Business Ownership, Regulations & IP

1. ABDM4233 ENTREPRENEURSHIP
Business Ownership,
Regulations
&
Intellectual Property
by
Stephen Ong
Principal Lecturer (Specialist)
Visiting Professor, Shenzhen

2. Forms of
Business Ownership

3. Choosing a Form of Ownership
 There is no one “best” form of ownership.
 The best form of ownership depends on
an entrepreneur’s particular situation.
 Key: Understanding the characteristics of
each form of ownership and how well they
match an entrepreneur’s business and
personal circumstances.
Ch, 5: Forms of Business 5-3

4. Factors Affecting the Choice
 Tax considerations
 Liability exposure
 Start-up and future capital requirements
 Control
 Managerial ability
 Business goals
 Management succession plans
 Cost of formation
Ch, 5: Forms of Business 5-4

5. Major Forms of Ownership
 Sole Proprietorship
 Partnership
 Corporation
 S Corporation
 Limited Liability Company
 Joint Venture
Ch, 5: Forms of Business 5-5

6. FIGURE 5.1 (A)
Forms of Business
Ownership –
Percentage of Business
Ch, 5: Forms of Business 5-6

7. FIGURE 5.1 (B)
Forms of Business
Ownership -
Percentage of Sales
Ch, 5: Forms of Business 5-7

8. FIGURE 5.1 (C)
Forms of Business
Ownership -
Percentage of Sales
Ch, 5: Forms of Business Ownership 5-8

9. Advantages of the
Sole Proprietorship
 Simple to create
 Least costly form to begin
 Profit incentive
 Total decision making authority
 No special legal restrictions
 Easy to discontinue
Ch, 5: Forms of Business 5-9

10. Disadvantages of the
Sole Proprietorship
 Unlimited personal liability
Ch, 5: Forms of Business 5 - 10

11. Liability Features of the Basic
Forms of Ownership
Sole Proprietorship
Claims of Sole Proprietor’s Creditors
Sole Proprietor’s Personal Assets
Ch, 5: Forms of Business 5 - 11

12. Disadvantages of the
Sole Proprietorship
 Unlimited personal liability
 Limited skills and capabilities
 Feelings of isolation
 Limited access to capital
 Lack of continuity of the business
Ch, 5: Forms of Business Ownership 5 - 12

13. Partnership
 An association of two or more people
who co-own a business for the
purpose of making a profit.
 Always wise to create a partnership
agreement.
 The best partnerships are
built on trust and respect.
Ch, 5: Forms of Business 5 - 13

14. Advantages of the Partnership
 Easy to establish
 Complementary skills of partners
 Division of profits
 Larger pool of capital
 Ability to attract limited partners
Ch, 5: Forms of Business 5 - 14

15. Types of Partners
 General partners
 Take an active role in managing a business.
 Have unlimited liability for the partnership’s
debts.
 Every partnership must have at least one
general partner.
 Limited partners
 Cannot participate in the day-to-day
management of a company.
 Have limited liability for the partnership’s
debts.
Ch, 5: Forms of Business 5 - 15

16. Advantages of the Partnership
 Easy to establish
 Complementary skills of partners
 Division of profits
 Larger pool of capital
 Ability to attract limited partners
 Minimal government regulation
 Flexibility
 Taxation
Ch, 5: Forms of Business 5 - 16

17. Disadvantages of the
Partnership
 Unlimited liability of at least one
partner
Ch, 5: Forms of Business 5 - 17

18. Liability Features of the Basic
Forms of Ownership
Partnership
Claims of Partnership’s Creditors
General General
Partnership’s Assets
Partner’s Partner’s
Personal Personal
Assets Assets
Ch, 5: Forms of Business 5 - 18

19. Disadvantages of the
Partnership
 Unlimited liability of at least one partner
 Capital accumulation
 Difficulty in disposing of partnership
interest without dissolving the partnership
 Lack of continuity
 Potential for personality and authority
conflicts
 Partners bound by law of agency
Ch, 5: Forms of Business Ownership 5 - 19

20. Limited Partnership
 A partnership composed of at least
one general partner and one or
more limited partners.
 A general partner in this partnership
is treated exactly as in a general
partnership.
 A limited partner has limited
liability and is treated as an
investor in the business.
Ch, 5: Forms of Business 5 - 20

21. Corporation
 A separate legal entity from its owners.
 Types of corporations:
 Domestic – a corporation doing business
in the state in which it is incorporated.
 Foreign – a corporation doing business in
a state other than the state in which it is
incorporated.
 Alien – a corporation formed in another
country but doing business in the United
States.
Ch, 5: Forms of Business 5 - 21

