Barringer e4 Ppt 07GE

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Copyright 2012 Pearson Education

Chapter 7

Preparing a Proper

Ethical and Legal

FoundationBruce R. Barringer

R. Duane Ireland

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Chapter Objectives1 of 3

1. Describe how to create a strong ethical culture in anentrepreneurial venture.

. !"plain the i#portance of $leading b% e"a#ple& in

ter#s of establishing a strong ethical culture in afir#.

3. !"plain the i#portance of having a code of conductand an ethics training progra#.

'. !"plain the criteria i#portant to selecting anattorne% for a new fir#.

(. Discuss the i#portance of a founders) agree#ent.

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Chapter Objectives of 3

*. +rovide several suggestions for how entrepreneurial

fir#s can avoid litigation.

7. Discuss the i#portance of nondisclosure and

nonco#pete agree#ents.,. +rovide an overview of the business licenses and

business per#its that a start-up #ust obtain before it

starts conducting business.

. Discuss the differences a#ong sole proprietorships/

partnerships/ corporations/ and li#ited liabilit%

co#panies.

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Chapter Objectives3 of 3

10. !"plain wh% #ost fast-growth entrepreneurial

ventures organie as corporations or li#ited

liabilit% co#panies rather than sole proprietorships

or partnerships.

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Initial !thical and 2egal Issues acing a

4ew ir#

!stablishing a strong

ethical culture

Choosing an attorne%

5voiding legal

disputes

Obtaining business

licenses and per#its

Choosing a for# of

business organiation

Drafting a founder)s

agree#ent

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!stablishing a 6trong !thical Culture1 of

2ead b% !"a#ple

8 9he #ost i#portant thing that an% entrepreneur/ or tea# of

entrepreneurs/ can do to build a strong ethical culture in

their organiation is to lead b% e"a#ple. !stablish a Code of Conduct

8 5 code of conduct :or code of ethics; is a for#al state#ent

of an organiation)s values on certain ethical and social

issues.

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!stablishing a 6trong !thical Culture of

I#ple#ent an !thics 9raining +rogra#

8 !thics training progra#s teach business ethics to help

e#plo%ees deal with ethical dile##as and i#prove their

overall ethical conduct.8 5n ethical dile##a is a situation that involves doing

so#ething that is beneficial to oneself or the organiation/

but #a% be unethical.

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+otential +a%offs for !stablishing a 6trong

!thical Culture

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Choosing an 5ttorne% for a ir#

6elect an 5ttorne% !arl%

8 It is i#portant for an entrepreneur to select an attorne% as

earl% as possible when developing a business venture.

8 It is criticall% i#portant that the attorne% be fa#iliar withstart-up issues.

Intellectual +ropert%

8 or issues dealing with intellectual propert% :patents/

trade#ar



=ow to 6elect an 5ttorne%

Contact the local bar association and as< for a list of attorne%s who

specialie in start-ups in %our area.

Interview several attorne%s.

6elect an attorne% who is fa#iliar with the start-up process.

6elect an attorne% who can assist %ou in raising #one% for %our new

venture.

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Drafting a ounders) 5gree#ent

ounders) 5gree#ent

8 5 founders) agree#ent :or shareholders) agree#ent; is a

written docu#ent that deals with issues such as the relative

split of the e?uit% a#ong the founders of the fir#/ howindividual founders will be co#pensated for the cash or the

$sweat e?uit%& the% put into the fir#/ and how long the

founders will have to re#ain with the fir# for their shares

to full% vest.

8 9he ite#s to include in the founders) agree#ent are shown

on the following slide.

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Ite#s to Include in a ounders) 5gree#ent

4ature of the prospective business.

Identit% and proposed titles of the founders.

2egal for# of business ownership.

5pportion#ent of stoc< :or division of ownership;.

Consideration paid for stoc< or ownership share of each of the founders.

Identification of an% intellectual propert% signed over to the business.

Description of the initial operating capital.

Bu%bac< clause.

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5voiding 2egal Disputes1 of

5voiding 2egal Disputes

8 >ost legal disputes are the result of #isunderstandings/

sloppiness/ or a si#ple lac< of


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5voiding 2egal Disputes of

5lthough it)s te#pting to tr%

to show people %ou trust

the# b% not insisting on

written agree#ents/ it)s not a

good practice.

