Part 2: a. Choose your structure and management role
Choose a business model. Most startups choose the corporation structure eventually. Ownership structure possibilities include: [Expand/Collapse]
- Sole proprietorships – A business that does not exist separately from its owner. Income and losses are reported on the owner’s personal tax return. This is not a good choice for raising money or protection from liability and so is not often used for startups.
- General partnerships – Two or more individuals share management and profits. They may protect you from debts and actions of your partners. You pay personal income tax on profits. Partnerships are not often used for startups.
- Limited liability companies – LLC’s offer the advantage of partnerships and corporations by protecting personal assets from liability while passing profits and losses to your personal income tax, avoiding corporate tax rates. LLCs are often used for startups, especially initially.
- Corporations are separate, legal entities owned by their shareholders and guided by a board of directors. Corporations offer the strongest protection from personal liability but cost more to form than other business structures. The most common type of corporation for startups is:
- S corp – Allows the protection of limited liability, but profits and losses pass to the owners, which avoids corporate tax rates. There are some limitations on stockholders and class of stock issued.
Decide what role you will play and who will be founders and key personnel. Potential role choices include:
- Founder: After founding the company, you would hire someone to develop the product and run the business. This would free you up to continue a research or academic career or to start another company.
- Chief Investigator/Chief Science Officer (CSO): As CSO, you would partner with a business-oriented CEO. This would allow you to have ongoing participation in the product’s scientific development. You could be a CSO part-time and also remain in academia.
- Founder and Executive Officer (Chief Executive Officer (CEO), Chief Operations Officer (COO), or Chief Financial Officer (CFO)) You could choose to focus on the business aspect and leave the science to others.
- More than one role. This can be demanding if you do it simultaneously but is more feasible if done sequentially.
Alternative: Licensing your invention to an existing business is an alternative to starting a business yourself
Decide on equity distribution. – Work out these details early and work with a lawyer. Plan carefully, so that you are left with some equity, despite dilutions.
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- Invest in a corporate lawyer rather than using a less costly one who specializes in something else.
- Your business structure may affect what taxes you will owe.
- You may switch your business structure later to gain the advantages of a different structure.