At present, in the practice of domestic private equity investment in RMB funds (limited partnership, hereinafter referred to as partnership mode), one structure is that the management company (hereinafter referred to as MC) and the unlimited partner (hereinafter referred to as GP, both of which are limited liability companies) are mixed into one. The specific structure is as follows: According to relevant regulations, MC usually needs to meet certain registered capital requirements (for example, it needs at least RMB 30 million to register a domestic equity investment fund management company in Beijing). At the same time, GP usually invests in the partnership according to market practice, for example, the investment amount accounts for 1% of the total subscription amount of the partners in the partnership. This structure has its own advantages, because the shareholders of GP/MC are only liable for the debts of GP/MC to the extent of their capital contribution, and will not be liable for the unlimited liability of GP for the partnership unless something leads to the application of the principle of piercing the corporate veil. As far as responsibility is concerned, the shareholders of enterprise GP are obviously superior to the general partners of partnership GP.

In addition, under this framework, based on the profits and management fees that GP gets from the partnership, the necessary incentives for the management team can be directly realized. However, the problem faced by this structure is that MC and GP are mixed together. If GP assumes unlimited legal responsibility for managing partnership affairs, its profits as GP, management fees as MC and registered capital will be eroded.

The solution to the above problems is to legally and effectively separate GP from MC. Under this structure, MC and GP are independent limited liability companies. The management team operates at MC level, and the establishment of MC meets certain registered capital requirements. At the same time, GP usually invests in partnership according to market practice, so GP also needs some capital, and GP's investment in partnership can be solved by capital from MC.

Under the premise of complying with the company law, the setting of GP can be done as long as the board of directors passes the investment decision made by MC's investment decision-making committee. The management cost of GP is relatively small. At the same time, due to the division of legal settings, GP's unlimited liability to the partnership does not affect MC's interests (provided that the principle of corporate veil piercing is not invoked). In addition, in tax planning, because the income of GP can be regarded as dividends among resident enterprises, it can be tax-free when distributed to MC, so the tax burden borne by MC shareholders under structure B is the same as that under structure A. If this structure is designed under the legal system of China, it will have the following characteristics:

(i) Both I)MC and GP are limited liability companies;

(2) GP makes a small amount of cash contribution to the partnership (if there are special requirements in local laws and regulations, such as Shanghai and Tianjin), or makes labor contribution instead of cash contribution. Special limited partners (hereinafter referred to as SLP) contribute cash to the partnership to meet the requirements of other limited partners for the risk of managers;

(3) MC usually meets certain registered capital requirements, while the establishment cost of GP can be lower;

(4) MC appoints directors to GP, and GP's board of directors can form investment resolutions of the partnership, so the management cost of GP is low;

(v)GP is responsible for managing the partnership, and the income share of GP can be returned to MC through dividends. Because the registered capital of GP is not large, due to unlimited liability, the income of GP will not suffer too much loss;

(vi) ㈥SLP also collects management fees as a management committee;

(vii) Compared with Structures A and B, the tax burden borne by MC shareholders is the same;

(VIII) Due to the participation of SLP, its rights and obligations in the partnership need special provisions.

This model is not uncommon in mature international private equity funds (although there are some controversies), but it may face challenges in the current China market. One is whether LP will agree to this arrangement, and whether it is regarded as GP evading unlimited liability. In addition, whether the examination and approval authority can accept the setting of SLP. For these reasons, Structure C needs to be accepted by the market and recognized by the examination and approval authorities.

Finally, what GP has done will be punished by the market in the end, and excellent GP is very cautious about his achievements. At present, some structural settings (such as structure A) are reasonable based on the current market situation. However, after the initial stage of PE practice in China, the situation of GP and the market's understanding of partnership culture should be further developed, and new structural settings may appear.