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

Entrepreneurship and Small Business Management

Chapter 16Addressing Legal Issues and

Managing Risk

© 2012 Pearson Education, Upper Saddle River, NJ 07458.

All Rights Reserved.2

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.




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




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




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




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.




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




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.




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




Comparison of Legal Structures




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.




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




A Successful Contract Achieves the Four As Avoid misunderstanding

Assure work

Assure payment

Avoid liability




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.




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




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)




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.)




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




Protecting Intangible Assets: Intellectual Property

Trademarks

Service marks

Copyright

Electronic rights

Patents




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.




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




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.




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.




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




Types of Business Insurance Workers’

Compensation Disability Commercial

Fleet Property General Liability

Product Liability Business

Income Errors and

Omissions Key Person Life

Insurance




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.




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.




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

Documents

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