CHAPTER 3

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CHAPTER 3

  1. 1. CHAPTER 3 ENTREPRENEURIAL STRATEGY AND THE LEGAL ENVIRONMENT
  2. 2. Chapter 3 Overview <ul><li>The Legal Form of the Company </li></ul><ul><li>Contracts and Small Business Strategy </li></ul><ul><li>Agency Law and Small Business Strategy </li></ul><ul><li>Trade Laws and Small Business Strategy </li></ul><ul><li>Intellectual Property Law </li></ul><ul><li>Internet Law </li></ul>
  3. 3. The Legal Form of the Company <ul><li>Sole Proprietorship </li></ul><ul><li>Partnership </li></ul><ul><li>Corporation </li></ul><ul><li>LLC </li></ul><ul><li>Nonprofit </li></ul>
  4. 4. Sole Proprietorship – Advantages <ul><li>Most common form </li></ul><ul><li>Flexible, easy, and inexpensive </li></ul><ul><li>All profits and losses belong to the owner </li></ul><ul><li>Taxes paid at owner’s tax rate </li></ul><ul><li>Subject to the hobby rule </li></ul>
  5. 5. Sole Proprietorship - Disadvantages <ul><li>Unlimited liability </li></ul><ul><li>More difficult to raise debt capital </li></ul><ul><li>Often no management team with diverse skills </li></ul><ul><li>Survival of company dependent on the owner </li></ul>
  6. 6. Partnerships – Advantages <ul><li>Quick, easy, and inexpensive to form </li></ul><ul><li>Advantages of a team </li></ul><ul><li>Shared financial strength </li></ul><ul><li>Shared workload </li></ul><ul><li>Taxed at individual partner level </li></ul>
  7. 7. Partnerships – Disadvantages <ul><li>No liability protection </li></ul><ul><li>Control is shared </li></ul><ul><li>Fraught with personal conflict </li></ul><ul><li>Shared equity </li></ul>
  8. 8. Types of Partnerships <ul><li>General </li></ul><ul><li>Limited </li></ul><ul><li>Secret partners </li></ul><ul><li>Silent partners </li></ul><ul><li>Dormant partners </li></ul>
  9. 9. The Partnership Agreement <ul><li>Business responsibilities of partners </li></ul><ul><li>Profit distribution </li></ul><ul><li>Transfer of interest </li></ul><ul><li>Term of partnership </li></ul><ul><li>Contributions of partners </li></ul><ul><li>Withdrawals and salaries </li></ul><ul><li>Dissolution and arbitration </li></ul>
  10. 10. Corporations - Overview <ul><li>C-Corporation </li></ul><ul><li>Subchapter S-Corporation </li></ul><ul><li>Limited Liability Company </li></ul><ul><li>Nonprofit Corporation </li></ul>
  11. 11. Corporations – Advantages <ul><li>Limited liability </li></ul><ul><li>Multiple classes of stock </li></ul><ul><li>Transferability of stock </li></ul><ul><li>Status and clout </li></ul><ul><li>Retirement plans, profit sharing, etc. </li></ul><ul><li>Continuity of life </li></ul><ul><li>Ease of raising capital </li></ul>
  12. 12. Corporations – Disadvantages <ul><li>More complex and expensive to form </li></ul><ul><li>Potential loss of control to stockholders </li></ul><ul><li>Requires regular stockholders’ meetings and records </li></ul><ul><li>Potential for double taxation </li></ul>
  13. 13. Types of C-Corporations <ul><li>Domestic </li></ul><ul><li>Foreign </li></ul><ul><li>Public </li></ul><ul><li>Closely held </li></ul>
  14. 14. Subchapter S-Corporation - How It Differs <ul><li>All earnings passed through to shareholders </li></ul><ul><li>Earnings taxed at individual rate </li></ul><ul><li>Losses shared according to percentage of ownership </li></ul><ul><li>Assets of business when sold taxed on amount of appreciation </li></ul><ul><li>Must convert to C-Corporation to go public </li></ul>
  15. 15. Limited Liability Company - How It Differs <ul><li>Owners are called “members” </li></ul><ul><li>Stock interests are known as “interests” </li></ul><ul><li>Formed via articles of organization </li></ul><ul><li>Members create an operating agreement </li></ul><ul><li>Managers, officers, and members not personally liable for company debts </li></ul><ul><li>Foreign ownership permitted </li></ul>
  16. 16. LLC vs. Corporation <ul><li>No corporate tax </li></ul><ul><li>No double tax on liquidation </li></ul><ul><li>Pass-through taxation </li></ul><ul><li>Debt in excess of basis may be put in LLC to avoid recognition of gain </li></ul><ul><li>Contribution of appreciated assets not subject to tax </li></ul>
  17. 17. LLC vs. S-Corporation <ul><li>More than 35 members allowed </li></ul><ul><li>Tax allocation not based on percentage of ownership </li></ul><ul><li>No restrictions on membership </li></ul><ul><li>Permits more than one class of stock </li></ul><ul><li>Step-up in basis at death of member </li></ul>
  18. 18. Nonprofit Corporation <ul><li>Established for charitable, public benefit, religious, or mutual benefit </li></ul><ul><li>Benefit of limited liability </li></ul><ul><li>Profits may not be distributed </li></ul><ul><li>Income from for-profit activities subject to tax </li></ul><ul><li>Must meet IRS501(c)(3) requirements for tax-exempt status </li></ul>
  19. 19. Contracts and Small Business Strategy <ul><li>Requirements for a legal contract </li></ul><ul><ul><li>» Capacity </li></ul></ul><ul><ul><li>» Offer, acceptance, and mutuality </li></ul></ul><ul><ul><li>» Consideration </li></ul></ul><ul><ul><li>» A legal purpose </li></ul></ul><ul><ul><li>» Correct form </li></ul></ul>
