Canadian Search Fund Legal Structures
November 01, 2018
by a searcher in Toronto, ON, Canada
This is a question for Canadian searchers, or those planning to search, in terms of how they navigated the legal structure of their search fund.
We do not have US style LLC's here which are the preferred vehicles in the US. However, setting up a corporation that is a GP in a Limited Partnership serves a similar function. Due to my previous experience in RE PE, I know how costly LPs are to setup and I don't see many searchers spending the 6 figures required to execute a proper LP. What is the typical legal structure in Canada for a search fund? Corp + LP, Corp (investors own restricted or common shares, etc)?
in Toronto, ON, Canada
A Canadian searcher ("Searcher") sets up a search fund as a Delaware LLC (the "Searchco") to raise search capital, primarily from US investors.
In turn, Searchco locates a Canadian business ("Canadianco") to acquire. Searchco raises the necessary equity through its LLC, and then acquires the ownership in the Canadianco.
Canadianco then hires the Searcher as a salaried CEO, who is incentivized through a vested equity schedule.
After 5-7yrs, when Canadianco is exited, the Searcher cashes in their vested equity as capital gains, and is taxed accordingly in Canada (as they're likely a Canadian resident) while the investors in the Delaware LLC are taxed in their jurisdiction since US LLCs have flow through properties.
From my understanding, the Searcher never owns equity in the deal and has an equity option tied to their vesting schedule on exit.
from Heriot in Toronto, ON, Canada