As%20compensation%20for%20the%20services,advisory%20fee%20from%20the%20Fund.", "proposition": "A filed sub-advisory agreement pays the sub-adviser out of the fee the investment adviser receives from the fund, within five business days of that receipt.", "verbatimQuote": "As compensation for the services rendered by the Sub-Adviser hereunder, the Investment Adviser agrees to pay the Sub-Adviser out of the fee it receives from the Fund pursuant to the investment advisory agreement between the Fund and the Investment Adviser a monthly fee computed at the annual rate of 0.30% of the net assets of the Fund, determined as of the start of business on the first business day of each month, after adjustment for any subscriptions effective on such day (the \"Sub-Advisory Fee\"). The Sub-Advisory Fee shall be payable monthly in arrears within five business days after the Investment Adviser's receipt of payment of its investment advisory fee from the Fund.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-xanthus-subadviser-fee-table" }, { "id": "bacap-nonvoting-interest-table", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "BACAP Opportunity Strategy, LLC, Form N-2/A (2002), Limited Liability Company Agreement § 2.8", "citation": "BACAP Opportunity Strategy, LLC, Limited Liability Company Agreement § 2.8, in Form N-2/A, Pre-Effective Amendment No. 1 (June 18, 2002).", "url": "https://www.sec.gov/Archives/edgar/data/0001168890/000095010902003409/dn2a.txt", "deepLink": "https://www.sec.gov/Archives/edgar/data/0001168890/000095010902003409/dn2a.txt#:~:text=The%20interest%20in%20the%20Fund,result%20of%20the%20Incentive%20Allocation.", "proposition": "A filed fund LLC agreement admits the adviser as a non-voting special advisory member that shares in profit only through the incentive allocation.", "verbatimQuote": "The interest in the Fund of the Special Advisory Member shall be non-voting and shall have no participation in the net profit or net loss of the Fund other than as a result of the Incentive Allocation.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-bacap-nonvoting-interest-table" }, { "id": "bacap-withdrawal-any-time-table", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "BACAP Opportunity Strategy, LLC, Form N-2/A (2002), Limited Liability Company Agreement § 4.6(d)", "citation": "BACAP Opportunity Strategy, LLC, Limited Liability Company Agreement § 4.6(d), in Form N-2/A, Pre-Effective Amendment No. 1 (June 18, 2002).", "url": "https://www.sec.gov/Archives/edgar/data/0001168890/000095010902003409/dn2a.txt", "deepLink": "https://www.sec.gov/Archives/edgar/data/0001168890/000095010902003409/dn2a.txt#:~:text=The%20Adviser%20may%20withdraw%20any,the%20Incentive%20Allocation%20is%20made.", "proposition": "A filed fund LLC agreement lets the adviser withdraw its incentive allocation at any time after it is made.", "verbatimQuote": "The Adviser may withdraw any Incentive Allocation credited to the Special Advisory Account at any time following the date on which the Incentive Allocation is made.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-bacap-withdrawal-any-time-table" }, { "id": "nb-cmp-professionals-slp-table", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "NB Crossroads Private Markets Fund V (TE) LP, Form N-2 (2017), Alignment of Interests", "citation": "NB Crossroads Private Markets Fund V (TE) LP, Form N-2, “Alignment of Interests” (2017), filed on EDGAR.", "url": "https://www.sec.gov/Archives/edgar/data/1702537/000114036117014189/formn2.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/1702537/000114036117014189/formn2.htm#:~:text=In%20addition%20to%20investing%20in,interest%20of%20the%20Master%20Fund.", "proposition": "A filed registration statement states that the fund's key investment professionals share in the master fund's carried interest through ownership interests in its special limited partner.", "verbatimQuote": "In addition to investing in the Fund, all key investment professionals will participate, through ownership interests in the Special Limited Partner, in the carried interest of the Master Fund.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-nb-cmp-professionals-slp-table" }, { "id": "nb-cmp-tax-distribution-table", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "NB Crossroads Private Markets Fund V (TE) LP, Form N-2 (2017), Tax Distributions", "citation": "NB Crossroads Private Markets Fund V (TE) LP, Form N-2, “Tax Distributions” (2017), filed on EDGAR.", "url": "https://www.sec.gov/Archives/edgar/data/1702537/000114036117014189/formn2.