E s b 18-1 p p t BA 346 Working as an Entrepreneur Bob Zahrowski.

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BA 346

Working as an Entrepreneur

Bob Zahrowski

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1818Legal Issues:Legal Issues:

Recognizing Your Small Business Needs

McGraw-Hill/Irwin ©2007 by the McGraw-Hill Companies, Inc. All rights reserved.

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ObjectivesObjectives• Know when you need legal information and how to

get it

• Understand the legal business structures that relate to small business

• Learn how to master the business of negotiating

• Recognize potential legal liabilities for your business

• Know contract terms and when a contract is needed

• Understand the basics of intellectual property

Chapter 18Chapter 18

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• Focus on Small Business: To Your Door To Your Door FitnessFitness

• Personal training business for well-to-do senior citizens

• Delivering flyers publicizing the business, collidedcollided with another vehicle; several people injured

• Injured driver figured both ownersboth owners were liableliable for the accident


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• Estimated Litigation Rates, 1990Estimated Litigation Rates, 1990– There are always unavoidable risks

– In a 2002 poll, less than 1 in 10 small business had been sued in the prior five years


0 20 40 60 80 100 120 140

China

Japan

Spain

France

USA

Austria

Israel

Sweden

Germany

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You Need A Good AttorneyYou Need A Good Attorney

• Find an attorney experienced in forming new new

business entitiesbusiness entities and handling the needs of small businesses

• Depend on one general purpose lawyer and several specialists


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• Sampler of Legal SpecialtiesSampler of Legal Specialties– Administrative

– Bankruptcy

– Biotechnology

– Computer / Technology

– Contracts

– E-Commerce

– Employment


– Estate planning

– Insurance

– Intellectual property

– Media / Entertainment

– Mergers / Acquisitions

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• Hourly feesHourly fees: rate based on price per hour

• Fee structuresFee structures:– Hourly feesHourly fees: vary greatly from one part of the

country to another

– Flat feesFlat fees: fixed amount paid for a certain task

• Example: flat fee paid for handling all the paperwork to establish a corporation


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• Fee structuresFee structures:– RetainersRetainers: paid a specific amount every month

regardless of the workload for that month

– ContingencyContingency: fee paid by a client to an attorney for legal services that is dependent upon the outcome of a case

• Not usually used in everyday contract and business-related matters


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• Free information availableFree information available:– www.business.gov: the general business site

– www.reginfo.gov: regulatory information website

– www.dol.gov: for labor laws

– www.sba.gov: the Small Business Administration site

– www.business.gov/regions/states: state’s offices


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Choosing a Business FormChoosing a Business Form

• Business formBusiness form: types of separate, legal entities– Legal entities can own property, sue, and be sued

• Seven general types shown in Figure 18.3Figure 18.3


0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0%

Limited Liability Companies

Subchapter S

C Corporations

Limited Partnerships

General Partnerships

Sole Proprietorships

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Advantages and Disadvantages of Corporations

Advantages Disadvantages

TABLE 18.1

Can have representative management

Ease of raising large amounts of capital

Legal entity separate and distinct from itsowners as individuals

Relatively permanent, since life of firm notaffected by loss of any shareholder

Owner’s liability for the firm’s debt limitedto their investment in it

Impersonal

Owners have limited interest in firm’s activities – except profits

High incorporation fees and high taxes, especiallydouble income taxation

Burdensome procedures, reports, and statements required by governments

Powers limited to those stated in charters – may be difficult to do business in another state

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Advantages and Disadvantages of Sole Proprietorships


TABLE 18.2

Secrecy

Unique tax advantages

Owner doesn’t have to share profits

Relative freedom of action and control

Easiest and simplest for to organize,operate, and dissolve

Limited capital

Difficulty in obtaining credit

Inadequate management and employment skills

Unlimited liability for the firm’s debts

Limited life because business and owner are legally the same

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Advantages and Disadvantages of Partnerships


TABLE 18.3

Easy to form

Division of labor and management responsibility

Can use ideas and plans of more than one person

Specialized skills available from individual partners

Can raise more capital since good credit may be available

Obtains financial resources from more than one person

Limited life

Unlimited liability for debts of the firm

Each partner is responsible for the acts of every other partner

An impasse may develop if the partners become incompatible

Death of any one of the partners terminates the partnership

A partner cannot obtain bonding protection against the acts of the other partner(s)

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• Six major factors at playSix major factors at play:– Personal liability of the business owner

– Taxation of both the entity and its owners

– Complexity and organizational costs in setting up

– Control of the business

– Continuity of the business

– Ability of the business to raise capital


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Everything is Negotiable, Negotiation is EverythingEverything is Negotiable, Negotiation is Everything

