The Organizational Plan McGraw-Hill/Irwin Entrepreneurship, 7/e Copyright © 2008  The McGraw-Hill Companies, Inc. All righ...
Developing the Management Team <ul><li>The management team is expected: </li></ul><ul><ul><li>To not operate the business ...
Legal Forms of Business <ul><li>Three basic legal forms of business: </li></ul><ul><ul><li>Proprietorship: single owner, u...
Ownership  (1 of 2) <ul><li>Proprietorship:  </li></ul><ul><ul><li>Owner is the individual who starts the business.  </li>...
Ownership  (2 of 2) <ul><li>Corporation: </li></ul><ul><ul><li>Ownership is reflected by ownership of shares of stock.  </...
Liability of Owners <ul><li>Sole proprietorship: </li></ul><ul><ul><li>Individual is liable for business liabilities. </li...
Costs of Starting a Business <ul><li>Sole proprietorship: </li></ul><ul><ul><li>Filing for a business or trade name.  </li...
Continuity of Business <ul><li>Sole proprietorship </li></ul><ul><ul><li>Death of owner results in the termination of the ...
Transferability of Interest  (1 of 2) <ul><li>Sole proprietorship: </li></ul><ul><ul><li>Entrepreneur has the right to sel...
Transferability of Interest  (2 of 2) <ul><li>Corporation: </li></ul><ul><ul><li>Shareholders may transfer their shares at...
Capital Requirements <ul><li>Sole proprietorship: </li></ul><ul><ul><li>From loans or by additional personal contributions...
Management Control  (1 of 2) <ul><li>Sole proprietorship: </li></ul><ul><ul><li>Entrepreneur is responsible for and has so...
Management Control  (2 of 2) <ul><li>Partnership-limited  </li></ul><ul><ul><li>Separation of ownership and control.  </li...
Distribution of Profits and Losses  (1 of 2) <ul><li>Sole proprietorship: </li></ul><ul><ul><li>Receive all distributions ...
Distribution of Profits and Losses  (2 of 2) <ul><li>Partnership-limited </li></ul><ul><ul><li>Protect limited partners ag...
Attractiveness for Raising Capital <ul><li>Sole proprietorship </li></ul><ul><ul><li>Limited to capability of owner and su...
Tax Attributes of Forms of Business  (1 of 2) <ul><li>Sole proprietorship: </li></ul><ul><ul><li>IRS treats business as th...
Tax Attributes of Forms of Business  (2 of 2) <ul><li>Partnership-limited: </li></ul><ul><ul><li>Has the advantage of limi...
Limited Liability Company Vs S Corporation <ul><li>Venture capitalists prefer LLCs as a form of business entity.  </li></u...
S Corporation <ul><li>Combines the tax advantages of the partnership and the corporation.  </li></ul><ul><li>Passage of th...
S Corporation- Advantages <ul><li>Gains/losses = Personal income/loss. </li></ul><ul><li>Limited Liability Protection. </l...
S Corporation- Disadvantages <ul><li>Some restrictions for qualification. </li></ul><ul><li>Potential tax disadvantages. <...
Limited Liability Company <ul><li>Partnership/corporation hybrid, laws differ from state to state. </li></ul><ul><li>Has m...
Advantages of LLC <ul><li>LLC liabilities added to partnership interest. </li></ul><ul><li>Most States do not tax LLCs. </...
Designing the Organization <ul><li>This is the entrepreneur’s formal and explicit indication to the members of the organiz...
Stages in Organizational Design <ul><li><<Insert Figure 9.1>> </li></ul>
Building the Management Team and a Successful Organization Culture  (1 of 2) <ul><li>A management team must be able to acc...
Building the Management Team and a Successful Organization Culture  (2 of 2) <ul><li>Factors to establish an effective tea...
Board of Directors  (1 of 2) <ul><li>Functions of the board of directors: </li></ul><ul><ul><li>Reviewing operating and ca...
Board of Directors  (2 of 2) <ul><li>They must be chosen to meet the requirements of the Sarbanes-Oxley Act and the follow...
Board of Advisors <ul><li>More loosely tied to the organization. </li></ul><ul><li>Serve the venture only in an advisory c...
Organization and Use of Advisors <ul><li>Usually used on an as-needed basis.  </li></ul><ul><li>Can also become an importa...
 
Intellectual Property and Other Legal Issues for the Entrepreneur McGraw-Hill/Irwin Entrepreneurship, 7/e Copyright © 2008...
Intellectual Property <ul><li>Includes:  </li></ul><ul><ul><li>Patents. </li></ul></ul><ul><ul><li>Trademarks. </li></ul><...
Selecting a Lawyer <ul><li>Lawyer may work on a:  </li></ul><ul><ul><li>Retainer basis. </li></ul></ul><ul><ul><li>One-tim...
Types of Patents <ul><li>Patent: grants holder protection from others making, using, or selling similar idea; issued by th...
International Patents <ul><li>The Patent Cooperation Treaty (PCT) was established to provide firms protection in global ma...
The Disclosure Document <ul><li>Statement to U.S. Patent and Trademark Office by inventor disclosing intent to patent idea...
The Patent Application  (1 of 2) <ul><li>Introduction  </li></ul><ul><ul><li>Background. </li></ul></ul><ul><ul><li>Advant...
The Patent Application  (2 of 2) <ul><li>Claims </li></ul><ul><ul><li>Serve to specify what the entrepreneur is trying to ...
Patent Infringement <ul><li>Many businesses, inventions, or innovations are results of improvements on, or modifications o...