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/1702537/000114036117014189/formn2.htm#:~:text=The%20Board%20of%20the%20Master,such%20an%20allocation%20is%20required.", "proposition": "A filed registration statement lets the master fund's board make tax distributions to the special limited partner.", "verbatimQuote": "The Board of the Master Fund may in its sole discretion cause the Master Fund to distribute to the Special Limited Partner (each, a “Tax Distribution”) an amount designed to assist the Special Limited Partner (or its direct and indirect investors) in satisfying any income tax liability attributable to allocations of taxable income and gains of the Master Fund in any fiscal year for which such an accrual or such an allocation is required.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-nb-cmp-tax-distribution-table" }, { "id": "ceres-partnership-pays-table", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "Ceres Tactical Commodity L.P., Management Agreement with EMC Capital Advisors (2022), § 3(a)", "citation": "Management Agreement among Ceres Managed Futures LLC, Ceres Tactical Commodity L.P. and EMC Capital Advisors, LLC § 3(a) (Aug. 3, 2022), filed as Exhibit 10.1.", "url": "https://www.sec.gov/Archives/edgar/data/1325676/000089914022000693/c57155143c.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/1325676/000089914022000693/c57155143c.htm#:~:text=In%20consideration%20of%20and%20as,by%2012)%20(the%20%E2%80%9CManagement%20Fee%E2%80%9D).", "proposition": "In a three-party management agreement, the partnership itself pays the trading advisor its incentive fee and management fee.", "verbatimQuote": "In consideration of and as compensation for all of the services to be rendered by the Advisor to the Partnership under this Agreement, the Partnership shall pay the Advisor (i) an incentive fee payable annually equal to 20% of New Trading Profits (as such term is defined below) earned by the Advisor for the Partnership (the “Incentive Fee”) and (ii) a monthly fee for professional management services equal to 0.60% per year of the end of the month Net Asset Value of the Partnership allocated to the Advisor (computed monthly by multiplying the Net Asset Value of the Partnership allocated to the Advisor as of the last day of each month by 0.60% and dividing the result thereof by 12) (the “Management Fee”).", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-ceres-partnership-pays-table" }, { "id": "pgim-subadviser-paid-table", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "PGIM Private Credit Fund, Prospectus (Form 424B3, 2024), Sub-Advisory Fee", "citation": "PGIM Private Credit Fund, Prospectus, “Sub-Advisory Fee” (Apr. 29, 2024), filed on EDGAR.", "url": "https://www.sec.gov/Archives/edgar/data/1923622/000110465924064606/pgim-20240429xn2.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/1923622/000110465924064606/pgim-20240429xn2.htm#:~:text=The%20Manager%20will%20pay%20a%20portion%20of%20the%20Management%20Fee%20and%20Incentive%20Fee%20it%20receives%20from%20the%20Fund%20to%20the%20Subadviser.%20No%20advisory,Fund%20directly%20to%20the%20Subadviser.", "proposition": "A 2024 fund prospectus states that the manager pays the subadviser a portion of its management and incentive fees and the fund pays the subadviser nothing directly.", "verbatimQuote": "The Manager will pay a portion of the Management Fee and Incentive Fee it receives from the Fund to the Subadviser. No advisory fees will be paid by the Fund directly to the Subadviser.", "pullQuoteLocator": "The Manager will pay a portion of the Management Fee and Incentive Fee it receives from the Fund to the Subadviser. No advisory|Fund directly to the Subadviser.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-pgim-subadviser-paid-table" }, { "id": "bessemer-assignment-intent-table", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "Bessemer Funds Trust (Bessemer Sand Hill Investors Fund II), Form N-2 (2001), Accrual of Incentive Fee", "citation": "Bessemer Funds Trust, Form N-2 (Apr. 19, 2001), filed on EDGAR.", "url": "https://www.sec.gov/Archives/edgar/data/1138363/000092542101500044/0000925421-01-500044.txt", "deepLink": "https://www.sec.gov/Archives/edgar/data/1138363/000092542101500044/0000925421-01-500044.txt#:~:text=The%20Incentive%20Fee%20for%20the,that%20role%20for%20the%20Fund.", "proposition": "A 2001 registration statement pays 90 percent of the annual incentive fee within 30 days after fiscal year-end and the balance after the audit, and states the manager's intention to assign the fee to the sub-adviser.", "verbatimQuote": "The Incentive Fee for the preceding fiscal year, if any, shall be paid by the Fund as follows: (i) 90% to be paid within 30 days after the Fund’s fiscal year-end; and (ii) the balance to be paid within 30 days after the completion of the Fund’s audit for the fiscal year. The Manager intends to assign the Incentive Fee to the Sub-Adviser so long as the Sub-Adviser acts in that role for the Fund.