• 4 steps4 steps to structure a negotiation:– PreparePrepare what you need to achieve

– PositionPosition by putting your best foot forward

– ProposePropose solutions that provide value and balance

– PouncePounce when agreement on any part of the negotiation appears at hand


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Legal LiabilitiesLegal Liabilities

• TortsTorts: arise when another’s legal rights are violated in ways other than from a breach of contract– 2 typical arguments to deflect liability2 typical arguments to deflect liability:

• Actor is not an employee, but an independent independent contractorcontractor

• Actions were outside the scopeoutside the scope of agency/employment


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• Independent contractor argumentIndependent contractor argument:– Many retail stores contract with an independent

contractor to provide store security

• If those security officers commit a tort, the department can avoid vicarious liabilityavoid vicarious liability because the guard is an employee of the security firm


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• Scope of authority argumentScope of authority argument:– If employees make a decision requiring more

authority than they really possess, the business can argue that it was not liable for the problem

– Firm must fully train employees of the exact authority they possess


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LitigationLitigation vs. Arbitration vs. Mediation


LitigationTABLE 18.2

Uses court system

Formal

Public judges

Multiple levels of postdecision appeal

Can force other party into court

Binding decisions

Public

Most costly

Slowest

Favors those with more money for legal help

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Litigation vs. ArbitrationArbitration vs. Mediation

ArbitrationTABLE 18.2

Works outside of court system

Informal

Private judges

Limited appeal possibilities

Occurs by agreement or accepting clause to arbitrate

Binding decision if agreed to beforehand

Confidential

Costly

Moderately fast

More balanced than courts

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Litigation vs. Arbitration vs. MediationMediation

MediationTABLE 18.2

Works outside of court system

Informal

Attorneys or mediation specialists

Full range of appeals

Occurs only by mutual agreement

Nonbinding decision

Confidential

Least costly

Fastest

Friendliest format for small business

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ContractingContracting

• ContractsContracts: agreements in which the parties exchange promises– Standard contractsStandard contracts: company can just fill in the

blanks as needed

– Specialty contractsSpecialty contracts: unique contract terms, large dollar amounts at stake


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• ContractsContracts: cont.– Interstate contractsInterstate contracts: when doing business outside

your home state it makes sense to have your lawyer draw up the contract because state laws vary

– Noncompete clausesNoncompete clauses: promises not to open a competing business or work for a competitor; need to be part of another agreement and cannot stand alone


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• ContractsContracts: cont.– Exculpatory clausesExculpatory clauses: a party to the contract will not

be responsible for certain things

– Hold harmless agreementsHold harmless agreements: one party is agreeing not to hold the other responsible for his or her actions; giving up legal rights to sue


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Internet issues in contractingInternet issues in contracting

• B2B contracts involving electronic data B2B contracts involving electronic data

interchange (EDI)interchange (EDI):– Order for new inventory submitted electronically

– Transactions are entered into and there is generally a master contract


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• B2C contractB2C contract:– Ensure control over the selling process

– Representations of merchandise or services are not actual offers to the buyer

– Seller reserves the right not to sell to everyone


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Intellectual propertyIntellectual property

• PatentsPatents: – www.uspto.gov: U.S. Patent Office

– Design patentDesign patent: covers the look of a product and those parts that are essential or a part of the design; last 14 years

– Utility patentUtility patent: covers processes and functions; last 20 years


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• Trade secretTrade secret: information known to certain people in the company that makes that company more competitive– Includes more than patents

– No expiration dates

– 5 steps to protecting trade secrets


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• 5 steps to protecting trade secrets5 steps to protecting trade secrets:

1. Trade secrets must really be secrets

2. Use warning labels

3. Restrict physical access: a big vault

4. Confidentiality agreements

5. Keep doing steps 1-4


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• CopyrightCopyright: involves the expression of ideas– Copyrights for creative works last the creator’s life,

plus 70 years

– ““Work for hire”Work for hire”: lasts 120 years after creation or 95 years after its first publication

– Unique expressions of ideasUnique expressions of ideas


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• TrademarksTrademarks: identify certain goods– Owner of the mark can keep others from using a

similar or identical mark to identify similar or identical goods

– Lasts for 10 years

– Can continue to be renewed 10 years at a time


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• Trade namesTrade names: name of a business used to identify itself to the public– Filing is made with Secretary of State’s office

– Best to consider trademark implications and check with the Secretary of State for a list of all registered entity names before selecting a business name


E s b 18-1 p p t BA 346 Working as an Entrepreneur Bob Zahrowski.

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