Business Method Patents <ul><li>Growth of Internet use and software development has given rise to use of business method p...
Trademarks <ul><li>A distinguishing word, name, or symbol used to identify a product. </li></ul><ul><ul><li>Can last indef...
Registering the Trademark  (1 of 2) <ul><li>Federal registration of trademarks – PTO.  </li></ul><ul><li>Filing must meet ...
Registering the Trademark  (2 of 2) <ul><li>Once accepted, trademark is published in the Trademark Official Gazette to all...
Copyrights <ul><li>Right given to prevent others from printing, copying, or publishing any original works of authorship </...
Trade Secrets <ul><li>Protection against others revealing or disclosing information that could be damaging to business. </...
Licensing  (1 of 2) <ul><li>Contractual agreement giving rights to others to use intellectual property in return for a roy...
Licensing  (2 of 2) <ul><li>Question to be considered by an entrepreneur: </li></ul><ul><ul><li>Will customers recognize l...
Product Safety and Liability  (1 of 2) <ul><li>Responsibility of a company to meet any legal specifications regarding a ne...
Product Safety and Liability  (2 of 2) <ul><li>Claims regarding product liability usually fall under one of the following ...
Insurance <ul><li>Provides a means of managing risk in the new business. </li></ul><ul><li>Entrepreneurs usually have limi...
Types of Insurance and Possible Coverage <ul><li><<Insert Table 6.4>> </li></ul>
Sarbanes-Oxley Act  (1 of 3) <ul><li>Congress passed the Act in 2002.  </li></ul><ul><ul><li>Has provided a mechanism for ...
Sarbanes-Oxley Act  (2 of 3) <ul><li>Attempt to influence the auditor or impede the internal auditing process is considere...
Sarbanes-Oxley Act  (3 of 3) <ul><li>Though private companies are not included, they are subject to control if:  </li></ul...
Contracts  (1 of 2) <ul><li>A legally binding agreement between two parties. </li></ul><ul><li>Business deals are conclude...
Contracts  (2 of 2) <ul><li>Four essential items in an agreement to provide the best legal protection:  </li></ul><ul><ul>...
 
The  Financial  Plan McGraw-Hill/Irwin Entrepreneurship, 7/e Copyright © 2008  The McGraw-Hill Companies, Inc. All rights ...
Operating and Capital Budgets  (1 of 2) <ul><li>Developed before the pro forma income statement.  </li></ul><ul><li>Sales ...
Example of a Manufacturing Budget <ul><li><<Insert Table 10.1>> </li></ul>
Operating and Capital Budgets  (2 of 2) <ul><li>Operating costs:  </li></ul><ul><ul><li>List of fixed expenses incurred re...
Example of an Operating Budget <ul><li><<Insert Table 10.2>> </li></ul>
Pro Forma Income Statements  (1 of 2) <ul><li>Pro forma income: projected net profit calculated from projected revenue min...
Pro Forma Income Statements  (2 of 2) <ul><li>Increasing selling expenses as sales increase should be taken into account. ...
Example of a Pro Forma Income Statement <ul><li><<Insert Table 10.3>> </li></ul>
Pro Forma Cash Flow  (1 of 2) <ul><li>Projected cash available calculated from projected cash accumulations minus projecte...
Statement of Cash Flows: The Indirect Method <ul><li><<Insert Table 10.5>> </li></ul>
Pro Forma Cash Flow  (2 of 2) <ul><li>Entrepreneurs must make monthly projections of cash.  </li></ul><ul><li>Difficulty w...
Example of a Pro Forma Cash Flow <ul><li><<Insert Table 10.6>> </li></ul>
Pro Forma Balance Sheet <ul><li>Pro forma balance sheet: summarizes the projected assets, liabilities, and net worth of th...
Example of a Balance Sheet <ul><li><<Insert table 10.7>> </li></ul>
Break-Even Analysis <ul><li>Break-even: volume of sales where the venture neither makes a profit nor incurs a loss. </li><...
Graphic Illustration of Breakeven <ul><li><<Insert Figure 10.1>> </li></ul>
Pro Forma Sources and Applications of Funds <ul><li>Sources </li></ul><ul><ul><li>Operations. </li></ul></ul><ul><ul><li>N...
Example for Sources and Applications of Funds <ul><li><<Insert Table 10.9>> </li></ul>
Software Packages <ul><li>A spreadsheet program (Microsoft Excel) is most suitable for completing pro forma statements. </...