22. Corporation
Types of corporations:
 Publicly held – a corporation that has
a large number of shareholders and
whose stock usually is traded on one
of the large stock exchanges.
 Closely held – a corporation in which
shares are controlled by a relatively
small number of people, often family
members, relatives, or friends.
Ch, 5: Forms of Business 5 - 22

23. Advantages of the Corporation
 Limited liability of stockholders
Ch, 5: Forms of Business 5 - 23

24. Liability Features of the Basic
Forms of Ownership
Corporation
Claims of Corporation’s Creditors
barri r
er arrie
b
Corporation’s Assets
Shareholder’s Shareholder’s
Personal Assets Personal Assets
Ch, 5: Forms of Business 5 - 24

25. Advantages of the Corporation
 Limited liability of stockholders
 Ability to attract capital
 Ability to continue indefinitely
 Transferable ownership
Ch, 5: Forms of Business Ownership 5 - 25

26. Disadvantages of the
Corporation
 Cost and time of incorporation process
 Double taxation
 Potential for diminished managerial
incentives
 Legal requirements and regulatory “red
tape”
 Potential loss of control by founder(s)
Ch, 5: Forms of Business 5 - 26

27. S Corporation
 No different from any other corporation
from a legal perspective.
 An S corporation is taxed like a
partnership, passing all of its profits (or
losses) through to individual shareholders.
 To elect “S” status, all shareholders must
consent, and the corporation must file with
the IRS within the first 75 days of its tax
year.
Ch, 5: Forms of Business 5 - 27

28. Liability Features of the Basic
Forms of Ownership
S-Corporation
Claims of S-Corporation’s Creditors
barri
er r
b arrie
S-Corporation’s Assets
Shareholder’s Shareholder’s
Personal Assets Personal Assets
Ch, 5: Forms of Business 5 - 28

29. Limited Liability Company
(LLC)
 Resembles an S Corporation but is
not subject to the same restrictions.
 Two documents required:
 Articles of organization
 Operating agreement
Ch, 5: Forms of Business 5 - 29

30. Limited Liability Company
(LLC)
 An LLC cannot have more than two of
these four corporate characteristics:
1. Limited liability
2. Continuity of life
3. Free transferability of interest
4. Centralized management
Ch, 5: Forms of Business 5 - 30

31. Liability Features of the Basic
Forms of Ownership
Limited Liability Company - LLC
Claims of LLC’s Creditors
barri
er r
b arrie
LLC’s Assets
Member’s Member’s
Personal Assets Personal Assets
Ch, 5: Forms of Business 5 - 31

32. The Professional Corporation
 Designed for professions – lawyers,
doctors, dentists, accountants and other
professionals
 Created in the same manner as a
corporation
 Identified by the abbreviations:
 P.C. – Professional Corporation
 P.A. – Professional Association
 S.C. – Service Corporation
Ch, 5: Forms of Business Ownership 5 - 32

33. The Joint Venture
Much like a partnership, but it:
 Is formed for a specific purpose
 Has a beginning and an end
Ch, 5: Forms of Business Ownership 5 - 33

34. Conclusion
 The “right” choice of the form of
ownership is unique to every
entrepreneur and their business.
 Each form has advantages and
disadvantages.
 The entrepreneur must be thoughtful
and strategic about this important
decision.
5 - 34

35. Intellectual
Property

36. The Importance of Intellectual Property
 Intellectual Property
 Is any product of human intellect that is intangible but
has value in the marketplace.
 It is called “intellectual” property because it is the
product of human imagination, creativity, and
inventiveness.
 Importance
 Traditionally, businesses have thought of their physical
assets, such as land, buildings, and equipment as the
most important.
 Increasingly, however, a company’s intellectual assets
are the most important.
12-36

37. SPOT the DIFFERENCE

38. Patent Litigation
Creative wins MP3 player patent
One of Apple's main rivals, Creative Technology, has
been awarded a patent in the US for the interface
used on many digital music players.
"The first portable media player based upon the user interface covered in our Zen
Patent was our Nomad Jukebox MP3 player," said Creative CEO Sim Wong Hoo.
"The Apple iPod was only announced in October 2001, 13 months after we had been
shipping the Nomad Jukebox based upon the user interface covered by our Zen
Patent."
In its press release, Creative said Apple had filed for a patent for a user interface in a
multimedia player in late 2002, but its application had been recently rejected.
On 24 August 2006, Apple and Creative announced a broad settlement to end their
legal disputes. Apple will pay Creative US$100 million for a paid-up license, to use
Creative's awarded patent in all Apple products. As part of the agreement, Apple will
recoup part of its payment, if Creative is successful in licensing the patent.
Source: bbc.co.uk 30th August 2005
38

