entrepreneurship and small business management chapter 16 addressing legal issues and managing risk
TRANSCRIPT
© 2012 Pearson Education, Upper Saddle River, NJ 07458.
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
Ch. 16 Performance Objectives Choose a legal structure for your
business. Understand the importance of contracts. Recognize key components of
commercial law. Protect your intellectual property. Protect your tangible assets and
manage risk.
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
Business Legal Structures Sole proprietorship—owned by one
person with unlimited liability and unlimited rights to profits
Partnership—two or more owners who make joint decisions and share profits, losses, assets, and liabilities
Corporation—legal entity composed of stockholders under a common name
© 2012 Pearson Education, Upper Saddle River, NJ 07458.
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
Sole Proprietorship Pros & ConsAdvantages Relatively easy to start Registration is low cost,
with little paperwork Fewer government
regulations Owner can make quick
decisions Owner is entitled to all
profits
Disadvantages May be difficult to
raise funds by oneself Often long hours
alone, without help or feedback from others
No way to limit personal legal responsibility
All profits are taxed personally
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
Partnership Partners:
Face unlimited liability in lawsuits Are fully responsible for all debts and
contracts of any partner Bring different strengths and skills Can support and advise each other May disagree and destroy the
partnership, friendship, and business
Limited partnership—one or more “limited” partners are not liable and have no official say in daily operations
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
Corporations Have rights and responsibilities under the
law May buy and sell property Enter into leases and contracts Can be prosecuted
Issue stock that is divided among founders and sold to investors (shareholders)
Company ownership is proportionate to the number of shares owned.
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
Types of Corporations C corporation
Most common type of corporate structure Can sell ownership as shares of stock Income taxed twice: as corporate income, and as
personal income when dividends are distributed to shareholders
Subchapter S corporation Has a limit of 75 stockholders Income taxed once, as personal income of owners
Professional corporation (PC) Used by doctors, lawyers, and small groups of
professionals Subject to special rules, such as licensing requirements
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
Types of Corporations(continued) Nonprofit corporation
Purpose is to improve society; all net profits go toward advancing the mission
Tax exempt; must follow applicable laws and regulations to keep this status
May not sell stock or pay dividends Limited liability company (LLC)
Combines features of partnership and corporation Good choice for small business owners seeking
liability protection Income taxed once, as personal income of owners Less rules on number/type of shareholders than S
corp.
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
Pros and Cons of CorporationsAdvantages Limited personal legal
liability for shareholders Money can be raised by
issuing stock Ownership is easily
transferred; new owner does not personally absorb corporation’s debt
Can exist indefinitely
Disadvantages Profits taxed twice (C
corporations) If shareholders gain over
50% of the stock, founder may lose control of co.
More expensive to start than sole proprietorships or partnerships
Subject to many government regulations
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
Comparison of Legal Structures
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
Starting a Nonprofit Organization
Remember, it cannot be bought and sold like other businesses.
Identify the organization’s mission, clearly.
Define your unit of change.
Determine how you will evaluate success.
Analyze your financing strategy.
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
Contracts A contract is:
A formal, written agreement between two or more parties that is enforceable by law
A “building block” of business, defining relationships in the production–distribution chain
Never sign a contract without: Having an attorney examine it for you Reading and understanding every word
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
A Successful Contract Achieves the Four As Avoid misunderstanding
Assure work
Assure payment
Avoid liability
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
Breach of Contract A contract is broken (breached) when
a signatory fails to fulfill it. The injured party may sue for breach
of contract. A lawsuit is an attempt to recover a
right or claim through legal action. Options aside from lawsuits include
small claims court and arbitration.
Avoid signing a contract with someone you do not trust.
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
Uniform Commercial Code (UCC) Directs a broad range of transactions,
such as loans and contracts, for the purpose of consistency
A recommendation for laws that U.S. states can choose to adopt or modify
Focuses on movable property rather than real (immovable) property
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
Agency Law An agent (third party) is authorized to
act on behalf of a principal (primary party) to create a legal relationship with another individual or business.
Common agency relationships: Employment (employer, employees) Real estate (real estate agents) Financial services (stockbrokers, insurance
agents) Promotion (acting, music, publishing, sports)
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
Agency Law (continued) When you authorize others to act for you,
you can be legally bound by their actions. Means by which authority is granted:
Written contract Words or conduct (You say or do something that
implies you are giving authority to the agent.) Ostensible authority (You put the agent in a position
of authority.) Implied authority (A level of authority is considered
necessary for the agent to do his/her job.)
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
Bankruptcy Chapter 11: Reorganization—
creating a plan and continuing operations
Chapter 7: Liquidation—converting assets to cash with a business closure
Chapter 13: Individual Debt Reorganization—consumer version of Chapter 11
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
Protecting Intangible Assets: Intellectual Property
Trademarks
Service marks
Copyright
Electronic rights
Patents
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
Trademarks & Service Marks Trademark—word, phrase, symbol, and/or
design that distinguishes a product Service mark—word, phrase, symbol,
and/or design that distinguishes a service Rights are reserved exclusively for owners. File an application with the U.S. Patent and
Trademark Office’s Principal Register for added advantages.
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
Copyright Protection for authors of original works
(songs, books, plays, art, etc.) For published and unpublished works Gives owner the sole right to print,
reprint, sell and distribute, revise, record, and perform the work
Endures for the life of the author/artist plus 70 years
Automatic upon creation of a work, but registration is recommended
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
Electronic Rights The right to produce someone’s work online Internet piracy—using online works (songs,
poems, photos, etc.) without permission Strategies for protecting your work:
Get buyer to define exactly what’s included in the rights (online publication, CD-ROMs, etc.)
Put a time limit on how long the buyer has rights. Ask for an extra fee each time your work is used
somewhere electronically.
© 2012 Pearson Education, Upper Saddle River, NJ 07458.
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
Patents Protect Inventions Three forms of patents:
Utility (process or improvement) Design Plant (varieties of vegetation)
You need a patent if… You have invented a product that you intend
to market yourself or sell to a manufacturer. You believe that someone else could
successfully sell your invention by copying it.
© 2012 Pearson Education, Upper Saddle River, NJ 07458.
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
Managing Risk with Insurance Insurance—system of protection which
reimburses people/businesses when their property or wealth is damaged or destroyed
Premium—amount paid for insurance Deductible—amount of loss or damage
you agree to cover before insurance pays a claim
A lower deductible = a higher premium A higher deductible = a lower premium
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
Types of Business Insurance Workers’
Compensation Disability Commercial
Fleet Property General Liability
Product Liability Business
Income Errors and
Omissions Key Person Life
Insurance
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
Other Forms of Risk Management Protect your computer and data from:
Power surges and outages Computer viruses Hard disk failure
Identify what you will do in case a fire or other catastrophe occurs that makes access to your business impossible.
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
Making a Disaster Recovery Plan
Communications: Identify who will get in touch with employees, vendors, and customers. Maintain a detailed contact list.
Base of operations: Decide where people should go if business location is inaccessible.
Priority activities: Identify which business activities are most essential/time-sensitive.
Return to facilities: Outline a process for regrouping and planning.
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
Licenses, Permits, Certificates Permit—official document that gives
the right to put on a specific event License—official document that
gives the right to engage in an activity for as long as the license is valid
Certificate—official document that verifies or proves something