Startup success does not happen overnight. It is a lengthy process that requires cohesion between your groundbreaking idea, passion and entrepreneurial spirit. This process involves selecting the business entity type best suited for you and your innovation.
Not sure which entity is right for your biotech startup? Here is a list of the ones commonly used by life sciences companies.
Limited Liability Company (LLC) offers the best of both worlds
LLC is the most popular choice for startups, including those in biotech, because it is easy to form. It offers limited liability protection, which protects your personal assets from business debts. It also allows you to enjoy the tax benefits of a pass-through entity (a legal business structure not subject to corporate income tax because it passes profits onto the owner), which means you avoid double taxation. Double taxation is when the company pays corporate income tax on its profits and the shareholders pay personal tax on dividends received.
However, institutional investors often prefer to avoid the pass-through of income or losses. LLCs may not be ideal if you plan to raise large amounts of capital through venture funding.
C corporation is a go-to for capital investment seekers
C corps also provide owners with liability protection. These have separate ownership (shareholders) and management, which is attractive to institutional investors. C corps can also issue different classes of stock and retain profits for reinvestment without incurring double taxation on those retained earnings.
The potential drawback if you are an early-stage startup is double taxation. Moreover, it has stricter governance formalities and regulations.
S corporation is a hybrid approach
S corps aim to offer some benefits of both LLCs and C Corps, so these are another popular option for biotech startups. Like LLCs, S corps avoid double taxation by being pass-through entities.
On the downside, you cannot have more than 100 shareholders and a shareholder cannot be a corporation, partnership or non-resident alien in the U.S. This means you cannot go public, so you will have limited capital generation abilities. The qualifications for this one can be complex and may only be suitable for some biotech startups.
The right entity depends on your situation
Every innovation has its unique business needs. Do you have funding goals? Which is more attractive to you, the pass-through benefits of LLCs or the retained earnings of C corps? Does your ownership structure involve multiple investors? How much flexibility do you need to manage your company?
An experienced life sciences lawyer can help you navigate the intricacies of U.S. life science laws and regulations as you lay the groundwork for your innovative venture.