39. Apple pays US$100m for use of Patent
Automatic hierarchical categorization of music by
metadata
Patent number: 6928433
Filing date: Jan 5, 2001
Issue date: Aug 9, 2005
Application number: 9/755,723
A method, performed by software executing on the processor of a portable
music playback device, that automatically files tracks according to hierarchical
structure of categories to organize tracks in a logical order. A user interface is
utilized to change the hierarchy, view track names, and...
Inventors: Ron Goodman, Howard N. Egan
Assignee: Creative Technology LTD
Source: bbc.co.uk 30th August 2005
39

40. SPOT the DIFFERENCE
PINK CREAF NASDAQ AAPL
Market Cap : Market Cap :
US$0.150 B US$308.8 B

41. CREATIVE vs APPLE

42. Determining What Intellectual
Property to Protect
Criteria 1 Criteria 2
Determine whether the Decide whether the
intellectual property in intellectual property in
question is directly question has value in
related to the firm’s the marketplace.
competitive advantage.
12-42

43. Common Mistakes Firms Make in
Regard to Protecting Their Intellectual
Property
Not properly identifying Not fully recognizing
all of their the value of their
intellectual property. intellectual property.
Not using their
Not legally protecting the
intellectual property as
intellectual property
part of their overall
that needs protecting.
plan for success.
12-43

44. The Four Key Forms of Intellectual
Property
Patents Trademarks
Copyrights Trade Secrets
12-44

45. FIGURE 2.4 Patent Applications and Patents Issued

46. FIGURE 2.6 Trademark Applications and Trademarks and Renewals Issued
2 - 46

47. Protecting Your Ideas
 Patent – a grant from the Patent and
Trademark Office to the inventor of
product, giving the exclusive right to
make, use, or sell the invention for
20 years from the date of
filing the patent application.
2 - 47

48. Patents
 Patents
 A patent is a grant from the federal government
conferring the rights to exclude others from making,
selling, or using an invention for the term of the patent.
(See the next slide for a full explanation.)
 Increasing Interest in Patents
 There is increasing interest in patents.
 Since Patent #1 was granted in 1790, the U.S. Patent &
Trademark Office has granted over six million patents.
 The patent office is strained. It now takes an average of 35.3
months from the date of first filing to receive a U.S. patent.
12-48

49. Proper Understanding for What a
Patent Means
A patent does not give its owner the right to make, use, or sell an invention;
rather, the right granted is only to exclude others from doing so.
As a result, if an inventor obtains a patent for a new kind of computer chip,
and the chip would infringe on a prior patent owned by Intel, the inventor
has no right to make, use, or sell the chip.
To do so, the inventor would need to obtain permission from Intel. Intel may
refuse permission, or ask that a licensing fee be paid for the rights to infringe
on its patent.
While this system may seem odd, it is really the only way the system could
work. Many inventions are improvements on existing inventions, and the
system allows the improvements to be (patented) and sold, but only with the
permission of the original inventors, who usually benefit by obtaining
licensing income in exchange for their consent.
12-49

50. Growth in Patent Applications in the
United States
12-50

51. Three Basic Requirements for Obtaining
a Patent
12-51

52. Types of Patents
Type Type of Invention Covered Duration
New or useful process, machine, 20 years from
Utility manufacturer, or composition of material or the date of the
any new and useful improvement thereof. original
application.
14 years from
Invention of new, original, and ornamental the date of the
Design design for manufactured products. original
application.
20 years from
Any new varieties of plants that can be
Plant the date of the
reproduced asexually.
original
application.
12-52

53. Business Method Patents
(Special Utility Patent)
 Business Method Patent
 A business method patent is a patent that protects an
invention that is or facilitates a method of doing
business.
 The most notable business method patents that have
been awarded:
 Amazon.com’s one-click ordering system.
 Priceline.com’s “name-your-price” business model.
 Netflix’s method for allowing customers to set up a rental list
of movies to be mailed to them.
12-53

54. The Six Steps to a Patent
6. File the patent application
5. Complete the patent application
4. Study search results
3. Search existing patents
2. Document the device
1. Establish the invention’s novelty
2 - 54

55. The Process of Obtaining a Patent
12-55

56. Patent Infringement
 Patent Infringement
 Takes place when one party engages in the
unauthorized use of another party’s patent.
 The tough part (particularly from a small
entrepreneurial firm’s point of view) is that patent
infringement cases are costly to litigate.
 A typical patent infringement case costs each side at least
$500,000 to litigate.
12-56

