Entrepreneurship and Small Business Management Chapter 16 Addressing

Entrepreneurship and Small Business Management Chapter 16 Addressing Legal Issues and Managing Risk

Ch. 16 Performance Objectives n n n 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. Entrepreneurship and Small Business Management, 1/e 2 © 2012 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Business Legal Structures n n n 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 Entrepreneurship and Small Business Management, 1/e 3 © 2012 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Sole Proprietorship Pros & Cons Advantages n n n Disadvantages 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 Entrepreneurship and Small Business Management, 1/e n n 4 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 © 2012 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Partnership n Partners: n n n 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 Entrepreneurship and Small Business Management, 1/e 5 © 2012 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Corporations n Have rights and responsibilities under the law n n n 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. Entrepreneurship and Small Business Management, 1/e 6 © 2012 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Types of Corporations n C corporation n n Subchapter S corporation n 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 Has a limit of 75 stockholders Income taxed once, as personal income of owners Professional corporation (PC) n n Used by doctors, lawyers, and small groups of professionals Subject to special rules, such as licensing requirements Entrepreneurship and Small Business Management, 1/e 7 © 2012 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Types of Corporations (continued) n Nonprofit corporation n n 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) n n 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. Entrepreneurship and Small Business Management, 1/e 8 © 2012 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Pros and Cons of Corporations Advantages n n Disadvantages 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 Entrepreneurship and Small Business Management, 1/e n n 9 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 © 2012 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Comparison of Legal Structures Entrepreneurship and Small Business Management, 1/e 10 © 2012 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Starting a Nonprofit Organization n Remember, it cannot be bought and sold like other businesses. n Identify the organization’s mission, clearly. n Define your unit of change. n Determine how you will evaluate success. n Analyze your financing strategy. Entrepreneurship and Small Business Management, 1/e 11 © 2012 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Contracts n A contract is: n n n 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: n n Having an attorney examine it for you Reading and understanding every word Entrepreneurship and Small Business Management, 1/e 12 © 2012 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

A Successful Contract Achieves the Four As n Avoid misunderstanding n Assure work n Assure payment n Avoid liability Entrepreneurship and Small Business Management, 1/e 13 © 2012 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Breach of Contract n n 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. Entrepreneurship and Small Business Management, 1/e 14 © 2012 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Uniform Commercial Code (UCC) n n n 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 Entrepreneurship and Small Business Management, 1/e 15 © 2012 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Agency Law n n 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: n n Employment (employer, employees) Real estate (real estate agents) Financial services (stockbrokers, insurance agents) Promotion (acting, music, publishing, sports) Entrepreneurship and Small Business Management, 1/e 16 © 2012 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Agency Law (continued) n n When you authorize others to act for you, you can be legally bound by their actions. Means by which authority is granted: n n 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. ) Entrepreneurship and Small Business Management, 1/e 17 © 2012 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Bankruptcy n n n 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 Entrepreneurship and Small Business Management, 1/e 18 © 2012 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Protecting Intangible Assets: Intellectual Property n Trademarks n Service marks n Copyright n Electronic rights n Patents Entrepreneurship and Small Business Management, 1/e 19 © 2012 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Trademarks & Service Marks n n 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. Entrepreneurship and Small Business Management, 1/e 20 © 2012 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Copyright n Protection for authors of original works (songs, books, plays, art, etc. ) n For published and unpublished works n Gives owner the sole right to print, reprint, sell and distribute, revise, record, and perform the work n Endures for the life of the author/artist plus 70 years n Automatic upon creation of a work, but registration is recommended Entrepreneurship and Small Business Management, 1/e 21 © 2012 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Electronic Rights n n n The right to produce someone’s work online Internet piracy—using online works (songs, poems, photos, etc. ) without permission Strategies for protecting your work: n n n 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. Entrepreneurship and Small Business Management, 1/e 22 © 2012 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Patents Protect Inventions n Three forms of patents: n n Utility (process or improvement) Design Plant (varieties of vegetation) You need a patent if… n n 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. Entrepreneurship and Small Business Management, 1/e 23 © 2012 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Managing Risk with Insurance n Insurance—system of protection which reimburses people/businesses when their property or wealth is damaged or destroyed n Premium—amount paid for insurance n Deductible—amount of loss or damage you agree to cover before insurance pays a claim n A lower deductible = a higher premium n A higher deductible = a lower premium Entrepreneurship and Small Business Management, 1/e 24 © 2012 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Types of Business Insurance n n n Workers’ Compensation Disability Commercial Fleet Property General Liability Entrepreneurship and Small Business Management, 1/e 25 n n Product Liability Business Income Errors and Omissions Key Person Life Insurance © 2012 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Other Forms of Risk Management n Protect your computer and data from: n n 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. Entrepreneurship and Small Business Management, 1/e 26 © 2012 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Making a Disaster Recovery Plan n n 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. Entrepreneurship and Small Business Management, 1/e 27 © 2012 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Licenses, Permits, Certificates n n n 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 Entrepreneurship and Small Business Management, 1/e 28 © 2012 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.