entrepreneurship chapter 11 addressing legal issues and managing risk

EntrepreneurshipChapter 11

Addressing Legal Issues and Managing Risk

Entrepreneurship, 2nd EditionMariotti and Glackin with NFTE

© 2010 Pearson Education, Upper Saddle River, NJ 07458.

All Rights Reserved.2

Business Legal Structures Sole Proprietorship Partnership Corporation




Sole Proprietorship Most common type of U.S. business Owned by one person & ceases to exist if person dies or

exits the firm Pros

Relatively easy to start Fewer government regulations Owners can make quick decision Profits are held by the owner

Cons May be difficult to raise funds for the type of entity Often long hours without help or companionship No way to limit personal legal & fiscal liability Odds of failure are high




Partnership Consists of two or more owners who make decisions

together, share profits, losses, assets, & liabilities Partners

Face unlimited liability in lawsuits Are fully responsible for all debts & contracts of any

partner Bring different strengths & skills May disagree & destroy the partnership, friendship, &

business Limited partnerships include some partners who

are not liable & have no say in daily operations. Always have a formal Partnership Agreement!




Corporation A legal entity composed of stockholders under a

common name Pros:

Limited legal liability Money can be raised through issuing stock. Ownership can be transferred easily; new owner does not

personally absorb corporation’s debt. May exist indefinitely

Cons: Profits taxed twice; first as corporate income, then as

personal income when distributed to shareholders Owner can lose control of company to stockholders if they

gain more than 50% of stock. More expensive to start than sole proprietorship and

partnership




Types of Corporations C Corporation—most common type, can sell ownership

shares to anyone & use bonds to borrow money. Income taxed twice, once as corporate income & then as personal income when distributed to owners (dividends)

Subchapter S Corporation—limits stockholders to 75; income taxed once, as personal income of owners

Professional Corporation (PC)—used by doctors, lawyers, small groups of professionals

Nonprofit corporation—tax exempt, mission is to improve society; 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




Comparison of Legal Structures




Not-for-Profit Organization 501(c)(3) nonprofit corporation in the United

States Tax exempt legal structure Can receive charitable donations Cannot be owned/bought/sold May not issue stocks or bonds Mission driven: must be involved with trying to

solve a problem for society Instead of Unit of Sale, uses Unit of Change to

measure success and prove it is succeeding in mission




Contracts: Building Blocks of Business

Formal written agreement between 2 or more parties

Enforceable in court of law Contracts define the relationships in the

production–distribution chain. Never sign a contract without having a lawyer

examine it for you. Never sign a contract without reading &

understanding every word. Be certain that it fully protects your interests.




A Good Contract Achieves the Four A’s1. Avoid misunderstanding2. Assure work3. Assure payment4. Avoid liability




Breach of Contract Breached when a signatory fails to fulfill it Injured party may then sue for breach of

contract. A lawsuit is attempt to recover a right or

claim through legal action. Other options aside from lawsuits

Small claims court Arbitration

A contract cannot substitute for trust. If you don’t trust someone, don’t expect a contract to protect you.




Intellectual Property Protection Trademark Service mark Copyright Electronic rights Patents




Trademarks & Service Marks Trademark = word, phrase, symbol, or

design to set your product apart Service mark = same as trademark,

but for a service Rights are reserved exclusively for

owners. There are advantages to owning them on

the U.S. Patent & Trademark Office Principal Register.




Copyright Protection for authors of original works

of authorship For published & unpublished works Owner has the sole right to print,

reprint, sell & distribute, revise, record, & perform the work.

Endures for the life of the author/artist plus 70 years

Copyright is automatic upon creation of a work & registration has advantages.




Electronic Rights Rights to produce someone’s work

online Using artwork without permission,

including a song, poem, or photo posted online = Internet piracy

Electronic rights may also be protected.




Patents Protect InventionsYou need a patent if:

You have invented a product you want to market yourself or sell to a manufacturer.

You believe someone else could sell the product by copying your invention.

Patent application must include: In-depth description of invention Drawing of invention Completed “Declaration for Patent Application” Notarized statement from inventor Filing fee to U.S. Patent & Trademark Office




Insurance System of protection for payment

provided by insurance companies to protect people & businesses from having property or wealth damaged or destroyed

Many kinds of insurance & almost anything can be insured

Premium = amount paid for insurance Deductible = amount of loss or damage

you agree to cover before insurance pays a claim

A higher deductible a lower premium




Small Business Insurance Workers’

Compensation Disability Commercial

Fleet Property General Liability

Product Liability Business

Income Errors &

Omissions Key Person




Protect Your Computer & Data Power surges & outages Computer viruses Disk failure




Disaster Recovery Plans Identify what you will do in case of

fire or other catastrophe that makes access to your business impossible

Communications Base of operations Priority activities Return to facilities




Licenses, Permits, Certificates License = right to engage in an

activity for as long as the license is valid

Permit = right to carry on a specific activity

Certificate = official document that proves something

entrepreneurship chapter 11 addressing legal issues and managing risk

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