AIF as Trust vs LLP vs Company: Choosing the Right Vehicle

The SEBI (Alternative Investment Funds) Regulations, 2012 let an AIF be set up as a trust, a company, a limited liability partnership or a body corporate. In practice almost every Indian AIF is a trust, and there are good reasons for that. But the choice is not automatic. The vehicle decides how investors come in and go out, how much filing the fund does and, for a Category III fund, how much tax it pays.

This note compares the three common vehicles on the points that matter in practice. It is general guidance: confirm the choice with counsel and your tax adviser for your actual investor mix.

Why most Indian AIFs are trusts

A trust is settled under the Indian Trusts Act, 1882, usually with the sponsor as settlor and a professional trustee company as trustee. The trustee appoints the manager under an investment management agreement, and investors sign contribution agreements and receive units. The fund's terms live in the trust deed, the PPM and those agreements, all private documents.

The practical advantages are flexibility and privacy. Investors can be admitted or exit without any filing with the Ministry of Corporate Affairs, drawdowns and distributions follow the contribution agreement, and the fund has none of the company-law machinery of share capital, board meetings and statutory registers. The professional trustee's fees are a cost, but they buy an independent governance layer that institutional investors expect.

For tax, a trust-form Category I or II AIF gets pass-through under Section 115UB. For Category III, the trust should be drafted as a determinate trust, with each investor's share clearly ascertainable, because an indeterminate trust risks tax at the maximum marginal rate.

The LLP route: familiar, but heavier than it looks

An LLP under the Limited Liability Partnership Act, 2008 is familiar to many sponsors because it is a common vehicle for the manager. As the fund vehicle it is less common. Every investor becomes a partner, so each admission or exit needs a change to the LLP agreement and filings with the Registrar, and the partner list moves every time a unit holder changes.

A Category I or II LLP still gets pass-through, because Section 115UB applies whatever the legal form of the fund. A Category III LLP is taxed as a firm, which can be better or worse than a trust depending on the income mix. There is also less market practice with LLP-form AIFs, which matters when institutional investors run their own diligence.

The company route: rarely the right answer

A company-form AIF is possible but rarely used. Raising money means a private placement under Section 42 of the Companies Act, 2013, which limits an offer to 200 persons in a financial year, with some exclusions, and returning capital means a buyback or a capital reduction instead of a simple redemption of units.

Tax is the bigger problem for Category III. The company pays corporate tax on its income, and distributions are taxed again in investors' hands as dividends, so the same profit is taxed twice. For Category I and II, pass-through under Section 115UB still applies, but the corporate-law friction usually outweighs any benefit.

The FEMA angle: who owns and controls the sponsor and manager

Vehicle choice interacts with foreign exchange rules. Under the FEMA non-debt instrument rules, an AIF's downstream investment counts as foreign investment if the sponsor, the manager or the investment manager is not owned and controlled by resident Indian citizens, or is owned or controlled by persons resident outside India. The share of foreign money in the fund's corpus is not the test.

That has real consequences. A fund whose downstream investments count as foreign investment must respect sectoral caps, entry routes, pricing rules and reporting for each portfolio company, which can rule out some deals. If the plan brings in a foreign co-sponsor or a foreign-owned manager, test this before the trust deed is signed.

Side by side

If most of your investors will be foreign, a fund in GIFT City under the International Financial Services Centres Authority framework is a separate route with its own rules and tax regime. That is a different comparison, worth running before you commit to an onshore vehicle.

For an onshore fund, the comparison below is a starting point. Each point can change, because tax law and SEBI circulars both change.

• Investor entry and exit: trust, by contribution agreement and unit issue or redemption; LLP, by partner admission and Registrar filings; company, by share allotment, transfer or buyback.
• Filings for the vehicle itself: trust, little beyond SEBI and tax; LLP, Registrar filings on every partner change; company, full Companies Act compliance.
• Category I and II tax: pass-through under Section 115UB for all three forms.
• Category III tax: trust, taxed through the trustee as a representative assessee, with determinacy critical; LLP, taxed as a firm; company, corporate tax plus tax on dividends.
• Market familiarity: trust, standard; LLP, uncommon; company, rare.

How to decide

For most Category I and II funds raising from Indian investors, the trust is the default, and the effort should go into drafting it well: clear unit classes, drawdown and default mechanics, determinate beneficial interests, and trustee powers that match what the PPM promises.

Consider an LLP or a company only for a specific reason, such as a sponsor group that needs a particular governance model, or a tax result modelled and confirmed by your tax adviser for your actual investors. The Income-tax Act, 2025 replaces the 1961 Act from 1 April 2026, so section references are changing; map each provision you rely on to the new Act.

Frequently asked questions

Which structure do most AIFs in India use?

The trust. It is flexible on investor entry and exit, keeps fund terms in private documents and is what investors, trustees and SEBI see most often. LLP and company forms are permitted but uncommon.

Does pass-through tax depend on the AIF being a trust?

No. Section 115UB pass-through for Category I and II funds applies whether the fund is a trust, a company or an LLP. The legal form matters far more for Category III funds, which are taxed at the fund level.

What is a determinate trust, and why does it matter for a Category III AIF?

It is a trust where each beneficiary's share is known and ascertainable from the deed. Determinacy supports taxing the trustee in the same way as the beneficiaries instead of automatically at the maximum marginal rate, although business income can still attract that rate. The drafting of the trust deed decides it.

Can foreign investors invest in a trust-form AIF?

Yes. AIFs can take foreign investment under the FEMA rules for investment vehicles, with Form InVi reporting on unit issues. What needs checking is whether the fund's own downstream investments will count as foreign investment, which turns on who owns and controls the sponsor and manager.

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