Whether / when to form an LLC for a part-time search
May 29, 2023
by a searcher from Harvard University - Harvard Business School in New York, NY, USA
Hey all,
I'm beginning to spin up a part-time, self-funded search. I understand that an LLC is fairly typical - but is there any advice on whether it's that helpful for a part-time search? If so, is this something that's important to start right away?
I'm planning to keep expenses fairly low to start. Also, there seems to be mixed advice on starting an LLC in DE or your home state - I'm based in NY in case that makes a difference.
Thanks all!
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
I will say from a lending perspective there is no need to set one up until you have a deal under LOI, a loan commitment, and are moving towards a closing.
Some individuals I think like using an entity for when they issue their LOI. However, I see plenty of transactions where the LOI is in a buyers name personally with the option to assign it to an entity at a later date. I think it is a matter of preference.
I am not expert on this, so again you should talk to your accountant, but I know some entities cannot really own other entities, which I believe is the case with corporations. If I am correct on this, if you do a corporation as an example and are buying 100% of another corporation, I think you are forced to collapse the two together, meaning one corporation cannot own 100% of another corporation and operate separately. So you want to be sure whatever entity you set up works for the situation you are envisioning. If you need to keep the operating entity in tact, then you want to be sure you are buying the stock or membership interest of that entity with the right type of entity.. I hope this helps. Good luck.
from Villanova University in West Chester, PA, USA
It depends on your risk tolerance - an LLC will protect you from liability. While not necessary when entering into NDA's and LOI's, it is highly recommended to have an entity enter into those documents to protect you from risk in the event of claims made by the other party (which may be made whether they are rightfully or wrongfully). The vast majority of the M&A industry has an entity for this purpose because the cost is minimal and the downside of not having one if an issue were to occur is significant. In addition, you will need an entity at some point, so having one from the outset utilizes that investment to the greatest extent possible to achieve the greatest ROI.
We have worked with dozens of searchers in various aspects of their search, and I have a guide on the different entity types and pros and cons on my website. We would discuss the right entity type for your needs and goals and form the entity for you or, if you would prefer, we have DIY cost effective solution to help searchers form an LLC on their own. I'd be happy to discuss this further.