General partners are taxed differently and often more favorably. They typically earn a 2% annual management fee plus 20% of any profits that the fund produces if it meets certain targets. Through a special provision in the law, that 20% is treated not as regular compensation but as carried interest, entitling it to preferential capital gains tax treatment.
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The insignificant interest exemption, which applies where benefit plan investors subject to ERISA own less than 25% of the value of each class of the equity interests of a fund, disregarding equity interests that the general partner and its affiliates hold. The venture capital operating company (VCOC) exemption, which applies if at least 50% of the investments of a venture capital fund, valued by cost, are in qualified venture capital investments which are investments in operating entities engaged in the production or sale of a product or service (other than the investment of capital) with which the fund has specific contractual rights substantially to participate in or influence the conduct of management of the entity.