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Section Three

  1. 2. The Organizational Plan McGraw-Hill/Irwin Entrepreneurship, 7/e Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 9
  2. 3. Developing the Management Team <ul><li>The management team is expected: </li></ul><ul><ul><li>To not operate the business as a sideline or part-time venture. </li></ul></ul><ul><ul><li>To operate the business full time and at a modest salary. </li></ul></ul>
  3. 4. Legal Forms of Business <ul><li>Three basic legal forms of business: </li></ul><ul><ul><li>Proprietorship: single owner, unlimited liability, controls all decisions, and receives all profits. </li></ul></ul><ul><ul><li>Partnership: two or more individuals, unlimited liability who have pooled resources to own a business. </li></ul></ul><ul><ul><li>Corporation (C corporation): most common form of corporation, regulated by statute, and treated as a separate legal entity for liability and tax purposes. </li></ul></ul><ul><li>New forms of business formations: </li></ul><ul><ul><li>Limited liability company (LLC). </li></ul></ul><ul><ul><li>Limited liability partnership (LLP). </li></ul></ul><ul><ul><li>S corporation. </li></ul></ul>
  4. 5. Ownership (1 of 2) <ul><li>Proprietorship: </li></ul><ul><ul><li>Owner is the individual who starts the business. </li></ul></ul><ul><ul><li>Has full responsibility for the operations. </li></ul></ul><ul><li>Partnership: </li></ul><ul><ul><li>General partnership owners and limited partnership owners. </li></ul></ul><ul><li>Limited liability partnerships (LLP): </li></ul><ul><ul><li>Partnership is treated as a legal entity. </li></ul></ul>
  5. 6. Ownership (2 of 2) <ul><li>Corporation: </li></ul><ul><ul><li>Ownership is reflected by ownership of shares of stock. </li></ul></ul><ul><ul><li>No limit to the number of shareholders. </li></ul></ul><ul><li>S corporation: </li></ul><ul><ul><li>Maximum number of shareholders is 100. </li></ul></ul>
  6. 7. Liability of Owners <ul><li>Sole proprietorship: </li></ul><ul><ul><li>Individual is liable for business liabilities. </li></ul></ul><ul><li>Partnership-general: </li></ul><ul><ul><li>Liable for all aspects of the business. </li></ul></ul><ul><ul><li>Amount of personal liability is shared equally. </li></ul></ul><ul><li>Partnership-limited: </li></ul><ul><ul><li>Limited partners liable for amount of capital contribution. </li></ul></ul><ul><li>Corporation: </li></ul><ul><ul><li>Owners liable only for the amount of their investment. </li></ul></ul>
  7. 8. Costs of Starting a Business <ul><li>Sole proprietorship: </li></ul><ul><ul><li>Filing for a business or trade name. </li></ul></ul><ul><li>Partnership-general: </li></ul><ul><ul><li>Partnership agreement, legal costs, trade name filing fees. </li></ul></ul><ul><li>Partnership-limited: </li></ul><ul><ul><li>More complex than a general partnership. </li></ul></ul><ul><li>Corporation: </li></ul><ul><ul><li>Created by statute, articles of incorporation, filing fees, taxes, fees for states in which corporation registers to do business </li></ul></ul>
  8. 9. Continuity of Business <ul><li>Sole proprietorship </li></ul><ul><ul><li>Death of owner results in the termination of the business. </li></ul></ul><ul><li>Partnership-general: </li></ul><ul><ul><li>Death or withdrawal of one of the partners results in partnership termination, unless stipulated otherwise. </li></ul></ul><ul><li>Partnership-limited: </li></ul><ul><ul><li>Death or withdrawal has no effect on continuity of business. </li></ul></ul><ul><li>Corporation: </li></ul><ul><ul><li>Death or withdrawal has no impact on continuation of business. </li></ul></ul>
  9. 10. Transferability of Interest (1 of 2) <ul><li>Sole proprietorship: </li></ul><ul><ul><li>Entrepreneur has the right to sell or transfer any assets in the business. </li></ul></ul><ul><li>Partnership-general: </li></ul><ul><ul><li>Cannot sell their interest without first refusal from the remaining general partners. </li></ul></ul><ul><li>Partnership-limited: </li></ul><ul><ul><li>Can sell their interest at any time without consent of the general partners. </li></ul></ul>
  10. 11. Transferability of Interest (2 of 2) <ul><li>Corporation: </li></ul><ul><ul><li>Shareholders may transfer their shares at any time without consent from the other shareholders. </li></ul></ul><ul><ul><li>Disadvantage: It can affect the ownership control </li></ul></ul><ul><li>S Corporation: </li></ul><ul><ul><li>Transfer of interest can occur only as long as the buyer is an individual. </li></ul></ul>
  11. 12. Capital Requirements <ul><li>Sole proprietorship: </li></ul><ul><ul><li>From loans or by additional personal contributions by the entrepreneur. </li></ul></ul><ul><li>Partnership: </li></ul><ul><ul><li>Loans can be obtained from banks but may require change in partnership agreement. </li></ul></ul><ul><li>Corporation: </li></ul><ul><ul><li>Stock may be sold as either voting or nonvoting. </li></ul></ul>
  12. 13. Management Control (1 of 2) <ul><li>Sole proprietorship: </li></ul><ul><ul><li>Entrepreneur is responsible for and has sole authority over all business decisions. </li></ul></ul><ul><li>Partnership-general: </li></ul><ul><ul><li>Can present problems if partnership agreement is not concise. </li></ul></ul><ul><ul><li>Usually majority rules unless agreement states otherwise. </li></ul></ul>
