Often one of the first steps in the commercialization or exploitation of Intellectual Property is the formation of a business entity. The selection of an appropriate business entity includes consideration of many factors, including the business goals, participants, and risk issues. Examples of business entities are corporations, partnerships, limited liability companies, sole proprietorships and charities. These are legally established organizations with the purpose of distributing goods and services to others.
A Corporation (Corporation, Corp., Inc.) is the most common form of business entity created under the authority of the laws of the state of California. Corporations are owned by stockholders and provide these individuals a way to run a business and share in its profits and losses, without holding that individual personally responsible for its losses or debts. The corporation is a separate legal entity and is liable for its own debts and losses. Corporations can sue and be sued but the shareholders are only financially responsible up to the value of their interest in the company. Shareholders in the corporation can sell or transfer their shares at any time and the corporation will still exist.
A Limited Liability Company (LLC) is a popular type of business structure which combines some of the beneficial elements of corporate and partnership structures. While it has many advantages of a corporation, the owners of a LLC are members as opposed to shareholders of the LLC or partners. These members are protected from dual taxation and are allowed to split the tax benefits and profits of the LLC any way they choose.
A Partnership is a type of business entity in which two or more persons combine their property, knowledge or activities for the purpose of generating and sharing the profit for their business. They are collectively responsible for all debts and liabilities in connection with the business. There are partnerships that can be formed to include limited liabilities for partners; however, there must always be a general partner that is ultimately liable for the activities of the partnership.
A Sole Proprietorship is a business entity in which one individual is responsible for the profits and losses of the business. There is no legal distinction between the owner and the business, therefore, the individual has unlimited liability. It is the oldest and most common form of business organization and is not subject to as much state or federal control as other business entities.
A Joint Venture is when two people or businesses join together for the purpose of sharing their ideas and profits in order to generate more revenue for their businesses, but there is no transfer of ownership in the transaction. Both parties have joint control over the business once they have contractually partnered together, and both typically share the same interests as well as profits and losses.
Mergers are the combinations of two companies to form a new company. This happens by one company acquiring the others assets, liabilities and profits of the other, causing the acquired company to cease to exist. There are several variations of mergers, for example, a “horizontal merger” occurs when two companies that are in direct competition and share the same products and target markets merge, and a “vertical merger” typically occurs between a customer and company or a supplier and company. Vertical mergers deal with the chain of distribution either toward the source of materials or to the consumer. Also, while not as popular, a “market extension merger” occurs when two companies that sell the same product in different markets merge together, and a “product extension merger” occurs when two companies that sell different but related products in the same market merge together. “Conglomeration” is when two distinct companies merge that have no common or related business areas.
Acquisitions are the purchase of one company by another without a new company being formed. They are only slightly different from mergers; during an acquisition, there is no exchange of stock or consolidation as a new company. Instead, the acquiring company purchases the acquisition in its entirety and absorbs it into its own business. This is often done by companies that have identified a need (market share, manufacturing capacity, materials sources, etc.) in their business, and acquire a company that has that specific needed capability.
Venture Capital Financing is generally considered to include an investment in a start-up business by an unrelated financing entity. It is a type of financing that may include an investment of private equity capital known as seed funding, intermediate funding, known as bridge funding, and may take place over several rounds of funding. Money for business can be generated through personal loans, bank loans or private investors, sometimes known as angel investors. These angel investors use their own capital to invest in a business venture, with an anticipated return on the investment.
The identification of suitable capital partners and the accurate valuations of the business are critical to a successful round of venture capital financing. Being well informed of the options for securing additional funding, and the risks and costs associated with that funding, allow a growing company to make the most prudent decisions.
For more information on the selection of a business entity, or the evaluation of potential mergers, acquisitions, or venture capital financing, please contact our office.