© Mark T. Schenkel 1 Foundations of Entrepreneurship Mark T. Schenkel, PhD Belmont University

© Mark T. Schenkel 1

Foundations of Entrepreneurship

Mark T. Schenkel, PhD Belmont University


Today’s Agenda

• Legal Representation in New Ventures

• Ownership Structures

• Other Legal Issues


Legal Representation

• Why Have It?

– Determine What Is Needed– Search For Lawyer With Special Expertise

• How to Select Lawyer– One-Time Service or On-Going?– Set-Up Comfortable Working Relationship– Determine Costs Up-Front


Ownership Structures


Legal Forms

• Sole Proprietorship

• Partnership

• Corporation

Case 12.2: A Question of Incorporation


Sole Proprietorship

• Ownership: one person (business = person)

• Set up costs: minimal (e.g., basic filing fees for trade name)

• Liability: individual liable for business liabilities• Continuity of business: death dissolves business• Transferability of interest: complete freedom to sell/transfer• Management control: owner has total• Profit distribution: through individual tax return

• Implications:– Easy and inexpensive if no significant liability risk (e.g., small consulting business)


General Partnership

• Ownership: more than one owner (no limit on #)• Set up costs: basic trade name filing fees, partnership agreement,

direct legal costs• Liability: all partners equally liable • Continuity of business: death/partner withdrawal dissolves business

unless agreement stipulates otherwise• Transferability of interest: GPs can sell only with consent of all other GPs

• Management control: all partners have equal rights; majority rules• Profit distribution: f(partnership agreement)

• Implications:– State/Fed tax ID required– Partnership agreement highly recommended– Must follow employment laws– Files tax returns (informational)


Limited Partnership

• Ownership: run by a “general partner”, but rules are more complex and regulated

• Set up costs: basic trade name filing fees, partnership agreement (more comprehensive = higher cost), direct legal costs

• Liability: limited partners liable for amount of capital contributions• Continuity of business: death/limited partner withdrawal has no

affect • Transferability of interest: LPs can sell w/o consent of GPs• Management control: only GPs• Profit distribution: f(membership agreement)

• Implications:– Only recommended for specific situations– Use experts to structure


C Corporation

• Ownership: No limit on # of shareholders (= Traditional corporation)• Set up costs: filing fees, taxes, articles of incorporation• Liability: limited for shareholders to amount of capital contributions• Continuity of business: death withdrawal of owner(s) has no affect on

legal existence of the business• Transferability of interest: Shareholders can sell/buy stock at will,

although some transfers might be restricted• Management control: major stockholders via key management

appointments• Profit distribution: dividends

• Implications:– Attractive fund raising potential– Double taxation– Simplest to take public


S Corporation

• Ownership: limited to 75 shareholders• Set up costs: filing fees, taxes, articles of incorporation• Liability: limited for shareholders to amount of capital contributions• Continuity of business: death withdrawal of owner(s) has no formal

affect on legal existence of the business • Transferability of interest: Shareholder can only sell stock to an

individual• Management control: major stockholders• Profit distribution: through individual tax return

• Implications:– Good for start-ups with limited ownership; with simple financing– Large body of tax law exists– No double taxation, but cannot deduct most fringe benefits for

shareholders


LLC (Limited Liability Corporation)

• Ownership: members (Vs. shareholders or partners) with interests designated in articles of organization

• Set up costs: filing fees, articles of organization• Liability: limited for members to amount of capital contributions• Continuity of business: management rules may create complexity• Transferability of interest: requires unanimous written consent of

members• Management control: based on articles of organization• Profit distribution: through individual tax return

• Implications:– More expensive– Less tax law on books– More documentation required– Attorneys and accountants like (see “More expensive” above!)


Non-profit Corporation

• Requires approval• Regulated• Limited scope of activity• Can fund raise• Some governmental funding limited to

non-profits


Other Legal Issues


Intellectual Property

• Patents

• Copyrights

• Trademarks

• Trade Secrets


Other Legal Issues . . .

• Licensing

• Product Liability

• Insurance

• Contracts (aka “tort”)


Key Takeaways . . . .

• In selecting legal counsel, be sure to determine costs and key selection criteria in advance.

• It is critical to understand the advantages and disadvantages of legal form choice – both at the inception and throughout the growth of the venture, noting that specific needs are likely to change.

Documents

© Mark T. Schenkel 1 Foundations of Entrepreneurship Mark T. Schenkel, PhD Belmont University