What Are Platform Companies and Why Are They Using LLCs?

By Larry Wittenberg and Ryan Sansom

With the launch of our new LLC incorporation offering on the Founders Workbench Document Driver, there’s a trend we’re seeing that may be of interest to founders: platform companies using LLCs in a holding company structure, particularly in the biotechnology industry.

Platform companies, rather than developing a single product, drug or device, are focused on creation of broad technology platforms from which a number of separate drugs, devices or products could grow.

Use of LLCs in a holding company structure is becoming increasingly common among early stage companies that see the potential for their businesses to turn into platform companies, and where capital requirements indicate that VC funds are likely to be among the company’s future backers. Many biotechnology companies fit this criterion.

In these businesses, the lead product candidate is often the one most valued by potential acquirers in a liquidity transaction. So, the company’s investors might seek to sell the high-valued lead product candidate, but retain the rest of the intellectual property and even re-invest the proceeds of the lead product sale into developing other products. While this could be easily accomplished by keeping the entire company as an LLC, for various reasons, many venture capital funds can’t or won’t invest directly in a simple LLC.

When companies foresee this type of situation, some are opting to maintain the intellectual property assets for each product in separate subsidiary C-corporations owned by a parent LLC, known as a holding company structure.

Like many other entity decisions, the main case for using a holding company structure is driven by tax considerations. In many types of liquidity transactions, founders and investors using LLCs can take advantage of more favorable tax treatments than those available to a standard C-corporation.

One simple example of these advantages is that the proceeds from selling a subsidiary corporation can pass through the LLC to its members without triggering corporate taxes. Based on the specific facts of the assets and the liquidity transaction, there may be other advantages as well.

While the potential tax advantages are noteworthy, there are a number of requirements for such a structure to work. Not the least of these is the requirement that the intellectual property assets must be able to be segregated along product lines and that this step must take place before value is created. In addition, an LLC holding company structure can be far more expensive to set up and maintain than a traditional corporation.

As with any corporate structure, the devil is in the details and discussion with a trusted tax and legal adviser is a must when considering the pros and cons of this structure for a start up business.

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