Developing and launching startups is exciting, but what most don’t think about is the administrative work it takes to get a venture off the ground. While there are tried and true methods for legally structuring a traditional startup (see infographic below), it’s unclear how one would go about legally structuring a Startup Studio.
A Startup Studio is a company that provides a cost-efficient and low-risk platform for building innovative new companies. These entities are run by experienced entrepreneurs and typically funded by early-stage Venture Capital firms. Some Studios take outside idea pitches and, if the internal team likes the idea, will bring new founders into the Studio to work on it (example: Human Ventures). Other Studios focus on innovating exclusively with their core team (example: Wilbur Labs).
Regardless of which approach a Studio takes, a legal structure needs to be in place to allow the Studio to launch and grow.
A Holding Company
A Startup Studio is an entity from which a variety of startups emerge. These startups are legally referred to as subsidiaries. The Studio exists to support the startup subsidiaries developed from within, but the Studio doesn’t run the startups once they’re created.
The above graphic illustrates the relationship between Studios and the startup ventures they create. The Studio is one single company and the startups are each individual ventures. The Studio, acting in this capacity, is called the “holding company” or the “parent” company.
The following information from Investopedia explains the key points to note about holding companies:
How To Legally Structure Your Studio
The most important aspect of any legal strategy is protection from liability. The second most important aspect is financial protection. You want to be sure that your holding company is legally separated from your startup ventures because if someone were to sue the startup you want to make sure they can’t come after your Studio.
Likewise, you want to ensure that your entire studio won’t go under if one of the startups fails. According to Investopedia, “if a subsidiary company goes bankrupt, the holding company may experience a capital loss and a decline in net worth. However, the bankrupt company’s creditors cannot legally pursue the holding company for remuneration.”
Creating multiple LLCs is the first way you could legally structure your Studio and the subsidiary startups that emerge from it. There is no limit to how many LLCs one holding company can form.
According to UpCouncil, “The advantage of this method is that it reduces the risk that each individual business has from the other. If one business gets sued, has a slump, or even goes under, it will not negatively affect the other businesses.”
The drawbacks of creating an LLC for each startup to come from the Studio is the amount of paperwork you’ll have to keep up with and the complicated tax issues you’ll have to deal with. You’ll be responsible for registering each startup as an LLC, setting up different employer identification numbers (EINS) for each business, paying licensing and other fees for each business and filing separate taxes for each startup.
Bottom line: it’s tedious to register each startup as its own LLC but it protects the holding company- your Studio- from legal and financial liability.
Doing Business As
Another way you can legally structure your Studio is by making it a DBA or a “Doing Business As” company. In this scenario, you need only file to register one entity (your Studio) which means much less paperwork and only having to file taxes for that one business.
All of the startups to emerge from the holding company (the Studio) will be DBA companies. According to UpCouncil this means that “as far as legal issues are concerned, each of your DBAs will benefit from the same legal protections that the main company has. The downside of this, and of running a DBA structure in general, is that each DBA is not protected from the others. If one is sued, then all other DBAs will be liable, as well.”
Bottom line: DBA’s are easier to start and manage and they’re a lot less financially messy but they don’t offer much protection when it comes to liability for the startup ventures. If someone sues one of the startup companies, the holding company is on the hook as well.
Things to Consider
In the end, you have to know the operational plan for your Studio before you can decide how to legally structure it. Some Studios are highly involved with the launch and scale of the ventures that are formed from within and as such these types of Studios don’t have to worry much about being held liable for their startup ventures.
On the other hand, some Studios create startups and rapidly spin them out to other teams which usually means they aren’t supporting the startup much. If they have no oversight into day-to-day operations, they’ll want to close themselves off from taking liability for the startup ventures they create.
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