Spring 2012 issue of Horizons

Life Sciences

Companies in the life sciences industry face a variety of issues, especially during their “early stage” years. In particular, these companies will find that determining the appropriate entity structure is an important decision to make based on their overall investment and business strategy goals. Entity Considerations for the Life Science Start-Up By Steve Hays, CPA & Dan Raskas, CM&AA

Entity structure options include:

• Sole Proprietorship • Partnership • Limited Partnership

• Limited Liability Company (LLC) • S Corporation • C Corporation

The following contrasts the advantages and disadvantages of each:

Entity Structure Comparison

Issue/Entity

Sole Proprietorship Partnership

LLC

S Corporation

C Corporation

Company is liable, except for withholding taxes and personal guarantees.

Corporation is liable, except for withholding taxes and personal guarantees.

Corporation is liable, except for withholding taxes and personal guarantees.

Liability

Owners can be 100% liable.

Partners generally 100% liable (joint and severable liability) - General – General partner can be 100% liable - Limited – Limited partners generally liable only to the extent of their investments.

Number of Owners

One

Need at least two partners

Requires a minimum of a single member

Limited to 100 shareholders (spouses are treated as one shareholder). One class of stock only, with many limitations on the types of shareholders (trusts, corporations, etc.). Cannot have non-U.S. residents as shareholders. Yes, but stock ownership must be monitored. Also may be limited by a buy/ sell agreement.

Unlimited

Classes of Owners

N/A

May be a general or limited partnership

Several classes – Common (stock) or Preferred

May have several classes of owners – Common (stock) or Preferred

Transfer of Interest

Assets sold

Generally, no. May be limited by buy/sell provisions in partnership agreement or separate agreement.

Generally, no. May be limited by buy/ sell agreement of other agreement. Consult with tax advisor.

Yes

Stock Options

No

No

Yes

Yes

There is no standard answer to which entity structure is best for your startup. As described in the table above, each entity type contains unique characteristics and can only be selected after considering how each aligns with your strategy for the company.

Information gleaned from: Nolan & Associates

www.rubinbrown.com

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