Limited Partners

Some studies suggest that the answer is  yes!  In a recent study, the Preqin Research Report Private Equity Investor Survey August 2009, many limited partners (LPs) investing in private equity funds reported that the balance of power in negotiations between the funds general partners (GPs) and the LP's had shifted in favor of the LPs.  In fact, according to the Preqin report, in April 2009, 27 percent of investors thought they had greater negotiating power.  Three months later, in July 2009, 55 percent of investors interviewed by Preqin believed they had greater negotiating power.

Why would that be?  Certainly, one of the reasons is that levels of LP investment have fallen significantly from previous years.  According to the Preqin report, private equity funds raised $194.5 billion in the first quarter of 2008, while they raised only $64 billion in the first quarter of 2009.  The GPs have to compete for the limited LP funds that are actually being invested now.  One of the ways to do that is to offer LPs more favorable terms.

So, cash-rich LPs appear to be returning to the market.  Private equity fundraising has already begun to improve in 2009.  According to the Preqin report, $79.7 billion was raised by private equity funds in the second quarter of 2009 as compared to $64 billion in the first quarter of 2009.

When you are choosing an entity there are a number factors you should consider.  For instance, you should think of how you would like to manage the business, protection against liability and your preferred tax treatment.  Below are brief descriptions of several business entities that may suit your needs and some of the advantages and disadvantages of choosing those entities.

Sole Proprietorship
The sole proprietorship is the simplest form of business.  A sole proprietorship is not an entity separate from you.  Though the sole proprietorship is a simple and convenient way to operate your business, you should beware, you will be exposed to unlimited personal liability if you operate your business as a sole proprietorship.  The owner of a sole proprietorship is directly and personally liable to creditors and other claimants. 

Corporate Entities

Corporation
A corporation is a business entity created under state law and is as an independent legal "person" apart from its shareholders and directors. A corporation's shareholders are generally not liable for the obligations of the corporation and are thus generally shielded from the corporation's creditors even if the corporation cannot pay its obligations.  Corporations must comply with statutory rules which are typically more restrictive and require considerably more formality than limited liability companies.

C Corporation
The distinction between a C Corporation and an S Corporation relates to the corporation's tax treatment.  Some of the advantages of a C Corporation are that ordinarily you may deduct the entire value of the fringe benefits offered to shareholders who also serve as employees, the number of shareholders the entity may have is unlimited and they may be either individuals, entities, U.S. residents or foreign.  C Corporations also have significant flexibility to carry corporate losses forward to future tax years.  But, operating as a C Corporation usually subjects you to double taxation, i.e., tax at two levels.  First, the net earnings of the corporation are taxed, and then, the shareholders will be taxed on the earnings of the corporation distributed to the shareholders.  For example, if a corporation issues dividends to its shareholders, it has already paid income tax on that money, but the dividends remain taxable as income to each shareholder. 

S Corporation
An S corporation is a regular corporation that has elected "S corporation" tax status. An S Corporation provides the limited liability of a corporation and the tax treatment of a partnership or a limited liability company.  With respect to non-tax considerations, the S corporation is essentially identical to a C Corporation.  The significant tax advantage with the S Corporation is that the corporation does not pay any income tax on its earnings.  Some disadvantages to an S Corporation are that only once class of stock is permitted and you must limit the shareholders to 100 individuals, none of which may be an entity (with the exception of estates and certain types of trusts) and none of which may be non-resident aliens.

Unincorporated Entities - Limited Liability Company
The limited liability company (LLC) has characteristics of both a corporation and a partnership. The primary characteristic an LLC shares with a corporation is limited liability, and the primary characteristic it shares with a partnership is the availability of "pass-through" income taxation.  Unlike a corporation, few of the LLC statutory rules are mandatory and most of its governance is dictated by an operating agreement executed by its members  The management powers in the LLC can be retained by the members of the LLC or centralized within a board of managers (who may or may not be members).  Another advantage of the LLC is that its flexibility allows for much less administrative paperwork and record keeping than a corporate structure.  Some disadvantages of an LLC are that some investors are more comfortable with a corporate structure (although this may only be an issue once the company is ready to take on significant investors and not in the early stages of your business) and some creditors may require that you, and other members, personally guarantee a loan to your LLC. 

Partnerships

General Partnership
In a general partnership, each partner has full and equal control over the partnership.  The partnership is a "pass through" entity for tax purposes.  While partners have considerable flexibility in structuring their relationship, partners run a great risk of loss because there is no limitation to a partner's liability.  Partners have joint and several liability for the acts of each partner within the scope of partnership business. 

Limited Partnership
Under a limited partnership (LP), unlike a general partnership, the limited partners are not responsible for partnership debts, obligations and liabilities.  An LP may have an unlimited number of limited partners, but must have at least one general partner who is responsible for the management of the partnership.  The general partner remains personally liable for partnership debts, obligations and liabilities, but the general partner can be a limited liability entity to add a layer of protection to the individuals managing it.  Like the general partnership, the LP is treated as a "pass-through" entity.  A disadvantage of the LP is that the limited partners must be careful not to become engaged in the decision making of the business or they will run the risk of losing limited liability protection. 