  13. 14. Management Control (2 of 2) <ul><li>Partnership-limited </li></ul><ul><ul><li>Separation of ownership and control. </li></ul></ul><ul><ul><li>Limited partners have no control over business decisions. </li></ul></ul><ul><ul><li>Rights of all partners are clearly defined in the agreement. </li></ul></ul><ul><li>Corporation: </li></ul><ul><ul><li>Management has control over day-to-day business </li></ul></ul><ul><ul><li>Majority stockholders control major long-term decisions through vote. </li></ul></ul><ul><ul><li>Stockholders can indirectly affect operation by electing someone to the board of directors. </li></ul></ul>
  14. 15. Distribution of Profits and Losses (1 of 2) <ul><li>Sole proprietorship: </li></ul><ul><ul><li>Receive all distributions of profits from the business. </li></ul></ul><ul><ul><li>Personally responsible for all losses. </li></ul></ul><ul><li>Partnership-general: </li></ul><ul><ul><li>Distribution of profits and losses depends on the agreement. </li></ul></ul><ul><ul><li>Sharing of profits and losses likely to be a function of the partners’ investments. </li></ul></ul>
  15. 16. Distribution of Profits and Losses (2 of 2) <ul><li>Partnership-limited </li></ul><ul><ul><li>Protect limited partners against personal liability. </li></ul></ul><ul><ul><li>May reduce share in any profits. </li></ul></ul><ul><li>Corporation: </li></ul><ul><ul><li>Distribute profits through dividends to stockholders. </li></ul></ul><ul><ul><li>Losses will often result in no dividends. </li></ul></ul>
  16. 17. Attractiveness for Raising Capital <ul><li>Sole proprietorship </li></ul><ul><ul><li>Limited to capability of owner and success of the business. </li></ul></ul><ul><ul><li>Least attractive for raising capital. </li></ul></ul><ul><li>Partnership-general: </li></ul><ul><ul><li>Depends on capability of partners and success of business. </li></ul></ul><ul><li>Corporation: </li></ul><ul><ul><li>Most attractive for raising capital. </li></ul></ul><ul><ul><li>Shares of stock, bonds, and/or debt are all opportunities for raising capital with limited liability. </li></ul></ul>
  17. 18. Tax Attributes of Forms of Business (1 of 2) <ul><li>Sole proprietorship: </li></ul><ul><ul><li>IRS treats business as the individual owner. </li></ul></ul><ul><ul><li>All income appears on owner’s return as personal income. </li></ul></ul><ul><ul><li>Tax advantages: </li></ul></ul><ul><ul><ul><li>No double tax when profits are distributed to owner. </li></ul></ul></ul><ul><ul><ul><li>No capital stock tax or penalty for retained earnings. </li></ul></ul></ul><ul><li>Partnership-general: </li></ul><ul><ul><li>Tax advantages and disadvantages similar sole proprietorship. </li></ul></ul>
  18. 19. Tax Attributes of Forms of Business (2 of 2) <ul><li>Partnership-limited: </li></ul><ul><ul><li>Has the advantage of limited liability. </li></ul></ul><ul><ul><li>Treated the same as the LLC for tax purposes. </li></ul></ul><ul><li>Corporation: </li></ul><ul><ul><li>Can take many deductions and expenses not available to proprietorship or partnership. </li></ul></ul><ul><ul><li>Distribution of dividends is taxed twice. </li></ul></ul><ul><ul><li>Double taxation can be avoided if income is distributed to entrepreneur(s) in the form of salary. </li></ul></ul>
  19. 20. Limited Liability Company Vs S Corporation <ul><li>Venture capitalists prefer LLCs as a form of business entity. </li></ul><ul><ul><li>Popularity has resulted from finalization of the new regulation. </li></ul></ul><ul><ul><li>LLC can be automatically taxed as a partnership, unless the entrepreneur actively makes another choice. </li></ul></ul><ul><li>Growth rate of the formation of S corporations has leveled off primarily because of the wide acceptance of LLCs. </li></ul>
  20. 21. S Corporation <ul><li>Combines the tax advantages of the partnership and the corporation. </li></ul><ul><li>Passage of the 1996 law loosened some of the restrictions. </li></ul><ul><li>In 2004, Congress responded to criticisms of the restrictions on S corporations as compared to LLCs. </li></ul><ul><ul><li>Intent was to make the S corporation as advantageous as the LLC. </li></ul></ul>
  21. 22. S Corporation- Advantages <ul><li>Gains/losses = Personal income/loss. </li></ul><ul><li>Limited Liability Protection. </li></ul><ul><li>No minimum tax. </li></ul><ul><li>Stock transferable. </li></ul><ul><li>Stock = Voting or non-voting. </li></ul><ul><li>Cash method of accounting. </li></ul><ul><li>Long-term capital gains/losses deductible to shareholders. </li></ul>
  22. 23. S Corporation- Disadvantages <ul><li>Some restrictions for qualification. </li></ul><ul><li>Potential tax disadvantages. </li></ul><ul><li>Most fringe benefits not deductible for shareholders. </li></ul><ul><li>Must have calendar tax year. </li></ul><ul><li>One class of stock. </li></ul><ul><li>Net loss limited to shareholder’s stock plus loans to business. </li></ul><ul><li>No more than 75 shareholders. </li></ul>
  23. 24. Limited Liability Company <ul><li>Partnership/corporation hybrid, laws differ from state to state. </li></ul><ul><li>Has members. </li></ul><ul><li>No shares issued, each member owns according to articles of incorporation. </li></ul><ul><li>Liability = Member’s capital contribution. </li></ul><ul><li>Transfer requires unanimous consent. </li></ul><ul><li>Taxed as partnership. </li></ul><ul><li>Standard term = 30 years, continuity restricted. </li></ul>
  24. 25. Advantages of LLC <ul><li>LLC liabilities added to partnership interest. </li></ul><ul><li>Most States do not tax LLCs. </li></ul><ul><li>Ownership not limited to individuals. </li></ul><ul><li>Members share income, profit, expense, etc., among themselves. </li></ul>