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-bessemer-assignment-intent-table" }, { "id": "bessemer-termination-stub-table", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "Bessemer Funds Trust (Bessemer Sand Hill Investors Fund II), Form N-2 (2001), Sub-Advisory Agreement", "citation": "Bessemer Funds Trust, Form N-2, form of Sub-Advisory Agreement (Apr. 19, 2001), filed on EDGAR.", "url": "https://www.sec.gov/Archives/edgar/data/1138363/000092542101500044/0000925421-01-500044.txt", "deepLink": "https://www.sec.gov/Archives/edgar/data/1138363/000092542101500044/0000925421-01-500044.txt#:~:text=In%20the%20event%20that%20the%20Sub%2DAdviser,audit%20for%20the%20fiscal%20year.", "proposition": "A filed sub-advisory agreement pays a sub-adviser terminated mid-year an incentive fee through the termination date, 90 percent within 30 days and the balance after the audit.", "verbatimQuote": "In the event that the Sub-Adviser is terminated during a fiscal year, the Sub-Adviser will be entitled to receive an Incentive Fee calculated from January 1st through the termination date. Within thirty (30) days after the termination date, the Sub-Adviser will be paid 90% of the incentive fee calculated through the termination date; the balance will be paid within thirty (30) days after the completion of the Fund’s audit for the fiscal year.", "pullQuoteLocator": "In the event that the Sub-Adviser|audit for the fiscal year.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-bessemer-termination-stub-table" }, { "id": "mevc-incentive-compensation-carried-interest", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "meVC Draper Fisher Jurvetson Fund I, Inc., Form N-2/A (2000)", "citation": "meVC Draper Fisher Jurvetson Fund I, Inc., Form N-2/A (Mar. 28, 2000).", "url": "https://www.sec.gov/Archives/edgar/data/1099941/000091205700013917/0000912057-00-013917.txt", "deepLink": "https://www.sec.gov/Archives/edgar/data/1099941/000091205700013917/0000912057-00-013917.txt#:~:text=We%20have%20also%20agreed%20to,realized%20and%20unrealized%20capital%20losses.", "proposition": "A 2000 registration statement for a venture fund corporation pays its adviser annual incentive compensation of 20 percent of realized capital gains net of realized and unrealized losses.", "verbatimQuote": "We have also agreed to pay meVC Advisers annual incentive compensation equal to 20% of our annual realized capital gains net of realized and unrealized capital losses.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-mevc-incentive-compensation-carried-interest" }, { "id": "ceres-ongoing-expenses-table", "authorityType": "sec-filing", "tier": "market-benchmark-backed", "title": "Ceres Tactical Commodity L.P., Management Agreement with EMC Capital Advisors (2022), New Trading Profits", "citation": "Management Agreement among Ceres Managed Futures LLC, Ceres Tactical Commodity L.P. and EMC Capital Advisors, LLC § 3(c) (Aug. 3, 2022), filed as Exhibit 10.1.", "url": "https://www.sec.gov/Archives/edgar/data/1325676/000089914022000693/c57155143c.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/1325676/000089914022000693/c57155143c.htm#:~:text=Ongoing%20expenses%20shall%20be%20attributed,organizational%20expenses%20of%20the%20Partnership.", "proposition": "The 2022 management agreement attributes ongoing fund expenses, including offering and organizational expenses, to the assets the advisor manages, but excludes litigation not involving the advisor's activities.", "verbatimQuote": "Ongoing expenses shall be attributed to the assets managed by the Advisor (but shall be paid by the Partnership) based on the Advisor’s proportionate share of Net Assets of the Partnership. Ongoing expenses shall not include expenses of litigation not involving the activities of the Advisor on behalf of the Partnership. Ongoing expenses include offering and organizational expenses of the Partnership.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/sharing-performance-compensation#src-ceres-ongoing-expenses-table" } ] } ] } }