A friend of yours is a biotech scientist who is developing a method of cloning c
ID: 445302 • Letter: A
Question
A friend of yours is a biotech scientist who is developing a method of cloning certain antibodies. You have estimated that if the proceeds can be patented, it would be worth $10 million per year in royalties if licensed to major firms. The cost of finishing the research is $5 million, one-half of which is for equipment and one-half scientists salaries. You can finance the deal yourself by bank borrowing at 15%, or, acting through a broker, find wealthy investors would put up equity. Due to risk considerations, they would probably expect 3:1 returns. Some of these investors would probably want some management control. You estimate that there is an 80% probability of success, with two years of R&D necessary before revenues would commence. What legal entity choice might be appropriate? How should it be structured? How might it evolve over time?
Explanation / Answer
When you start a business, you must decide whether it will be a sole proprietorship, partnership, corporation, or limited liability company (LLC). Since my friend is a biotech scientist who is developing a method of cloning certain antibodies and is planning for patenting his work this requires huge funds therefore it is better for him if he would start as a limited liability company .
At the start up stage he might require to fulfill certain formalities which are legal and time consuming but in the long run it will be beneficial for him to carry on his idea is worth investing.The main benefit of an LLC or a corporation is that these structures limit the owners' personal liability for business debts and court judgments against the business.
What sets the corporation apart from all other types of businesses is that a corporation is an independent legal and tax entity, separate from the people who own, control and manage it. Because of this separate status, the owners of a corporation don't use their personal tax returns to pay tax on corporate profits -- the corporation itself pays these taxes. Owners pay personal income tax only on money they draw from the corporation in the form of salaries, bonuses, and the like.
Like corporations, LLCs provide limited personal liability for business debts and claims. But when it comes to taxes, LLCs are more like partnerships: the owners of an LLC pay taxes on their shares of the business income on their personal tax returns.
When decided to create a corporation, following task needs to be performed step by step :
Changes can be made at the later stage depending on the requirement such a new directors can be added or reduced as required , issues bond or shares employment opportunities can be created.