  20. 20. Contracts and Small Business Strategy (continued) <ul><li>Buy-sell agreements </li></ul><ul><ul><li>» Disposition of owner’s share of business </li></ul></ul><ul><ul><li>» Important to prevent ownership falling into unwanted hands </li></ul></ul><ul><ul><li>» Addresses how shares will be valued </li></ul></ul>
  21. 21. Agency Law and Small Business Strategy <ul><li>Employees are agents of the company </li></ul><ul><li> • Express authority </li></ul><ul><li> • Incidental authority </li></ul><ul><li> • Implied authority </li></ul><ul><li> • Emergency authority </li></ul><ul><li> • Apparent authority </li></ul><ul><li> • Ostensible authority </li></ul>
  22. 22. Trade Laws and Small Business Strategy <ul><li>Uniform Commercial Code </li></ul><ul><ul><li>• Assumes dealings by professionals </li></ul></ul><ul><ul><li>• Product liability </li></ul></ul><ul><ul><li>• Implied warranties </li></ul></ul><ul><ul><ul><li>» Strict liability </li></ul></ul></ul><ul><ul><ul><li>» Warrant of merchantability </li></ul></ul></ul>
  23. 23. Consumer Credit Laws and Financial Strategy <ul><li>Equal Credit Opportunity Act </li></ul><ul><li>Truth-in-Lending Act – Regulation Z </li></ul><ul><li>Fair Credit Billing Act </li></ul><ul><li>Fair Credit Reporting Act </li></ul>
  24. 24. Truth in Advertising and Marketing Strategy <ul><li>Regulated by the Federal Trade Commission </li></ul><ul><li>Illegal to mislead customers about: </li></ul><ul><ul><li>» What a product can do </li></ul></ul><ul><ul><li>» A reduced price on an item never priced higher </li></ul></ul><ul><ul><li>» List price as a comparison if never sold at list </li></ul></ul><ul><ul><li>» Bait and switch techniques </li></ul></ul>
  25. 25. Consumer Protection Law and Customer Strategy <ul><li>Cover four major areas </li></ul><ul><ul><li>• Unscrupulous sellers </li></ul></ul><ul><ul><li>• Unreasonable credit items </li></ul></ul><ul><ul><li>• Unsafe products </li></ul></ul><ul><ul><li>• Mislabeling of products </li></ul></ul>
  26. 26. Consumer Protection Law and Customer Strategy <ul><li>Regulatory Agencies </li></ul><ul><ul><li>• Food and Drug Administration </li></ul></ul><ul><ul><li>• Consumer Product Safety Commission </li></ul></ul><ul><ul><li>• Fair Packaging and Labeling Act </li></ul></ul>
  27. 27. Price Discrimination and Pricing Strategy <ul><li>Federal Trade Commission </li></ul><ul><ul><li>• Can’t sell same product to different customers at different prices without justification </li></ul></ul><ul><ul><li>• Justification = Quantity sold discount, seconds or slightly damaged, cost savings on part of seller </li></ul></ul>
  28. 28. Intellectual Property Law <ul><li>Overview </li></ul><ul><ul><li>• Patents </li></ul></ul><ul><ul><li>• Trademarks </li></ul></ul><ul><ul><li>• Copyrights </li></ul></ul><ul><ul><li>• Trade secrets </li></ul></ul>
  29. 29. Patents <ul><li>Exclusive right to an invention </li></ul><ul><li>Utility patents </li></ul><ul><li>Design patents </li></ul>
  30. 30. Rules for Patents <ul><li>Invention must fit into one of these categories </li></ul><ul><ul><li>» Machine (fax, rocket, electronic circuits) </li></ul></ul><ul><ul><li>» Process (chemical reactions, methods of production) </li></ul></ul><ul><ul><li>» Articles of manufacture (furniture, diskettes) </li></ul></ul><ul><ul><li>» Composition (gasoline, food additives) </li></ul></ul><ul><ul><li>» A new use for one of these </li></ul></ul><ul><li>Utility </li></ul><ul><li>No prior art </li></ul><ul><li>Unobvious </li></ul>
  31. 31. Patent Process <ul><li>File a notice of disclosure </li></ul><ul><li>File patent application with claims </li></ul><ul><li>Patent applied for status when application received </li></ul><ul><li>Modify and appeal rulings on the claims by the PTO </li></ul><ul><li>Patent pending stage when patent is approved </li></ul><ul><li>Patent good for 20 years from date of filing </li></ul>
  32. 32. Trademarks <ul><li>Symbol, word, or design used to identify a business or product </li></ul><ul><li>Must be renewed every ten years </li></ul><ul><li>Must be actively used to be registered </li></ul>TM
  33. 33. Trade Secrets <ul><li>Protection from disclosure by employees or others involved in business </li></ul><ul><li>Achieved through written agreement (i.e., employee contract) </li></ul>
  34. 34. Copyrights <ul><li>Protect original works of authors, composers, screenwriters, and computer programmers </li></ul><ul><li>Do not protect an idea but only the form in which it appears </li></ul><ul><li>Good for life of the holder plus 50 years </li></ul>
  35. 35. Internet Law <ul><li>Copyright infringement </li></ul><ul><ul><li>» BBS operators need to be aware of infringement liability </li></ul></ul><ul><ul><li>» Directly liable for reproducing proprietary content without authorization </li></ul></ul><ul><li>Electronic contracts </li></ul><ul><ul><li>» To satisfy Statute of Frauds, legal messages should be sent using secure methods with forensic trail to signer </li></ul></ul><ul><ul><li>» Computer messages should state legal intent </li></ul></ul><ul><ul><li>» State if binding without formal acceptance (i.e., purchase orders) </li></ul></ul>

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