Advice on Business Entity and SBIR Relationship

[Anonymous]

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Hello,

I am interested in obtaining an SBIR grant, but I don’t have a business. I need some advice. I know start-up companies are not generally awarded SBIR grants. My question has paths and scenarios. I have a potential partner who has a business, though. We will call that business A and my soon-to-be LLC business as business B (Path 1). Company B will do the research and uses Company A for support with assets. I am going to elaborate further on two paths. Both paths are potentially a way for a start-up to meet SBIR eligibility. Path 1: Company B operates as a “hybrid” (out of a lack of better terminology) using company A’s assets, and showing some income as part of company A, to allow company B to meet eligibility for SBIR? Company B will contract some work from A. Company B does not have any assets of its own without the contract with company A. Is this business set up (Company A) eligible for an SBIR? Would it be advisable for myself, who would be the one who will seek the SBIR grant, to do this instead (Path 2). Instead of a LLC business before contacts and SBIR awarding, An LLC that I will name as company C. Company C has as employees certain select Company A’s employees and owner that will be contracted from Company A to support Company C? In Path 1, assuming company B is SBIR-eligible, company B obtains an SBIR but Company A doesn’t have any tax liability other than the influx of money from contractual work. Is this correct with regard to tax liability? In Path 2, all assets of company C purchased with SBIR funds would be owned by company C but company C would be liable for the taxes. Do both paths end up with companies (company B and company C) SBIR eligible?

I hope I made some sense. Anyone up for answering eligibility of company B and company C as far as meeting SBIR elegibility?

Thanks to all who offer expert advice, fyzxman (I have other related questions)

[Anonymous]

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Hello,

This is related to my “Advice on Business Entity and SBIR Relationship” posting. I have the understanding that SBIR grants are taxed. How can a start-up company that meets eligibility for an SBIR as one of the possible business entities (company B or C or some other advised structure yet to be replied) deal with the tax burden? This also raises another question related to the types of business expenses that can be part of the SBIR award budget proposal (phase one submission). What types of things are not allowed? Could some of the funds be used to pay the taxes? Can the submitted budget in the proposal include an income for the principal researcher? Is capital equipment for the research of the SBIR submission included in the total amount awarded? Because I am not familiar with the accounting terminology found in literature on SBIR, I am asking these questions.

Has anyone out there been awarded an SBIR using any of the business entities mentioned in my OG posting?

Thanks 10^6,
fyzxman

[Lu@EGC]

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Hi! Thanks for reaching out. Here are the answers from our Accounting & Compliance team:

Q1 – Yes, company B is considered eligible, and the tax liability to company C from the grant would come from the budgeted amount in the award allocated to them. Just make sure company A is listed in the budget justification.

Q2 – Based on the information provided, Company C is also eligible for the SBIR award as long as the budget clearly lays out the employees and contractors on the grant. The preferable pathos Path 1 with the owner of company B listed as the PI and over 51% employed by Company B

Q3 – The granting organizations strongly suggest an S-corp formation (or LLC filing as an S-corp) to meet the requirements of all employees on the grants being paid through W-2 (including owner/PI)

Q4 – You would need to read through the FAR (FAR 31) to read what is allowed versus unallowed.

Q5 – Yes, you can use fees to cover the taxes. The Fee income is used for any costs including federal income tax.

Q6 – Yes, it is required for an SBIR that the PI be employed 51% by the company receiving the grant.

Q7 – Yes, you can have capital equipment as part of an SBIR submission. These reimbursements are handled differently under grant versus tax accounting.

Q8 – Yes, we have dealt with these types of relationships.

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