  25. 26. Designing the Organization <ul><li>This is the entrepreneur’s formal and explicit indication to the members of the organization as to what is expected of them. </li></ul><ul><ul><li>Organization structure. </li></ul></ul><ul><ul><li>Planning, measurement, and evaluation schemes. </li></ul></ul><ul><ul><li>Rewards. </li></ul></ul><ul><ul><li>Selection criteria. </li></ul></ul><ul><ul><li>Training. </li></ul></ul>
  26. 27. Stages in Organizational Design <ul><li><<Insert Figure 9.1>> </li></ul>
  27. 28. Building the Management Team and a Successful Organization Culture (1 of 2) <ul><li>A management team must be able to accomplish three functions: </li></ul><ul><ul><li>Execute the business plan. </li></ul></ul><ul><ul><li>Identify fundamental changes in the business as they occur. </li></ul></ul><ul><ul><li>Make adjustments to the plan based on changes in the environment and market that will maintain profitability. </li></ul></ul>
  28. 29. Building the Management Team and a Successful Organization Culture (2 of 2) <ul><li>Factors to establish an effective team, and in turn a successful organization culture: </li></ul><ul><ul><li>Desired culture must match business strategy outlined in the business plan. </li></ul></ul><ul><ul><li>The workplace must encourage communication from the bottom up. </li></ul></ul><ul><ul><li>Entrepreneur should be flexible enough to try different things. </li></ul></ul><ul><ul><li>Entrepreneur needs to spend extra time in the hiring process. </li></ul></ul><ul><ul><li>Core values and appropriate tools must be provided for employees to effectively complete their jobs. </li></ul></ul>
  29. 30. Board of Directors (1 of 2) <ul><li>Functions of the board of directors: </li></ul><ul><ul><li>Reviewing operating and capital budgets. </li></ul></ul><ul><ul><li>Developing longer-term strategic plans for growth and expansion. </li></ul></ul><ul><ul><li>Supporting day-to-day activities. </li></ul></ul><ul><ul><li>Resolving conflicts among owners or shareholders. </li></ul></ul><ul><ul><li>Ensuring the proper use of assets. </li></ul></ul><ul><ul><li>Developing a network of information sources for the entrepreneurs. </li></ul></ul>
  30. 31. Board of Directors (2 of 2) <ul><li>They must be chosen to meet the requirements of the Sarbanes-Oxley Act and the following criteria: </li></ul><ul><ul><li>Individuals who can work with a diverse group and will commit to the venture’s mission. </li></ul></ul><ul><ul><li>Candidates who understand the market environment. </li></ul></ul><ul><ul><li>Candidates who can contribute important skills to the new venture’s achievement of planning goals. </li></ul></ul><ul><ul><li>Candidates who will show good judgment in business decision making. </li></ul></ul>
  31. 32. Board of Advisors <ul><li>More loosely tied to the organization. </li></ul><ul><li>Serve the venture only in an advisory capacity. </li></ul><ul><li>Has no legal status, unlike the board of directors. </li></ul><ul><li>Likely to meet less frequently or depending on the need to discuss important venture decisions. </li></ul><ul><li>Useful in a family business. </li></ul><ul><li>Selection process for advisors can be similar to the process for selecting a board of directors. </li></ul>
  32. 33. Organization and Use of Advisors <ul><li>Usually used on an as-needed basis. </li></ul><ul><li>Can also become an important part of the organization. </li></ul><ul><li>Need to be managed just like any other permanent part of the new venture. </li></ul><ul><li>Even after hiring advisors, the entrepreneur should question their advice. </li></ul>
  33. 35. Intellectual Property and Other Legal Issues for the Entrepreneur McGraw-Hill/Irwin Entrepreneurship, 7/e Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6
  34. 36. Intellectual Property <ul><li>Includes: </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><ul><li>Represents important assets to the entrepreneur. </li></ul><ul><li>Should be understood even before engaging the services of an attorney. </li></ul>
  35. 37. Selecting a Lawyer <ul><li>Lawyer may work on a: </li></ul><ul><ul><li>Retainer basis. </li></ul></ul><ul><ul><li>One-time fee. </li></ul></ul><ul><li>A good working relationship with a lawyer: </li></ul><ul><ul><li>Eases some of the risk in starting a new business. </li></ul></ul><ul><ul><li>Gives the entrepreneur necessary confidence. </li></ul></ul><ul><li>Entrepreneur can offer lawyer stock in exchange for the services. </li></ul>
  36. 38. Types of Patents <ul><li>Patent: grants holder protection from others making, using, or selling similar idea; issued by the PTO. </li></ul><ul><ul><li>Utility patent: grants owner protection from anyone else making, using, and/or selling the identified invention. </li></ul></ul><ul><ul><li>Design patent: provide inventor with a negative right excluding others from making, using, or selling an article having the ornamental appearance given in the drawings included in the patent. </li></ul></ul><ul><ul><li>Plant patent: given for new varieties of plants, represent a limited area of interest. </li></ul></ul>
