Business structures are legally recognized organizations. A major reason to form a business entity is to protect your personal assets as owner of the business from liabilities of the business. Common business structures include the following with LLC and Corporation (especially S corp) being the entities most often used for biotech startups:
Sole proprietorship
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.
Partnership
A business with two or more individuals sharing management and profits. Limited liability partnerships protect the partners from debts and actions of other partners; you do pay personal income tax on the profits. Partnerships are not often used for startups.
*Limited liability company (LLC)
A business with the advantage of both partnership and corporation by protecting your personal assets from liability while passing profits and losses to your personal income tax, avoiding corporate tax rates. It is often used for startups, including biotech startups and offers flexibility via a number of options.
*Corporation
A business that is a separate, legal entity owned by its shareholders and guided by a board of directors. Corporations offer the strongest protection from personal liability but cost more to form. Types of corporations include:
- C corp – A basic corporation, that pays income taxes on its profits and is responsible for its actions and debts. It allows for raising money through selling shares and is attractive to investors.
- *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 number and state of residence of stockholders and class of stock issued. This is a popular choice for startups.
- B corp – A benefit corporation is committed to social, environmental , and financial results which may have associated legal and tax benefits.
- Nonprofit corporation – Serves some public purpose without profit being the purpose of the business, so it gets special legal treatment and limits how profits can be used.
- Close corporation – Similar to a B corp, but has less corporate structure. It is run by a small group of shareholders rather than a board of directors.
*=most common for biostartups
Tips:
- Invest in a corporate lawyer rather than using a less costly one who specializes in something else.
- An LLC or an S corp can be later converted to a C corp, which may offer advantages for attracting venture capital.
FYI: Your business structure may affect what taxes you will owe.
Resources on Business Structure
Read more on types of business structure on Entrepreneur.com:
Choose a Business Structure – U.S. Small Business Administration
Choice of Entity for Biotech Startups – Describes what is unique, protections, taxations, and drawbacks for each structure, by Sandiego Corporate Law
Choose what’s right for your business. Compares LLC, Doing Business As, and Incorporation (S or C corp) in terms of unique characteristics of each, cost, protections and taxation, drawbacks, liabilities. by LegalZoom.
NIA and NHLBI Entrepreneur Workshop Series: Corporate Governance and Management – Covers creating a governing framework and process, including incorporation options and board of directors. 24 minute video.
