Fund Structure
Tax Distribution
A distribution from a fund to partners specifically to cover their tax liabilities from the fund's income, even if the fund hasn't made regular distributions.
Tax distributions are payments made by a fund to its partners (both GPs and LPs) to cover the tax obligations generated by the fund's activities. Since venture funds are typically structured as pass-through entities, partners owe taxes on their share of fund income even if no cash has been distributed. Tax distributions ensure partners aren't forced to pay taxes out of pocket on phantom income from unrealized gains.
In Practice
The fund had $20M in realized gains from a portfolio exit but hadn't yet made distributions. A tax distribution of $4M was made to LPs to cover their estimated tax liability on the pass-through income.
Why It Matters
Tax distributions are essential for LP liquidity planning. Without them, LPs would face tax bills on income they haven't actually received — a particularly painful situation for individual LPs or smaller institutions.
VC Beast Take
Tax distributions are one of those fund terms nobody thinks about until they need them. Then they become the most important provision in the LPA.
Related Concepts
Further Reading
What a Series A Process Actually Looks Like
The Series A is where fundraising gets real — partner meetings, deep diligence, and term sheet negotiations. Here's a realistic week-by-week breakdown of what to expect.
What Is a Special Purpose Vehicle (SPV) in Venture Capital?
How special purpose vehicles work in venture capital — SPV structure, economics, legal requirements, and when they make sense for angel syndicates, co-investments, and emerging managers.
LP vs GP: How Venture Capital Fund Structure Works
A clear explanation of how venture capital funds are structured, the roles of limited partners and general partners, fee economics, and how fund structure affects startup founders.
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