Limited Liability Partnerships

By Merrifield, D. Bruce | Research-Technology Management, September/October 2005 | Go to article overview
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Limited Liability Partnerships

Merrifield, D. Bruce, Research-Technology Management

With companies' survival increasingly dependent on continuous innovation, the Limited Partnership model has a role to play.

OVERVIEW: The R&D Limited Partnership model of organization and management, subsequently modified as the Limited Liability Corporation (LLC), has become an organization of choice for innovative new businesses, with three basic uses evolving. One allows formation of vertically integrated collaborative efforts to assist new, entrepreneurial organizations in accessing missing time-critical skills and resources. The second allows large companies to form portfolios of entrepreneurial new businesses outside the change-resistant corporate culture, while providing missing skills, resources and risk capital for accelerated development and commercialization. The third use, which may eventually prove the most important, provides a means for developing new businesses and jobs in developing countries by coupling entrepreneurial small businesses in those countries with large companies in the U.S. and other industrial countries. The model was successfully piloted in Israel and then "cloned" in India and several other countries.

KEY CONCEPTS: Limited Liability Corporations, innovation, collaborative R&D, entrepreneurs hip.

The Research and Development Limited Partnership (RDLP) model of organization and management was developed by the Technology Office in the U.S. Department of Commerce, during the Reagan Administration (1). It was urgently needed at that time to allow U.S. companies to collaborate (without antitrust concerns), in developing next-generation technologies, on a scale of effort competitive with the Japanese "targeted industry strategy."

Also, because of continued anxiety over treble damages and prison sentences for perceived collusion, the Technology Office put through the Cooperative Research and Development (CRADA) Acts of 1984, 1986 and 1989, which further allowed collaborative manufacturing. In 1988, the Internal Revenue Service confirmed passthrough status to these partnerships for tax purposes, eliminating the double taxation required for conventional corporations (2).

Sematech was the first consortium organized by the Technology Office, followed by Genentech, (now both corporations), and by many of the biotech companies. Since then, the Limited Liability Partnership model, modified to the Limited Liability Corporation (LLC), has proliferated rapidly, becoming the organizational entity of choice for many new organizations. By 1990, over 100,000 LLC's had been incorporated, rising to 600,000 by 1995, with $2 trillion in assets. Current projections are that over 1.5 million will have been formed by 2005 with $4 to 5 trillion in assets (3).

Three Applications

Although the U.S. spends more for basic research than all other nations combined, the high-risk funding needed for the earliest stages of development is often lacking (the so-called Valley of Death). The Limited Partnership model provides a unique source of such risk capital as well as the missing skills and resources, through formation of vertically integrated consortia.

In addition, the model provides a way for large companies to continually access innovative new technologies in start-up businesses that lack risk capital and other capabilities. A portfolio of investments, outside the corporate culture, can permit incremental diversification and continual renewal without threatening the risk-avoidant traditional operations of the company which may no longer be growing.

A third use of this management model was adapted by the Commerce Department's Technology Office, also during the Reagan Administration, to form joint ventures between entrepreneurial small businesses in developing countries and U.S. companies (4). It has been remarkably successful, and addresses an important need, which is to create new jobs for the exploding populations in those countries. Some 35 to 50 percent of the population in Middle Eastern and many Asian countries are under 15 years of age, and are without the prospect of employment.

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