57. Protecting Your Ideas
 Trademark – any distinctive word,
symbol, design, name, logo, slogan, or
trade dress a company uses to identify
the origin of a product or to distinguish
it from other goods on the market.
 Servicemark – the same as a trademark
except that it identifies the source of a
service rather than a product.
2 - 57

58. Trademarks
 Trademark
 A trademark is any word, name, symbol, or device used
to identify the source or origin of products or services
and to distinguish those product or services from
others.
 Trademarks also provide consumers with useful
information.
 For example, consumers know what to expect when they see a
Macy’s store.
 Think how confusing it would be if any retail store could use
the name Macy’s.
12-58

59. Types of Trademarks
1 of 2
Type Types of Marks Covered Duration
Any word, name, symbol, or device
used to identify and distinguish one Renewable every
Trademark 10 years, as long
company’s goods from another.
as the mark
Examples: Apple, d.light, Dry Soda,
remains in use.
ModCloth, and Zeo.
Similar to trademarks; are used to Renewable every
Service mark identify the services or intangible
10 years, as long
activities of a business, rather than a
business’s physical products. as the mark
remains in use.
Examples: 1-800-FLOWERS,
Amazon.com, Mint.com, and Zipcar.
12-59

60. Types of Trademarks
2 of 2
Type Types of Marks Covered Duration
Trademarks or service marks used by
the members of a cooperative, Renewable every
Collective 10 years, as long
association, or other collective group.
mark as the mark
Examples: Rotary International and
remains in use.
International Franchise Association
Marks, words, names, symbols, or Renewable every
Certification devices used by a person other than
10 years, as long
mark the owner to certify a particular
quality about a good or service. as the mark
remains in use.
Examples: 100% Napa Valley and
Underwriters Laboratories
12-60

61. What is Protected Under Trademark
Law
1 of 2
Item Example(s)
Words YouTern, PledgeMusic, GiftZip
Numbers 3M, MSNBA, 1-800-FLOWERS
and letters
Designs Nike swoosh logo
and logos
Sounds MGM’s lion’s roar
12-61

62. What is Protected Under Trademark
Law
2 of 2
Item Example
Fragrances Stationery treated with a special fragrance
Shapes Unique shape of the Apple iPhone
Colors Nexium—the “purple pill”
Trade dress The layout and décor of a restaurant
12-62

63. Exclusions From Trademark Protection
Item Example
Immoral or Profane words
scandalous matter
Labeling oranges “Fresh Florida
Deceptive matter Oranges” that aren’t grown in Florida
Phrases like “golf ball” and “fried chicken”
Descriptive marks are descriptive and can’t be trademarked
Common surnames like “Anderson” or
Surnames
“Smith” can’t be trademarked
12-63

64. The Process of Obtaining a Trademark
12-64

65. Protecting Your Ideas
 Copyright – an exclusive right that
protects the creators of original works
of authorship such as literary,
dramatic, musical, and artistic works.
 Copyrighted material is denoted by
the symbol ©.
2 - 65

66. Copyrights
 Copyrights
 A copyright is a form of intellectual property protection
that grants to the owner of a work of authorship the
legal right to determine how the work is used and to
obtain the economic benefits from the work.
 A work does not have to have artistic merit to be
eligible for copyright protection.
 As a result, things such as operating manuals and sales
brochures are eligible for copyright protection.
12-66

67. What is Protected By a Copyright?
Literary works Musical compositions
Computer software Dramatic works
Pantomimes and Pictorial, graphic, and
choreographic works sculptural works
12-67

68. Exclusions From Copyright Protection
 The Idea-Expression Dichotomy
 The main exclusion is that copyright laws cannot
protect ideas.
 For example, an entrepreneur may have the idea to open a
soccer-themed restaurant. The idea itself is not eligible for
copyright protection. However, if the entrepreneur writes
down specifically what his or her soccer-themed restaurant will
look like and how it will operate, that description is
copyrightable.
 The legal principle describing this concept is called the idea-
expression dichotomy.
 An idea is not copyrightable, but the specific expression of an
idea is.
12-68

69. Obtaining a Copyright
 How to Obtain a Copyright
 Copyright law protects any work of authorship the
moment it assumes a tangible form.
 Technically, it is not necessary to provide a copyright
notice or register work with the U.S. Copyright Office.
 The following steps can be taken, however, to enhance
copyright protection.
 Copyright protection can be enhanced by attaching the
copyright notice, or “copyright bug” to something.
 Further protection can be obtained by registering the work
with the U.S. Copyright Office.
12-69