  37. 39. International Patents <ul><li>The Patent Cooperation Treaty (PCT) was established to provide firms protection in global markets. </li></ul><ul><ul><li>Has over 100 participants. </li></ul></ul><ul><ul><li>Facilitates patent filings in multiple countries in one office. </li></ul></ul><ul><ul><li>Administered by the World Intellectual Property Organization (WIPO) in Geneva, Switzerland. </li></ul></ul><ul><ul><li>Provides a preliminary search that assesses whether filing firm will face infringements in any country. </li></ul></ul><ul><li>Significant differences may exists in patent laws in each of these countries. </li></ul>
  38. 40. The Disclosure Document <ul><li>Statement to U.S. Patent and Trademark Office by inventor disclosing intent to patent idea. </li></ul><ul><ul><li>Establish a date of conception of the invention. </li></ul></ul><ul><ul><li>Important when two entrepreneurs file patents on similar inventions. </li></ul></ul><ul><ul><li>Relevant when foreign companies are involved. </li></ul></ul><ul><li>To file a disclosure document: </li></ul><ul><ul><li>Prepare a clear and concise description of the invention. </li></ul></ul><ul><ul><li>Include photographs. </li></ul></ul><ul><ul><li>Include a cover letter and a duplicate with the description. </li></ul></ul>
  39. 41. The Patent Application (1 of 2) <ul><li>Introduction </li></ul><ul><ul><li>Background. </li></ul></ul><ul><ul><li>Advantages of the invention and the nature of problems that it overcomes. </li></ul></ul><ul><ul><li>States how the invention differs from existing offerings. </li></ul></ul><ul><li>Description of invention </li></ul><ul><ul><li>Description of the drawings that accompany it. </li></ul></ul><ul><ul><li>Detailed description of the invention. </li></ul></ul>
  40. 42. The Patent Application (2 of 2) <ul><li>Claims </li></ul><ul><ul><li>Serve to specify what the entrepreneur is trying to patent. </li></ul></ul><ul><ul><li>Essential parts of the invention should be described in broad terms </li></ul></ul><ul><ul><ul><li>Claims must not be too general either. </li></ul></ul></ul><ul><li>Application should contain a declaration or oath signed by the inventor or inventors. </li></ul>
  41. 43. Patent Infringement <ul><li>Many businesses, inventions, or innovations are results of improvements on, or modifications of, existing products. </li></ul><ul><li>Copying and improving on a product: </li></ul><ul><ul><li>May be perfectly legal </li></ul></ul><ul><ul><li>A good business strategy. </li></ul></ul><ul><li>Products can be licensed from the patent holder. </li></ul><ul><li>Advisable to hire a patent attorney to ensure no possibility of patent infringement. </li></ul>
  42. 44. Business Method Patents <ul><li>Growth of Internet use and software development has given rise to use of business method patents. </li></ul><ul><ul><li>E.g. Amazon.com. </li></ul></ul><ul><li>Firms that hold these patents use them to assault competitors. </li></ul><ul><ul><li>Subsequently provide a steady stream of income from royalties or licensing fees. </li></ul></ul>
  43. 45. Trademarks <ul><li>A distinguishing word, name, or symbol used to identify a product. </li></ul><ul><ul><li>Can last indefinitely. </li></ul></ul><ul><ul><li>Can be filed solely on intent to use the trademark in interstate or foreign commerce. </li></ul></ul><ul><ul><li>Can also be filed with intent to use in the future. </li></ul></ul><ul><li>Categories: </li></ul><ul><ul><li>Coined marks. </li></ul></ul><ul><ul><li>Arbitrary marks. </li></ul></ul><ul><ul><li>Suggestive marks. </li></ul></ul><ul><ul><li>Descriptive marks. </li></ul></ul>
  44. 46. Registering the Trademark (1 of 2) <ul><li>Federal registration of trademarks – PTO. </li></ul><ul><li>Filing must meet four requirements: </li></ul><ul><ul><li>Completion of the written form. </li></ul></ul><ul><ul><li>A drawing of the mark. </li></ul></ul><ul><ul><li>Five specimens showing actual use of the mark. </li></ul></ul><ul><ul><li>The fee. </li></ul></ul><ul><li>Initial determination of suitability takes 3 months. </li></ul><ul><ul><li>Objections must be raise within six months, or application is considered abandoned. </li></ul></ul><ul><ul><li>Right to appeal in case of refusal. </li></ul></ul>
  45. 47. Registering the Trademark (2 of 2) <ul><li>Once accepted, trademark is published in the Trademark Official Gazette to allow any party: </li></ul><ul><ul><li>30 days to oppose. </li></ul></ul><ul><ul><li>Request an extension to oppose. </li></ul></ul><ul><ul><li>Registration issued if no opposition is filed. </li></ul></ul><ul><ul><li>Procedure takes about 13 months from initial filing. </li></ul></ul>
  46. 48. Copyrights <ul><li>Right given to prevent others from printing, copying, or publishing any original works of authorship </li></ul><ul><ul><li>Issues surrounding access to material on the Internet have led to major legal battles for the entertainment industry. </li></ul></ul><ul><ul><li>Example: Napster. </li></ul></ul><ul><li>Copyrights are registered with the Library of Congress </li></ul><ul><ul><li>Usually do not require an attorney. </li></ul></ul><ul><ul><li>Term of the copyright is the life of the author plus 70 years. </li></ul></ul>
  47. 49. Trade Secrets <ul><li>Protection against others revealing or disclosing information that could be damaging to business. </li></ul><ul><ul><li>Have a life as long as the idea or process remains a secret. </li></ul></ul><ul><ul><li>Not covered by any federal law but is recognized under a governing body of common laws in each state. </li></ul></ul><ul><li>Entrepreneur needs to take proper precautions. </li></ul><ul><li>Legal action can be taken only after the secret has been revealed. </li></ul>
