Necessary legal entities for the Search Fund

intermediary profile

December 10, 2018

by an intermediary from University of California, Los Angeles - UCLA Anderson School of Management in Alpine, UT 84004, USA

Can someone help me understand the various legal entities that need to be created before starting my search fund efforts?

I wanted to quickly set up an LLC to run my MBA expenses through and then want to use it later as my search fund entity. Any conflicts doing that?

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commentor profile
Reply by an investor
from University of California, Berkeley in Moorestown, NJ 08057, USA
I have a feeling this comment may spark controversy, and I must agree with the above commenter that you should seek your own tax advice from an accountant, but having owned multiple businesses and having consulted with an accountant about my search, my accountant has instructed me that there is no *tax* or *financial* reason you need a LLC to conduct a search ***if you are self-funding your search***.

LLC's are "pass-through entities" meaning that for tax purposes, all revenue and expenses pass straight through to your personal tax return. In the eyes of the IRS there is no difference. You can run your search under your own name and claim expenses on your 1040 and save the legal fees associated with setting up a company until you are ready to set one up for your acquisition.

The main reason for LLC's is for legal protection.. As an LLC, anyone who does business with you is limited in how much they can claim against you based on the assets of the LLC. Hence the name "Limited Liability Company".

If you are raising a search fund, your investors will probably require that you set up a LLC to protect them against any claims that may result. So all of the BS I've typed above is null and void in that case.

Also, if you name your LLC "XYZ Capital" or "XYZ Investment Partners", business brokers will assume you are a Private Equity fund and may send you listings that they wouldn't send an individual. Unsophisticated sellers may also be impressed by a fancy company name.

Lastly, if you do set up a LLC, spend a few extra bucks and have a good attorney help you, unless you've done so many that you are familiar with how to set up an operating agreement and keep company records. Your lawyer can also act as the registered agent for your LLC.
commentor profile
Reply by a searcher
from University of Delaware in Philadelphia, PA, USA
Jordan,

I would suggest consulting with a accountant.

Anecdotally, the approach you are suggesting is in fact how my fund is structured. It is an LLC during the search and we will re-evaluate the structure of the firm when we formalize our first transaction. There are too many unknowns... (i.e. the state of the company, the type of purchase, etc.)

I hope this help.

Ross
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