Business structures are legally recognized organizations. A major reason to form a business entity is to protect your personal assets as an owner of the business from the 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:
Limited Liability Company (LLC)
A business structure that protects your personal assets from liability while passing profits and losses to your personal income tax, which avoids corporate tax rates. It is often used for startups, including biotech startups, especially at the beginning. LLCs offer flexibility via a number of options having different rules. The most common is a Single Manager LLC, managed by one entrepreneur. There are also alternatives involving more than one manager, or Multi-Manager LLC. Be sure to look at the rules and tax implications of each option.
Corporation
A business structure that is a separate, legal entity owned by its shareholders and guided by a board of directors is a corporation. Corporations offer the strongest protection from personal liability but cost more to form. Types of corporations include the following:
- 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 the number and state of residence of stockholders and the class of stock issued. This is a popular choice for startups and the most common for bio 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.
Structures Less Commonly Used for 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.
Tips
- Invest in a corporate lawyer rather than using a less costly one who specializes in something else.
- You can convert an LLC or an S corp to a C corp later, which may offer advantages for attracting venture capital.
FYI: Your business structure may affect what taxes you will owe.
References:
Entrepreneur. Business Structure Terms | Small Business Encyclopedia. Entrepreneur. March 3, 2023.
Leonard MJL. Choice of Entity for Biotech Startups. San Diego Corporate Law. November 9, 2015.
SBA. Choose a business structure. Small Business Administration. Accessed: 3/6/2023.
Resources on Business Structure
Read more on types of business structures on Entrepreneur.com:
Choose a Business Structure – US Small Business Administration
Choice of Entity for Biotech Startups – Describes what is unique about, protections of, taxations for, and drawbacks of each structure, by San Diego 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, taxation, drawbacks, and 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.