  48. 50. Licensing (1 of 2) <ul><li>Contractual agreement giving rights to others to use intellectual property in return for a royalty or fee. Type of licensing: </li></ul><ul><ul><li>Patent license agreement: specifies how the licensee would have access to the patent. </li></ul></ul><ul><ul><li>Trademark: involves a franchising agreement. </li></ul></ul><ul><ul><li>Copyrights. </li></ul></ul><ul><li>Licensing has become a revenue boom for many Fortune 500 companies. </li></ul>
  49. 51. Licensing (2 of 2) <ul><li>Question to be considered by an entrepreneur: </li></ul><ul><ul><li>Will customers recognize licensed property? </li></ul></ul><ul><ul><li>How well does the licensed property complement my products or services? </li></ul></ul><ul><ul><li>How much experience do I have with the licensed property? </li></ul></ul><ul><ul><li>What is the long-term outlook for the licensed property? </li></ul></ul><ul><ul><li>What kind of protection does the licensing agreement provide? </li></ul></ul><ul><ul><li>What commitment do I have in terms of payment of royalties, sales quotas, and so on? </li></ul></ul><ul><ul><li>Are renewal options possible and under what terms? </li></ul></ul>
  50. 52. Product Safety and Liability (1 of 2) <ul><li>Responsibility of a company to meet any legal specifications regarding a new product covered by the Consumer Product Safety Act. </li></ul><ul><ul><li>First passed in 1972. </li></ul></ul><ul><ul><li>Created a five-member commission with: </li></ul></ul><ul><ul><ul><li>Power to prescribe safety standards. </li></ul></ul></ul><ul><ul><ul><li>Responsibility and power to identify substantial hazards and bar products it considers unsafe. </li></ul></ul></ul><ul><li>Act was amended and signed into law in 1990. </li></ul><ul><ul><li>Establishes stricter guidelines for reporting product defects and any injury or death resulting from such defects. </li></ul></ul>
  51. 53. Product Safety and Liability (2 of 2) <ul><li>Claims regarding product liability usually fall under one of the following categories: </li></ul><ul><ul><li>Negligence. </li></ul></ul><ul><ul><li>Warranty. </li></ul></ul><ul><ul><li>Strict liability. </li></ul></ul><ul><ul><li>Misrepresentation. </li></ul></ul><ul><li>Best protection against product liability is to: </li></ul><ul><ul><li>Produce safe products. </li></ul></ul><ul><ul><li>Warn consumers of any potential hazards. </li></ul></ul>
  52. 54. Insurance <ul><li>Provides a means of managing risk in the new business. </li></ul><ul><li>Entrepreneurs usually have limited resources in the beginning. </li></ul><ul><ul><li>Some insurances are required by law and cannot be avoided. </li></ul></ul><ul><ul><li>Other insurances are not required but may be necessary to protect the financial net worth of the venture. </li></ul></ul>
  53. 55. Types of Insurance and Possible Coverage <ul><li><<Insert Table 6.4>> </li></ul>
  54. 56. Sarbanes-Oxley Act (1 of 3) <ul><li>Congress passed the Act in 2002. </li></ul><ul><ul><li>Has provided a mechanism for greater control over the financial activities of public companies. </li></ul></ul><ul><ul><li>Has created some difficulties for start-ups and smaller companies. </li></ul></ul><ul><li>Under this law: </li></ul><ul><ul><li>CEOs need to vouch for financial statements through a series of internal control mechanisms and reports. </li></ul></ul><ul><ul><li>Directors must meet background, length of service, and responsibilities requirements regarding internal auditing and control. </li></ul></ul>
  55. 57. Sarbanes-Oxley Act (2 of 3) <ul><li>Attempt to influence the auditor or impede the internal auditing process is considered a criminal act. </li></ul><ul><ul><li>Law covers bank fraud. </li></ul></ul><ul><li>Passage of this law has been of some concern due to: </li></ul><ul><ul><li>Interpretation of this law. </li></ul></ul><ul><ul><li>Subsequent directors’ liability. </li></ul></ul><ul><li>Foreign companies that trade on U.S. stock exchanges often delist. </li></ul>
  56. 58. Sarbanes-Oxley Act (3 of 3) <ul><li>Though private companies are not included, they are subject to control if: </li></ul><ul><ul><li>They consult with a public company. </li></ul></ul><ul><ul><li>Influence that public company in any wrongdoing established by the Sarbanes-Oxley Act. </li></ul></ul><ul><li>Entrepreneurs can set up a board of advisors instead of an extended board of directors. </li></ul>
  57. 59. Contracts (1 of 2) <ul><li>A legally binding agreement between two parties. </li></ul><ul><li>Business deals are concluded with a handshake, but in case of disagreements, entrepreneurs: </li></ul><ul><ul><li>May find that there is no deal. </li></ul></ul><ul><ul><li>May be liable for something never intended. </li></ul></ul><ul><li>Rule is to not to rely on a handshake if deal cannot be completed within one year. </li></ul><ul><li>Courts insist on a written contract for all transactions over $500. </li></ul>
  58. 60. Contracts (2 of 2) <ul><li>Four essential items in an agreement to provide the best legal protection: </li></ul><ul><ul><li>All parties involved should be named and specific roles in the transaction specified. </li></ul></ul><ul><ul><li>Transaction should be described in detail. </li></ul></ul><ul><ul><li>Exact value of the transaction should be specified. </li></ul></ul><ul><ul><li>Signature(s) of the person(s) involved in the deal should be obtained. </li></ul></ul>
  59. 62. The Financial Plan McGraw-Hill/Irwin Entrepreneurship, 7/e Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 10