Limited Liability Partnership
A limited liability partnership (LLP) is a variation of the LP which allows a limitation of liability without the restriction on active participation required with an LP.  Under an LLP, partners remain liable for their own acts and are generally not liable for the acts of others, unless the partner has acted negligently or committed misconduct.  As with the general partnership and the LP, an LLP is treated as a "pass-through" entity for tax purposes.

Bottom Line:  There is no "one size fits all" answer to the choice of entity question.  You should give careful consideration to your needs and the needs of your business before settling on an entity.  Since the factors in consideration may be significant and the tax analysis complex, it may be wise to consult your tax advisor or an attorney to assist you in the decision process. 

The following blog was posted by Kristine Danz, a partner at Ice Miller LLP.

We can now officially relegate 2008 to the records books.  Wall Street took a beating unlike anything we've seen since the 1930s, we witnessed a historical presidential election and a bailout of an unfathomable magnitude.  Main Street felt the pinch as well with unemployment on the rise.  So what awaits us in 2009?

By all accounts, we're looking at a rough first quarter.  According to a survey by the National Venture Capital Association (NCVA), U.S. venture capitalists are forecasting a difficult 2009 for, "the country's economy, the capital markets, and the venture industry as the global financial crisis takes its toll on the entrepreneurial system." Other highlights, or rather lowlights include:

• Continued slowdown in the number of IPOs;
• Limited investments in seed and early stage investments;
• Difficulty in securing funding for newer companies;
• Declining returns for VCs.

And now for the good news.  Investments in clean technology, life sciences and biotechnology are expected to grow and debt markets will likely improve.

Like they say in the news business, we don't make the news, we just report it.

The following blog was posted by Jennifer Rhodes, a partner at Ice Miller LLP.

In our fourth in a series of life science distinguished speakers luncheons we were privileged to have Dr. Eric Meslin Ph.D., Director IU Center for Bioethics, Associate Dean (Bioethics), IU School of Medicine, Professor of Medicine, Medical and Molecular Genetics, and Philosophy.  The topic was “What In The World does Ethics Have To Do With Health Research.”  Dr. Meslin’s point was not just to talk about the world but the people who are working in it, on it, for it and with it.

Dr. Meslin started out by telling the group that there is much more research going on in the world involving a collaboration of researchers from different countries and cultures, but the problem then becomes, who is reviewing the research and what ethical guidelines apply.  There is also a lot more money than ever before.  Studies show that between 1998 and 2003, global expenditures on health research have quadrupled, to about $125 billion.  By 2000, 70% of all clinical trials were funded by the private sector.  It's not simply the federal government or the pharmaceutical industry, but there are also public and private players, including large philanthropic players.

And yet the shift in the epidemiology of diseases is happening in economically developing countries just like it's happening here.  People who live in developing countries are not just dying of malaria, TB or HIV.  They die of heart disease, cancer and diabetes just as people in developed countries such as the U.S. do.  He pointed out that drugs are still too expensive, despite the efforts of many in the healthcare industry that donate drugs and have humanitarian aid programs.  And still, the Global Forum on Health Research coined the phrase the “10/90 Gap” which means that of all of the dollars spent on research in the world only 10% is going to diseases that affect 90% of the world's population.

This begs the question which was Dr. Meslin’s topic of discussion, what in the world does ethics have to do with health research?  And the answer is: all studies involving human subjects must receive prior science and ethics review.  He went on to state that despite the increased investment in research and development and international philanthropy, there is still a demonstrable inequity in access to benefits of research.  Which led to his next big question, are there universal ethical principles that apply irrespective of country or culture?  Bioethics has been working on this question for quite some time.  There are 17 articles in the universal declaration on bioethics and human rights.  But what do you do when they conflict?  Which one takes precedence over the other?  And what is really meant by each of them?

Collaborative research not exclusively, but especially between economically developed and developing countries requires some common set of ethics guidelines or procedures.  Not feeling that there was a single set of ethical principles, Dr. Meslin and his international colleagues have written a memorandum of understanding that is the first of its kind to describe the common principles that will be followed in their research and guide those relationships and activities.  The guidelines address the following issues: Who may be asked for informed consent?  What procedures will be in place to prevent exploitation?  When is it acceptable to use a placebo?  Where else is it acceptable to conduct studies that can feasibly be carried out in one’s home country?  Why is research conducted on some groups and not others? And how should any benefits be distributed?

Despite the significance of the guidelines, Dr. Meslin emphasized that there was still work to be done in order to make this document live and work.  Simply stated, they had to figure out what its limitations were, and this is what they realized, not only do cultural differences have a real impact on how people think about ethical issues in different countries, but economically developing countries are not necessarily ethically developing countries. He made the point that we should not be thinking that just because a country's GDP is lower than ours, that the people who are in that country are any less concerned about ethics, are any less concerned about how to carry out ethically relevant research and ethically consistent research.  The question of ethics in healthcare research is an ongoing one and will always be.