Procedure
An R&D limited partnership generally progresses through three stages: the funding stage, the development stage, and the exit stage. In the funding stage, a contract is established between the sponsoring company and limited partners, and the money is invested for the proposed R&D effort. All the terms and conditions of ownership, as well as the scope of the research, are carefully documented.
In the development stage, the sponsoring company performs the actual research, using the funds from the limited partners. If the technology is subsequently successfully developed, the exit stage commences, in which the sponsoring company and the limited partners commercially reap the benefits of the effort. There are three basic types of arrangements for doing this: equity partnerships, and joint ventures.
In the typical equity partnerships arrangement, the sponsoring company and the limited partners form a new. Jointly owned corporation. On the basis of the formula established in the original agreement, the limited partners’ interest can be transferred to equity in the new corporation on a tax-free basis. An alternative is to incorporate the R&D Limited partnership itself and then either merge it into the sponsoring company or continue as a new entity.