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Abdm4223 lecture week 5 010612 part 2


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Business Ownership, Regulations & IP

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Abdm4223 lecture week 5 010612 part 2

  1. 1. ABDM4233 ENTREPRENEURSHIPBusiness Ownership, Regulations & Intellectual Property by Stephen OngPrincipal Lecturer (Specialist) Visiting Professor, Shenzhen
  2. 2. Forms ofBusiness Ownership
  3. 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. 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 formationCh, 5: Forms of Business 5-4
  5. 5. Major Forms of Ownership  Sole Proprietorship  Partnership  Corporation  S Corporation  Limited Liability Company  Joint VentureCh, 5: Forms of Business 5-5
  6. 6. FIGURE 5.1 (A) Forms of Business Ownership – Percentage of BusinessCh, 5: Forms of Business 5-6
  7. 7. FIGURE 5.1 (B) Forms of Business Ownership - Percentage of SalesCh, 5: Forms of Business 5-7
  8. 8. FIGURE 5.1 (C) Forms of Business Ownership - Percentage of SalesCh, 5: Forms of Business Ownership 5-8
  9. 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 discontinueCh, 5: Forms of Business 5-9
  10. 10. Disadvantages of the Sole Proprietorship  Unlimited personal liabilityCh, 5: Forms of Business 5 - 10
  11. 11. Liability Features of the Basic Forms of Ownership Sole Proprietorship Claims of Sole Proprietor’s Creditors Sole Proprietor’s Personal AssetsCh, 5: Forms of Business 5 - 11
  12. 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 businessCh, 5: Forms of Business Ownership 5 - 12
  13. 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. 14. Advantages of the Partnership  Easy to establish  Complementary skills of partners  Division of profits  Larger pool of capital  Ability to attract limited partnersCh, 5: Forms of Business 5 - 14
  15. 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. 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  TaxationCh, 5: Forms of Business 5 - 16
  17. 17. Disadvantages of the Partnership  Unlimited liability of at least one partnerCh, 5: Forms of Business 5 - 17
  18. 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 AssetsCh, 5: Forms of Business 5 - 18
  19. 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 agencyCh, 5: Forms of Business Ownership 5 - 19
  20. 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. 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. 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. 23. Advantages of the Corporation  Limited liability of stockholdersCh, 5: Forms of Business 5 - 23
  24. 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 AssetsCh, 5: Forms of Business 5 - 24
  25. 25. Advantages of the Corporation  Limited liability of stockholders  Ability to attract capital  Ability to continue indefinitely  Transferable ownershipCh, 5: Forms of Business Ownership 5 - 25
  26. 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. 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. 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 AssetsCh, 5: Forms of Business 5 - 28
  29. 29. Limited Liability Company (LLC)  Resembles an S Corporation but is not subject to the same restrictions.  Two documents required:  Articles of organization  Operating agreementCh, 5: Forms of Business 5 - 29
  30. 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 managementCh, 5: Forms of Business 5 - 30
  31. 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 AssetsCh, 5: Forms of Business 5 - 31
  32. 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 CorporationCh, 5: Forms of Business Ownership 5 - 32
  33. 33. The Joint Venture Much like a partnership, but it:  Is formed for a specific purpose  Has a beginning and an endCh, 5: Forms of Business Ownership 5 - 33
  34. 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. 35. Intellectual Property
  36. 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. 37. SPOT the DIFFERENCE
  38. 38. Patent Litigation Creative wins MP3 player patent One of Apples 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 Creatives 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: 30th August 2005 38
  39. 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: 30th August 2005 39
  40. 40. SPOT the DIFFERENCEPINK CREAF NASDAQ AAPLMarket Cap : Market Cap :US$0.150 B US$308.8 B
  41. 41. CREATIVE vs APPLE
  42. 42. Determining What Intellectual Property to Protect Criteria 1 Criteria 2Determine whether the Decide whether theintellectual property in intellectual property in question is directly question has value in related to the firm’s the marketplace.competitive advantage. 12-42
  43. 43. Common Mistakes Firms Make inRegard to Protecting Their Intellectual PropertyNot properly identifying Not fully recognizing all of their the value of their intellectual property. intellectual property. Not using theirNot legally protecting the intellectual property as intellectual property part of their overall that needs protecting. plan for success. 12-43
  44. 44. The Four Key Forms of Intellectual Property Patents Trademarks Copyrights Trade Secrets 12-44
  45. 45. FIGURE 2.4 Patent Applications and Patents Issued
  46. 46. FIGURE 2.6 Trademark Applications and Trademarks and Renewals Issued 2 - 46
  47. 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. 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. 49. Proper Understanding for What a Patent MeansA 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 inventorhas no right to make, use, or sell the chip.To do so, the inventor would need to obtain permission from Intel. Intel mayrefuse permission, or ask that a licensing fee be paid for the rights to infringeon its patent.While this system may seem odd, it is really the only way the system couldwork. Many inventions are improvements on existing inventions, and thesystem allows the improvements to be (patented) and sold, but only with thepermission of the original inventors, who usually benefit by obtaininglicensing income in exchange for their consent. 12-49
  50. 50. Growth in Patent Applications in the United States 12-50
  51. 51. Three Basic Requirements for Obtaining a Patent 12-51
  52. 52. Types of PatentsType Type of Invention Covered Duration New or useful process, machine, 20 years fromUtility 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 theDesign design for manufactured products. original application. 20 years from Any new varieties of plants that can bePlant the date of the reproduced asexually. original application. 12-52
  53. 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: ’s one-click ordering system. ’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. 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 device1. Establish the invention’s novelty 2 - 54
  55. 55. The Process of Obtaining a Patent 12-55
  56. 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. 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. 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. 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 everyService 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,,, and Zipcar. 12-59
  60. 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 everyCertification 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. 61. What is Protected Under Trademark Law 1 of 2 Item Example(s) Words YouTern, PledgeMusic, GiftZip Numbers 3M, MSNBA, 1-800-FLOWERSand letters Designs Nike swoosh logo and logos Sounds MGM’s lion’s roar 12-61
  62. 62. What is Protected Under Trademark Law 2 of 2 Item ExampleFragrances 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. 63. Exclusions From Trademark Protection Item Example Immoral or Profane wordsscandalous matter Labeling oranges “Fresh FloridaDeceptive 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. 64. The Process of Obtaining a Trademark 12-64
  65. 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. 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. 67. What is Protected By a Copyright? Literary works Musical compositionsComputer software Dramatic works Pantomimes and Pictorial, graphic, andchoreographic works sculptural works 12-67
  68. 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. 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. 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. 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. 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. 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. 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, ordiscovered. 12-74
  75. 75. Physical Measures for Protecting Trade Secrets Restricting access Labeling documents Password protecting Maintaining logbooks confidential computer for visitors filesMaintaining logbooks for Maintaining adequate access to sensitive overall security material measures 12-75
  76. 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. 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. 78. Protecting Your Ideas Type of What It TimeProtection Covers Required CostCopyright Works of original About 2 weeks About $35 authorshipTrademark Logos, names, 6 – 12 months $900 - $1,500 phrasesDesign patent Look of an Up to 2 years $5,000 - $20,000 original productUtility patent How an original 2 – 5 years $5,000 - $20,000 product worksBusiness A business 2 – 5 years $5,000 - $20,000method patent process Source: Anne Field, “How to Knock Out Knock Offs,” Business Week, March 14, 2005. Offs,” Week, 2 - 78
  79. 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. 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.