70. Copyright Infringement
1 of 2
 Copyright Infringement
 Copyright infringement occurs when one work derives
from another or is an exact copy or shows substantial
similarity to the original work.
 To prove infringement, a copyright owner is required to
show that the alleged infringer had prior access to the
copyrighted work and that the work is substantially
similar to the owner’s.
12-70

71. Copyright Infringement
2 of 2
• The illegal downloading of
music is an example of
copyright infringement.
• Copyright infringement costs
the owners of copyrighted
material an estimated $20
billion per year in the U.S.
alone.
12-71

72. Trade Secrets
 Trade Secrets
 A trade secret is any formula, pattern, physical device,
idea, process, or other information that provides the
owner of the information with a competitive advantage
in the marketplace.
 Trade secrets include marketing plans, product
formulas, financial forecasts, employee rosters, logs of
sales calls, and similar types of proprietary information.
 The Federal Economic Espionage Act, passed in 1996,
criminalizes the theft of trade secrets.
12-72

73. What Qualifies for Trade Secret
Protection?
1 of 2
 Trade Secret Protection
 Not all information qualifies for trade secret protection.
 In general, information that is know to the public or
that competitors can discover through legal means
doesn’t qualify for trade secret protection.
 Companies protect trade secrets through physical
measures and written documents.
12-73

74. What Qualifies for Trade Secret
Protection?
2 of 2
The strongest case for trade secret protection is
information that is characterized by the following.
• Is not known outside the company.
• Is known only inside the company on a “need-to-know” basis.
• Is safeguarded by stringent efforts to keep the information
confidential.
• Is valuable and provides the company a competitive advantage
• Was developed at great cost, time, and effort.
• Cannot be easily duplicated, reverse engineered, or
discovered.
12-74

75. Physical Measures for Protecting Trade
Secrets
Restricting access Labeling documents
Password protecting
Maintaining logbooks
confidential computer
for visitors
files
Maintaining logbooks for Maintaining adequate
access to sensitive overall security
material measures
12-75

76. Conducting an Intellectual Property
Audit
1 of 2
 Intellectual Property Audit
 The first step a firm should take to protect its
intellectual property is to complete an intellectual
property audit.
 An intellectual property audit is conducted to
determine the intellectual property a firm owns.
 There are two reasons for conducting an intellectual
property audit:
 First, it is prudent for a company to periodically determine
whether its intellectual property is being properly protected.
 Second, it is important for a firm to remain prepared to justify
its valuation in the event of a merger or acquisition.
12-76

77. Conducting an Intellectual Property
Audit
2 of 2
 The Process of Conducting an Intellectual
Property Audit
 The first step is to develop an inventory of a firm’s
existing intellectual property. The inventory should
include the firm’s present registrations of patents,
trademarks, and copyrights.
 The second step is to identify works in progress to
ensure that they are being documented and protected in
a systematic, orderly manner.
12-77

78. Protecting Your Ideas
Type of What It Time
Protection Covers Required Cost
Copyright Works of
original About 2 weeks About $35
authorship
Trademark Logos, names, 6 – 12 months $900 - $1,500
phrases
Design patent Look of an Up to 2 years $5,000 - $20,000
original product
Utility patent How an original 2 – 5 years $5,000 - $20,000
product works
Business A business 2 – 5 years $5,000 - $20,000
method patent process
Source: Anne Field, “How to Knock Out Knock Offs,” Business Week, March 14, 2005.
Offs,” Week,
2 - 78

79. Conclusion
 The creative process is a tenant of the
entrepreneurial experience.
 Success, and even survival itself, requires
entrepreneurs to tap their creativity.
 The seven steps of the creative process
transform an idea into a business reality.
 Creativity results in value, and value
provides a competitive advantage.
 Entrepreneurs protect their creative ideas
with patents, trademarks, servicemarks, and
copyrights to sustain a competitive edge.
Ch. 2: Inside the Entrepreneurial Mind 2 - 79

80. Further Reading
 Scarborough, Norman, M. 2011. Essentials of
Entrepreneurship and Small Business
Management. 6th edition. Pearson.
 Brooks, Arthur C. (2006) Social Entrepreneurship :
A Modern Approach to Social Value Creation.
Pearson
 Barringer, Bruce R. & Ireland, R. Duane, 2011
Entrepreneurship – Successfully launching new
ventures 4th edition, Pearson.
 Schaper, M., Volery, T., Weber, P. & Lewis, K. 2011.
Entrepreneurship and Small Business. 3rd Asia
Pacific edition. John Wiley.