One of the si#plest wa%s to

avoid #isunderstandings

and ulti#atel% legal disputes is to get ever%thing in

writing.

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Obtaining Business 2icenses and +er#its1 of

Business 2icenses

8 In #ost co##unities/ a business needs a license to operate.

8 If the business will be run out of the founder)s ho#e/ a

separate ho#e occupation business license is oftenre?uired.

8 If a business has e#plo%ees/ or is a corporation/ li#ited

liabilit% co#pan%/ or li#ited partnership/ it will usuall%

need a state business license in addition to its local one.8 5 narrow group of co#panies are re?uired to have a federal

business license/ including invest#ent advising/ drug

#anufacturing/ and interstate truc


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Obtaining Business 2icenses and +er#its of

Business +er#its

8 5long with obtaining the appropriate licenses/ so#e

businesses #a% need to obtain one or #ore per#its.

8 9he need to obtain a per#it depends on the nature andlocation of the business.

If %ou plan to sell food/ %ou)ll need a cit% or count% health per#it.

If %our business is open to the public/ %ou #a% need a fire per#it.

6o#e co##unities re?uire businesses to obtain a license to put up

a sign.

5ll businesses that plan to use a fictitious na#e need a fictitious

business na#e per#it.

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Choosing a or# of Business Ownership

hen a business is launched/ a for# of legal entit% #ust bechosen. 9he #ost co##on legal entities are

6ole +roprietorship +artnership

Corporation2i#ited 2iabilit%

Co#pan%

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Issues to Consider in Choosing a 2egal

or# of Business Ownership

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6ole +roprietorship

6ole +roprietorship

8 9he si#plest for# of business entit% is the sole

proprietorship.

8 5 sole proprietorship is a for# of business organiationinvolving one person/ and the person and the business are

essentiall% the sa#e.

8 5 sole proprietorship is not a separate legal entit%. 9he

sole proprietor is responsible for all the liabilities of thebusiness/ and this is a significant drawbac


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5dvantages and Disadvantages of a

6ole +roprietorship1 of

5dvantages of a 6ole +roprietorship

Creating one is eas% and ine"pensive.

9he owner #aintains co#plete control of the business and retains all of the

profits.Business losses can be deducted against the sole proprietor)s other sources of

inco#e.

It is not subject to double ta"ation :e"plained later;.

9he business is eas% to dissolve.

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6ole +roprietorship of

Disadvantages of a 6ole +roprietorship

2iabilit% on the owner)s part is unli#ited.

9he business relies on the s


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+artnerships1 of 3

+artnerships

8 If two or #ore people start a business/ the% #ust organie

as a partnership/ corporation/ or li#ited liabilit% co#pan%.

8 +artnerships are organied as either general or li#itedliabilit% partnerships.

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+artnerships of 3

@eneral +artnership

5 for# of business organiation

where two or #ore people pool

their s


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+artnerships3 of 3

2i#ited +artnership

5 #odified for# of general

partnership.

9he #ajor difference between

the two is that a li#ited

partnership includes two classes of ownersA general partners and

li#ited partners.

9he general partners are liable

for the debts and obligations of the partnership/ but the li#ited

partners are onl% liable up to

the a#ount of their invest#ent.

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@eneral +artnership1 of

5dvantages of a @eneral +artnership

Creating one is relativel% eas% and ine"pensive co#pared to a corporation or

li#ited liabilit% co#pan%.

9he s


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@eneral +artnership of

Disadvantages of a +artnership

2iabilit% on the part of each general partner is unli#ited.

9he business relies on the s


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Corporations

Corporations8 5 corporation is a separate legal entit% organied under the

authorit% of a state.

8 Corporations are organied as either C corporations orsubchapter 6 corporations.

8 C corporations are what #ost people thin< of when the%hear the word $corporation.& =owever/ business startupsare often organied as subchapter 6 corporations.

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C Corporation1 of

C Corporation

Is a separate legal entit% that/ in the

e%es of the law/ is separate fro# its

owners.

In #ost cases a corporation shields

its owners/ who are called shareholders/ fro# personal liabilit% for the debts of

the corporation.

5 corporation is governed b% a board

of directors/ which is elected b% the shareholders.

5 corporation is for#ed b% filing

articles of incorporation.

