1. CHAPTER 3 ENTREPRENEURIALSTRATEGY ANDTHELEGALENVIRONMENT

2. Chapter 3 Overview

The Legal Form of the Company

Contracts and Small Business Strategy

Agency Law and Small Business Strategy

Trade Laws and Small Business Strategy

Intellectual Property Law

Internet Law

3. The Legal Form of the Company

Sole Proprietorship

Partnership

Corporation

LLC

Nonprofit

4. Sole Proprietorship Advantages

Most common form

Flexible, easy, and inexpensive

All profits and losses belong to the owner

Taxes paid at owners tax rate

Subject to the hobby rule

5. Sole Proprietorship - Disadvantages

Unlimited liability

More difficult to raise debt capital

Often no management team with diverse skills

Survival of company dependent on the owner

6. Partnerships Advantages

Quick, easy, and inexpensive to form

Advantages of a team

Shared financial strength

Shared workload

Taxed at individual partner level

7. Partnerships Disadvantages

No liability protection

Control is shared

Fraught with personal conflict

Shared equity

8. Types of Partnerships

General

Limited

Secret partners

Silent partners

Dormant partners

9. The Partnership Agreement

Business responsibilities of partners

Profit distribution

Transfer of interest

Term of partnership

Contributions of partners

Withdrawals and salaries

Dissolution and arbitration

10. Corporations - Overview

C-Corporation

Subchapter S-Corporation

Limited Liability Company

Nonprofit Corporation

11. Corporations Advantages

Limited liability

Multiple classes of stock

Transferability of stock

Status and clout

Retirement plans, profit sharing, etc.

Continuity of life

Ease of raising capital

12. Corporations Disadvantages

More complex and expensive to form

Potential loss of control to stockholders

Requires regular stockholders meetings and records

Potential for double taxation

13. Types of C-Corporations

Domestic

Foreign

Public

Closely held

14. Subchapter S-Corporation -How It Differs

All earnings passed through to shareholders

Earnings taxed at individual rate

Losses shared according to percentage of ownership

Assets of business when sold taxed on amount of appreciation

Must convert to C-Corporation to go public

15. Limited Liability Company - How It Differs

Owners are called members

Stock interests are known as interests

Formed via articles of organization

Members create an operating agreement

Managers, officers, and members not personally liable for company debts

Foreign ownership permitted

16. LLC vs. Corporation

No corporate tax

No double tax on liquidation

Pass-through taxation

Debt in excess of basis may be put in LLC to avoid recognition of gain

Contribution of appreciated assets not subject to tax

17. LLC vs. S-Corporation

More than 35 members allowed

Tax allocation not based on percentage of ownership

No restrictions on membership

Permits more than one class of stock

Step-up in basis at death of member

18. Nonprofit Corporation

Established for charitable, public benefit, religious, or mutual benefit

Benefit of limited liability

Profits may not be distributed

Income from for-profit activities subject to tax

Must meet IRS501(c)(3) requirements for tax-exempt status

19. Contracts andSmall Business Strategy

Requirements for a legal contract

• Capacity

• Offer, acceptance, and mutuality

• Consideration

• A legal purpose

• Correct form

20. Contracts andSmall Business Strategy (continued)

Buy-sell agreements

• Disposition of owners share of business

• Important to prevent ownership falling intounwanted hands

• Addresses how shares will be valued

21. Agency Law and Small Business Strategy

Employees are agents of the company

Express authority

Incidental authority

Implied authority

Emergency authority

Apparent authority

Ostensible authority

22. Trade Laws andSmall Business Strategy

Uniform Commercial Code

• Assumes dealings by professionals

• Product liability

• Implied warranties

• • Strict liability

• • Warrant of merchantability

23. Consumer Credit Laws and Financial Strategy

Equal Credit Opportunity Act

Truth-in-Lending Act Regulation Z

Fair Credit Billing Act

Fair Credit Reporting Act

24. Truth in Advertising and Marketing Strategy

Regulated by the Federal Trade Commission

Illegal to mislead customers about:

• What a product can do

• A reduced price on an item never priced higher

• List price as a comparison if never sold at list

• Bait and switch techniques

25. Consumer Protection Law and Customer Strategy

Cover four major areas

• Unscrupulous sellers

• Unreasonable credit items

• Unsafe products

• Mislabeling of products

26. Consumer Protection Law and Customer Strategy

Regulatory Agencies

• Food and Drug Administration

• Consumer Product Safety Commission

• Fair Packaging and Labeling Act

27. Price Discrimination and Pricing Strategy

Federal Trade Commission

• Cant sell same product to different customersat different prices without justification

• Justification = Quantity sold discount,seconds or slightly damaged, cost savings onpart of seller

28. Intellectual Property Law

Overview

• Patents

• Trademarks

• Copyrights

• Trade secrets

29. Patents

Exclusive right to an invention

Utility patents

Design patents

30. Rules for Patents

Invention must fit into one of these categories

• Machine (fax, rocket, electronic circuits)

• Process (chemical reactions, methods of production)

• Articles of manufacture (furniture, diskettes)

• Composition (gasoline, food additives)

• A new use for one of these

Utility

No prior art

Unobvious

31. Patent Process

File a notice of disclosure

File patent application with claims

Patent applied for status when application received

Modify and appeal rulings on the claims by the PTO

Patent pending stage when patent is approved

Patent good for 20 years from date of filing

32. Trademarks

Symbol, word, or design used to identify abusiness or product

Must be renewed every ten years

Must be actively used to be registered

TM 33. Trade Secrets

Protection from disclosure by employeesor others involved in business

Achieved through written agreement (i.e.,employee contract)

34. Copyrights

Protect original works of authors, composers, screenwriters, and computer programmers

Do not protect an idea but only the form in which it appears

Good for life of the holder plus 50 years

35. Internet Law

Copyright infringement

• BBS operators need to be aware of infringement liability

• Directly liable for reproducing proprietary content without authorization

Electronic contracts

• To satisfy Statute of Frauds, legal messages should be sent using secure methods with forensic trail to signer

• Computer messages should state legal intent

• State if binding without formal acceptance (i.e.,purchase orders)