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September 19, 2023 | BusinessContract DraftingEmployment

Key Considerations When Forming a Private Equity Company

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Robert Kleinfeldt

Senior Counsel

Ellie Sanders

Associate Attorney

Private equity has long been a favored avenue for investors seeking higher returns and greater control over their investments.  Private equity funds are formed by sponsors to pursue specific types of investment strategies.  However, forming a private equity company is not a decision to be taken lightly.  Private equity transactions can be quite complex and typically require both legal expertise as well as general knowledge of a variety of topics, including mergers and acquisitions, debt finance, capital markets, and tax. Beyond the financial and operational aspects, there are numerous legal considerations that can significantly impact the success and longevity of your private equity venture.  An experienced corporate attorney can help explain certain legal aspects that you should be aware of when forming a private equity company.

Choosing the Right Legal Structure

The first crucial decision you’ll face is selecting the appropriate legal structure for your private equity company.  The most common options include limited liability companies, limited partnerships, and corporations.  Each structure has its own advantages and disadvantages, depending on factors like taxation, liability, and governance.  Consulting with legal experts is essential to make an informed choice that aligns with your goals and risk tolerance.

Internal Documentation

The legal documentation surrounding your private equity fund is intricate and includes the partnership or operating agreement (depending on your entity type).  These documents outline the rights, obligations, and responsibilities of the fund’s owners.  Crafting these agreements carefully can help prevent disputes down the road.  In the private equity context, including provisions for fund governance, decision-making processes and exit strategies is especially important.

Fiduciary Duties

Private equity professionals (or “Sponsors”) typically owe fiduciary duties to the company, other members or managers of the company, and others that are either parties to, or otherwise bound by, the company’s internal governing agreement (such as investors).  Frequently, these duties require that you act in the best interests of the business and your business partners to, for example, avoid conflicts of interest.  Failing to satisfy these responsibilities can have grave legal ramifications and cause reputational damage.  Establishing robust compliance policies and governance structures can help safeguard against breaches of fiduciary duties.

Regulatory Compliance

Private equity firms are subject to a complex web of federal and state regulations.  Compliance with securities laws is paramount.  Your firm may also need to register with the Securities and Exchange Commission (SEC) or state securities authorities, depending on the size and nature of your operations.  Failure to adhere to these regulations can result in severe penalties, including fines and legal action, so it is important to stay updated on any revisions by the SEC.

Due Diligence and Investment Transactions

Private equity firms often invest in privately held companies, which require thorough due diligence.  This process includes legal due diligence to assess the target company’s compliance with laws and regulations.  You must also negotiate and structure investment transactions, including purchase agreements, equity investments, and debt financing.  Legal counsel is vital to ensure these deals are executed correctly and protect your interests.

Fundraising and Investor Relations

Private equity firms raise capital from a variety of sources, including high-net-worth individuals, institutional investors, and pension funds.  When soliciting funds, you must abide by strict regulations to avoid violating securities laws.  It’s crucial to provide potential investors with all the necessary disclosures, including risks, fees, and investment strategies.  Maintaining transparent and ethical investor relations is essential to build trust and protect your firm from legal disputes.

Exit Strategies and Liquidation

Exit strategies, such as selling portfolio companies or taking them public, often require complex legal arrangements.  You must plan for the eventual liquidation of your private equity fund and ensure that the proceeds are distributed correctly to investors.  Legal guidance is beneficial in these final stages to minimize tax liabilities and regulatory complications.


Forming a private equity company is a multifaceted endeavor that involves far more than financial acumen.  Understanding and addressing the legal aspects of this process is crucial for long-term success and compliance.  Seeking expert legal counsel from the outset, and throughout your private equity journey, is essential in navigating this complex legal landscape effectively.  By doing so, you can mitigate risks, build strong investor relationships, and position your firm for sustainable growth in the dynamic world of private equity.  If you have questions or are seeking further guidance, reach out to a member of our team for your next steps.


Photo by Morgan Housel on Unsplash
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