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C Corporation of

C Corporation

5 corporation is ta"ed as a separate

legal entit%.

5 disadvantage of a C corporation is

that it is subject to double ta"ation.

9his #eans that a corporation is ta"ed on its net inco#e/ and when the sa#e

inco#e is distributed to shareholders

in the for# of dividends/ the inco#e is

ta"ed again on the shareholders)personal ta" returns.

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C Corporation1 of

5dvantages of a C Corporation

Owners are liable onl% for the debts and obligations of the corporation up to

the a#ount of their invest#ent.

9he #echanics of raising capital is easier.4o restrictions e"ist on the nu#ber of shareholders/ which differs fro#

subchapter 6 corporations.

6toc< is li?uid if traded on a #ajor stoc< e"change.

9he abilit% to share stoc< with e#plo%ees through stoc< options or other

incentive plans can be a powerful for# of e#plo%ee #otivation.

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C Corporation of

Disadvantages of a C Corporation

6etting up and #aintaining one is #ore difficult than for a sole proprietorship

or a partnership.

Business losses cannot be deducted against the shareholder)s other sources of inco#e.

Inco#e is subject to double ta"ation/ #eaning that it is ta"ed at the corporate

and the shareholder levels.

6#all shareholders t%picall% have little voice in the #anage#ent of the fir#.

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6ubchapter 6 Corporation1 of

6ubchapter 6

Corporation

Co#bines the advantages of a

partnership and a C corporation.

Is si#ilar to a partnership in that the

inco#e of the business is not subject

to double ta"ation.Is si#ilar to a corporation in that the

owners are not subject to personal

liabilit% for the debts or behavior of

the business.5 6ubchapter 6 Corporation does not

pa% ta"es. +rofits and losses are passed

through to the ta" returns of the owners.

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6ubchapter 6 Corporation of

9he business cannot be a subsidiar% of another corporation.

9he shareholders #ust be .6. citiens. +artnerships and C corporations #a%

not own shares in a subchapter 6 corporation. Certain t%pes of trusts and

estates are eligible to own shares in a subchapter 6 corporation.

It can onl% have one class of stoc< issued and outstanding :either preferred

stoc< or co##on stoc


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2i#ited 2iabilit% Co#pan%

2i#ited 2iabilit%

Co#pan%

Is a for# of business ownership that

is rapidl% gaining popularit% in the

.6.

5long with the 6ubchapter 6/ it is a

popular choice for start-up fir#s.9he li#ited liabilit% co#pan% co#bines

the li#ited liabilit% advantage of the

corporation with the ta" advantages of

a partnership.5 li#ited liabilit% co#pan% does not

pa% ta"es. +rofits and losses are passed

through to the ta" returns of the owners.

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2i#ited 2iabilit% Co#pan%1 of

5dvantages of a 2i#ited 2iabilit% Co#pan%

>e#bers are liable for the debts and obligations of the business onl% up tothe

a#ount of their invest#ent.

9he nu#ber of shareholders is unli#ited.

5n 22C can elect to be ta"ed as a sole proprietor/ partnership/ 6 corporation/

or corporation/ providing #uch fle"ibilit%.

Because profits are ta"ed onl% at the shareholder level/ there is no double

ta"ation.

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2i#ited 2iabilit% Co#pan% of

Disadvantages of a 2i#ited 2iabilit% Co#pan%

6etting up and #aintaining one is #ore difficult and e"pensive.

9a" accounting can be co#plicated.

6o#e of the regulations governing 22Cs var% b% state.Because 22Cs are a relativel% new t%pe of business entit%/ there is not as

#uch legal precedent available for owners to anticipate how legal disputes

#ight affect their business.

6o#e states lev% a franchise ta" on 22CsEwhich is essentiall% a fee the 22C pa%s the state for the benefit of li#ited liabilit%.

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C i ht 2012 P Ed ti

!"" rights reser#ed$ %o part o& this pu'"ication (ay 'ereproduced) stored in a retrie#a" syste() or trans(itted) in

any &or( or 'y any (eans) e"ectronic) (echanica")photocopying) recording) or other*ise) *ithout the prior*ritten per(ission o& the pu'"isher$ Printed in the +nited

,tates o& !(erica$


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Barringer e4 Ppt 07GE