C-Corp vs. LLC for Search Fund Structure?

searcher profile

June 30, 2025

by a searcher from The University of Arizona - Eller College of Management in Phoenix, AZ, USA

I’m in the process of finalizing the legal structure for my search fund and would appreciate input from investors and operators who have weighed this decision firsthand. I’m leaning toward a C-Corp structure given the potential QSBS benefits—particularly as I plan to pursue acquisitive growth and a 5+ year hold. However, I’m conscious of the downside of double taxation, especially if I intend to distribute earnings along the way. An LLC would offer pass-through efficiency and greater flexibility in returning capital during the hold period, but it comes with tradeoffs—namely the loss of QSBS eligibility and some administrative complexity around capital accounts and distributions. For those who’ve made this decision: How did you weigh interim tax efficiency against long-term QSBS potential? Have your investors had strong preferences one way or another? For those who chose C-Corp, did you simply plan to reinvest earnings and avoid dividends altogether? Open to any perspectives—especially from those who’ve seen the implications play out over time.
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commentor profile
Reply by an investor
from Harvard University in 150 Washington Ave #201, Santa Fe, NM 87501, USA
Form the fund as an LLC taxed as a partnership. When you find an acquisition you can form a new wholly-owned subsidiary AcquireCo as a C, to try to qualify for QSBS if that makes sense at the time. New capital comes in to acquire QSBS stock via the partnership or directly to fund the acquisition. So, the original search capital is not QSBS, but the deal closing capital (the preponderance of the dollars) is. Seek tax advice from a good tax attorney, but I think this should work.
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Reply by a searcher
from Indiana University, Bloomington/Indianapolis in Chicago, IL, USA
I am utilizing a C-Corp for my transaction..... as a forced execution due to ROBS, but I have gotten comfortable over time that I probably prefer C-Corp anyway. The current corporate tax regime is decent (21%) and the QSBS benefits at exit far outweigh the "double taxation" for my transaction (IMO). Note, I am a self-funded searcher, no outside investors, and plan to own / operate this business for 5+ years. I also intend to reinvest in the business over time and not take large distributions, so I will focus on maximizing the value of the business over time and minimizing distributions along the way. Further, I'm married, filing w-2 income jointly, so I can have up to ~$290,000 Gross Income on a W-2 ($260k in AGI) and have a federal effective income tax rate of 21% (since we have a marginal tax bracket in the US###-###-#### so $290k is my point of indifference between Salary & Distributions because the federal income tax rate for a c-corp is currently 21% (the math changes if the the TCJA rates expire)
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