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Advice You - Differences Between LLCs and S-Corps
The most common decision for smaller start up companies is whether to form a LLC or corporation with a "s election". Both entities have many similarities such as limited liability protection of personal assets against lawsuits and debts. However,
According to USFDA, a combination product is one composed of any combination of a drug and device; biological product and device; drug and biological product
there are several differences, especially in regards to taxation. Although there is a lot of information regarding s-corporations and LLC's in general, there is very little available that breaks down the important differences. Below I have summa
; or drug, device, and biological product and fixed dose combination would include two or more combinations of drug.
Examples of combination products may in
Examples of combination products may in
ized the major characteristics and issues associated with each entity:
I. S-Corporation
A. Liability
1. Shareholders granted personal protection from debts and liabilities of business (like c-corp and LLC)
B. Taxation
1. Pass thr
I. S-Corporation
A. Liability
1. Shareholders granted personal protection from debts and liabilities of business (like c-corp and LLC)
B. Taxation
1. Pass thr
lude drug-coated devices, drugs packaged with delivery devices in medical kits, and drugs and devices packaged separately but intended to be used together.
ugh: Profits and losses pass through the corp and reported to the individual tax return of shareholder (same as partnership and LLC)
2. Self-Employment Tax Break: Profits of the S-Corp which pass through to the shareholders are not subject t
2. Self-Employment Tax Break: Profits of the S-Corp which pass through to the shareholders are not subject t
here is enormous increase in the number of combination products entering the market in the recent years. Combination products have proven advantages but fixe
o self-employment tax (Social Security and Medicare which is approximately 15%). Rather, self-employment is only taxed on the portion classified as a "reasonable salary". LLCs and sole-proprietorships must pay self-employment tax on all income. T
d dose combinations are still in the process of convincing regulatory authority on their advantages over the single ingredient formulations.
Combination pro
Combination pro
e ability to minimize self-employment tax is deemed to be one of the greatest benefits of a s-corporation.
3. Corporate Losses: losses in the corporation can be deducted from the individual tax returns of the shareholder thereby allowing the
3. Corporate Losses: losses in the corporation can be deducted from the individual tax returns of the shareholder thereby allowing the
ucts have become life saving products for the pharmaceutical companies who doesn’t have many innovative molecules in their product pipeline and have been inc
to offset other sources of income such as their W-2 income.
4. Franchise Tax: Franchise Tax is waived your first year. LLC on the other hand, must pay franchise tax its first year. S-Corp must pay the CA Franchise Tax board either a 1.5% ta
4. Franchise Tax: Franchise Tax is waived your first year. LLC on the other hand, must pay franchise tax its first year. S-Corp must pay the CA Franchise Tax board either a 1.5% ta
easingly used in the product life cycle management. Even the companies having product patents are trying to extend their product life cycle through the combi
x on net CA income or $800, whichever is greater.
5. Distribution of Profits and Losses: No special allocation of profit and losses for shareholders. Corporate profits and losses must be split up proportionately to the percentage of shares
5. Distribution of Profits and Losses: No special allocation of profit and losses for shareholders. Corporate profits and losses must be split up proportionately to the percentage of shares
nation products and maximize the revenues. But the companies involved in this practice are overlooking that they are burdening the patients both economically
wned by each shareholder. LLC’s on the otherhand allow for flexibility as to how they split their profits and losses.
C. Formalities
1. Must file an S-Corporation annual income tax return each year (IRS Form 1120S)
2. Must file ann
C. Formalities
1. Must file an S-Corporation annual income tax return each year (IRS Form 1120S)
2. Must file ann
and physically. They need to rightly judge the benefits of the combination products and they have to even look at the risks involved when combining the produ
al report with Secretary of State, and a reporting fee of $25 and a statement of information are required 90 days after formation.
3. Must maintain corporate formalities such as: Drafting Bylaws, Minutes, Annual Meetings, issuance of stock,
3. Must maintain corporate formalities such as: Drafting Bylaws, Minutes, Annual Meetings, issuance of stock,
ts. Some of the combination products were well accepted by physicians while others suffered. Companies involved in development of combination products are fi
o keep a paper a trail of financial dealings between the corporation and its shareholders, and to avoid “piercing of the corporate veil.”
D. Other Characteristics
1. No more than 100 shareholders
2. Shareholders must be US citizens
D. Other Characteristics
1. No more than 100 shareholders
2. Shareholders must be US citizens
ding difficulty in defining their combination products and facing various challenges from selecting a combination to marketing it.