  60. 63. Operating and Capital Budgets (1 of 2) <ul><li>Developed before the pro forma income statement. </li></ul><ul><li>Sales budget: estimate of the expected volume of sales by month. </li></ul><ul><ul><li>Cost of sales can be determined from the sales forecasts. </li></ul></ul><ul><ul><li>In manufacturing ventures: costs of internal production or subcontracting are compared. </li></ul></ul><ul><ul><li>Includes estimated ending inventory required as a buffer. </li></ul></ul>
  61. 64. Example of a Manufacturing Budget <ul><li><<Insert Table 10.1>> </li></ul>
  62. 65. Operating and Capital Budgets (2 of 2) <ul><li>Operating costs: </li></ul><ul><ul><li>List of fixed expenses incurred regardless of sales volume. </li></ul></ul><ul><ul><li>Variable expenses must be linked to strategy in the business plan. </li></ul></ul><ul><li>Capital budgets provide a basis for evaluating expenditures that will impact the business for more than one year. </li></ul>
  63. 66. Example of an Operating Budget <ul><li><<Insert Table 10.2>> </li></ul>
  64. 67. Pro Forma Income Statements (1 of 2) <ul><li>Pro forma income: projected net profit calculated from projected revenue minus projected costs and expenses. </li></ul><ul><li>Sales by month is calculated first. </li></ul><ul><ul><li>Basis of the figures: marketing research, industry sales, and some trial experience. </li></ul></ul><ul><ul><li>Forecasting techniques may be used. </li></ul></ul><ul><li>New ventures take time to build up sales. </li></ul><ul><li>Projections of all operating expenses for each of the months during the first year should be made. </li></ul>
  65. 68. Pro Forma Income Statements (2 of 2) <ul><li>Increasing selling expenses as sales increase should be taken into account. </li></ul><ul><li>Changes in expenses during the first year can necessitate month-by-month illustration. </li></ul><ul><li>Increase in individual expenses need to be reflected in the first year’s pro forma income statement. </li></ul><ul><li>Projections should be made for years 2 and 3 as well. </li></ul>
  66. 69. Example of a Pro Forma Income Statement <ul><li><<Insert Table 10.3>> </li></ul>
  67. 70. Pro Forma Cash Flow (1 of 2) <ul><li>Projected cash available calculated from projected cash accumulations minus projected cash disbursements. </li></ul><ul><ul><li>Not the same as profit. </li></ul></ul><ul><ul><li>Sales may not be regarded as cash. </li></ul></ul><ul><ul><li>Cash flow is a major problem faced by new ventures. </li></ul></ul><ul><ul><li>Use of profit as a measure of success for a new venture may be deceiving. </li></ul></ul><ul><li>Two standard methods used to project cash flow: </li></ul><ul><ul><li>Indirect method. </li></ul></ul><ul><ul><li>Direct method. </li></ul></ul>
  68. 71. Statement of Cash Flows: The Indirect Method <ul><li><<Insert Table 10.5>> </li></ul>
  69. 72. Pro Forma Cash Flow (2 of 2) <ul><li>Entrepreneurs must make monthly projections of cash. </li></ul><ul><li>Difficulty with projecting cash flows is determining the exact monthly receipts and disbursements. </li></ul><ul><li>Cash flow statement is based on best estimates. </li></ul>
  70. 73. Example of a Pro Forma Cash Flow <ul><li><<Insert Table 10.6>> </li></ul>
  71. 74. Pro Forma Balance Sheet <ul><li>Pro forma balance sheet: summarizes the projected assets, liabilities, and net worth of the new venture. </li></ul><ul><ul><li>A picture of the business at a certain moment in time. </li></ul></ul><ul><ul><li>Does not cover a period of time. </li></ul></ul><ul><li>Consists of: </li></ul><ul><ul><li>Assets: items that are owned or available to be used in the venture operations. </li></ul></ul><ul><ul><li>Liabilities: money that is owed to creditors. </li></ul></ul><ul><ul><li>Owner’s equity: amount owners have invested and/or retained from the venture operations. </li></ul></ul>
  72. 75. Example of a Balance Sheet <ul><li><<Insert table 10.7>> </li></ul>
  73. 76. Break-Even Analysis <ul><li>Break-even: volume of sales where the venture neither makes a profit nor incurs a loss. </li></ul><ul><li>Break-even sales point indicates the volume of sales needed to cover total variable and fixed expenses. </li></ul><ul><li>Major weakness in calculating the breakeven lies in determining if a cost is a fixed or variable. </li></ul>
  74. 77. Graphic Illustration of Breakeven <ul><li><<Insert Figure 10.1>> </li></ul>
  75. 78. Pro Forma Sources and Applications of Funds <ul><li>Sources </li></ul><ul><ul><li>Operations. </li></ul></ul><ul><ul><li>New investments. </li></ul></ul><ul><ul><li>Long-term borrowing. </li></ul></ul><ul><ul><li>Sale of assets. </li></ul></ul><ul><li>Uses/ Applications: </li></ul><ul><ul><li>Increase assets. </li></ul></ul><ul><ul><li>Retire long-term liabilities. </li></ul></ul><ul><ul><li>Reduce owner or stockholders’ equity. </li></ul></ul><ul><ul><li>Pay dividends. </li></ul></ul>
  76. 79. Example for Sources and Applications of Funds <ul><li><<Insert Table 10.9>> </li></ul>
  77. 80. Software Packages <ul><li>A spreadsheet program (Microsoft Excel) is most suitable for completing pro forma statements. </li></ul><ul><ul><li>Helps present different scenarios and assess their impact on the pro forma statements. </li></ul></ul><ul><ul><li>A simple and easy to use software is useful in the start-up stage. </li></ul></ul><ul><li>Software packages vary in price and complexity. </li></ul>

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