What is cashless contribution?
Generally, GPs contribute cash toward the fund similarly to an LP. This is known as a GP Commitment.
However, there is an alternative method to cash contribution for the GP commitment, known as cashless contribution.
Some GPs do this in an endeavor to shift ordinary income into long-term capital gains. This structure can lead to certain tax benefits, as long-term capital gains are typically subject to a lower tax rate compared to ordinary income.
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Can I do a 100% cashless capital setup with my fund?
If directed by you, the Carta team can accommodate a 100% cashless contribution setup in Carta’s templated fund formation documents.
However, you should consult with your legal and tax teams to discuss if this is a valid option for you. Carta does not provide legal, financial or tax advice as part of its fund formation services, and clients are responsible for their own legal and tax compliance obligations, as well as remaining in compliance with all applicable laws, rules, and regulations.
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Are there any downsides?
To some LPs, cashless contribution for a GP commitment may send a negative signal, as GP commitment is usually a sign of “skin in the game.” In addition, once the GP waives management fee, if the fund does not return LP contributions and reach a level where the GP is eligible to receive carry, the GP will not receive any cash flows from either carry or management fee.
Additionally, the IRS may not agree with your position of waiving management fees for a cashless contribution. It is critical that you speak with your tax, audit and legal teams before moving forward with cashless contribution.
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How do I get started?
As mentioned above, you will first need to consult with your tax and legal advisors and receive their go ahead. You may find that legal and tax advisors prefer to see some sort of cost basis for the carry that you may receive as the GP.
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DISCLOSURE: This communication is being sent on behalf of Carta Investor Services, Inc. (“Carta”), an affiliate of eShares, Inc. dba Carta, Inc. This communication is not to be construed as legal, financial, accounting or tax advice and is for informational purposes only. This communication is not intended as a recommendation, offer or solicitation for the purchase or sale of any security. Carta does not assume any liability for reliance on the information provided herein.
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