Following aspects would a
Following aspects would a
or have US residency status
3. Shareholders must be individuals (not corporations or partnerships)
4. Only one class of stock (but different voting rights permitted, and same rights to participate in dividends and sale of assets)
3. Shareholders must be individuals (not corporations or partnerships)
4. Only one class of stock (but different voting rights permitted, and same rights to participate in dividends and sale of assets)
dd to the challenges in developing combination products:
Which markets to tap where the combination products can do fairly well?
Which combination prod
Which markets to tap where the combination products can do fairly well?
Which combination prod
. Owners are called “shareholders”
II. LLC
A. Liability: shareholders granted personal protection from debts and liabilities of business (like s and c-corp)
B. Taxation
1. Pass through: Profits and losses pass through the LLC
II. LLC
A. Liability: shareholders granted personal protection from debts and liabilities of business (like s and c-corp)
B. Taxation
1. Pass through: Profits and losses pass through the LLC
cts are meaningful and rational?
Which therapeutic categories to select?
Which Combinations can address unmet needs of the patients?
Do combin
Which therapeutic categories to select?
Which Combinations can address unmet needs of the patients?
Do combin
nd reported to the individual tax return of shareholder (same as partnership and Corps)
2. Self-Employment Tax: LLC members must pay self-employment tax on all income from the LLC.
3. LLC Losses: losses in the LLC can be deducted from
2. Self-Employment Tax: LLC members must pay self-employment tax on all income from the LLC.
3. LLC Losses: losses in the LLC can be deducted from
tions increase the patient compliance?
What would be the developing cost?
How to tackle the risks encountered during combination product developmen
What would be the developing cost?
How to tackle the risks encountered during combination product developmen
the individual tax returns of the member thereby allowing them to offset other sources of income such as their W-2 income.
4. Franchise Tax: Must pay first year minimum annual tax of $800, and is due 75 days after formation and every year t
4. Franchise Tax: Must pay first year minimum annual tax of $800, and is due 75 days after formation and every year t
t?
As combination products don't fit into the traditional categories of drugs, medical devices, or biological products, the USFDA is in the process of devel
As combination products don't fit into the traditional categories of drugs, medical devices, or biological products, the USFDA is in the process of devel
ereafter. Annual franchise tax is greater if total reported income is greater than $250,000. See http://www.ftb.ca.gov/forms/06_forms/06_3522.pdf.
5. Distribution of Profits and Losses: It is flexible since an LLC allows you to decide what
5. Distribution of Profits and Losses: It is flexible since an LLC allows you to decide what
ping new procedures for reviewing their safety, efficacy and quality.
Professional from academic institutions, pharmaceutical industries, health care indust
Professional from academic institutions, pharmaceutical industries, health care indust
hare of the LLC profits and losses each owner will receive.
C. Formalities
1. Very little formalities required. Operating agreement is recommended, annual meetings not required.
2. A reporting fee of $25 and a statement of informat
C. Formalities
1. Very little formalities required. Operating agreement is recommended, annual meetings not required.
2. A reporting fee of $25 and a statement of informat
y and representatives from various regulatory agencies are working out to design the regulatory requirements for manufacture and sale of combination products
ion are required 90 days after formation and then every two years.
D. Other Characteristics
1. Licensed professional in California must form a Professional Corporation instead.
2. Owners are called “members”
3. Members may be
D. Other Characteristics
1. Licensed professional in California must form a Professional Corporation instead.
2. Owners are called “members”
3. Members may be
.
As there is an increasing trend of the combination products companies manufacturing such products should be able to tackle the problems involved in the de
As there is an increasing trend of the combination products companies manufacturing such products should be able to tackle the problems involved in the de
ndividuals or separate legal entity such as a corporation.
4. Member’s investment receives a percentage ownership interest in return.
Percentage ownership determines how profit and losses are split up.
© 2006 Michael N. Cohen, Esq.
4. Member’s investment receives a percentage ownership interest in return.
Percentage ownership determines how profit and losses are split up.
© 2006 Michael N. Cohen, Esq.
elopment. They need to be wiser in analyzing the market trends and the regulatory requirements.
Companies that provide selfless information through particip
Companies that provide selfless information through particip
This article is not intended as a substitute for legal advice. The specific facts that apply to your matter may make the outcome different than would be anticipated by you. You should consult with an attorney familiar with the issues and the laws
tion in industry events and feedback to regulatory authorities would be able to face the challenges and will be successful in developing combination products
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