Part IV – Initiating Part IV – Initiating Entrepreneurial Ventures Entrepreneurial Ventures

Chapter 11 – Assessment and Evaluation ofChapter 11 – Assessment and Evaluation of Entrepreneurial Opportunities Entrepreneurial OpportunitiesChapter 12 – Legal Structures for NewChapter 12 – Legal Structures for New Business Ventures Business VenturesChapter 13 – Legal Issues Related to Chapter 13 – Legal Issues Related to Emerging Ventures Emerging VenturesChapter 14 – Sources of Capital for Chapter 14 – Sources of Capital for Entrepreneurs Entrepreneurs

Copyright (c) 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Chapter 12 – Legal StructuresChapter 12 – Legal Structures For New Business For New Business Ventures Ventures

Sole ProprietorshipsSole ProprietorshipsA sole proprietorship is a business A sole proprietorship is a business

that is owned and operated by that is owned and operated by one person. The enterprise has one person. The enterprise has

no existence apart from its no existence apart from its owner.owner.

AdvantagesAdvantages

• Ease of formationEase of formation

• Sole ownership of profitsSole ownership of profits

• Decision making and control vested in one Decision making and control vested in one ownerowner

• FlexibilityFlexibility

• Relative freedom from governmental controlRelative freedom from governmental control

• Freedom from corporate business taxesFreedom from corporate business taxes

DisadvantagesDisadvantages

• Unlimited liabilityUnlimited liability

• Lack of continuityLack of continuity

• Less available capitalLess available capital

• Relative difficulty obtaining long-term Relative difficulty obtaining long-term financingfinancing

• Relatively limited viewpoint and experienceRelatively limited viewpoint and experience

PartnershipsPartnerships• A partnership is an association of two or A partnership is an association of two or

more persons acting as co-owners of a more persons acting as co-owners of a business for profit.business for profit.

• The The Uniform Partnership ActUniform Partnership Act is generally is generally followed by most states as the guide for legal followed by most states as the guide for legal requirements in forming partnerships.requirements in forming partnerships.

• The articles of partnership clearly outline the The articles of partnership clearly outline the financial and managerial contributions of the financial and managerial contributions of the partners and carefully delineate the roles in partners and carefully delineate the roles in the partnership relationship.the partnership relationship.

AdvantagesAdvantages• Ease of formationEase of formation

• Direct rewardsDirect rewards

• Growth and performance facilitatedGrowth and performance facilitated

• FlexibilityFlexibility

• Relative freedom from governmental control Relative freedom from governmental control and regulationand regulation

• Possible tax advantagePossible tax advantage

DisadvantagesDisadvantages• Unlimited liability of at least one partnerUnlimited liability of at least one partner

• Lack of continuityLack of continuity

• Relative difficulty obtaining large sums of Relative difficulty obtaining large sums of capitalcapital

• Bound by the acts of just one partnerBound by the acts of just one partner

• Difficulty of disposing of partnership interestDifficulty of disposing of partnership interest

Factors Associated with Partnership Factors Associated with Partnership SuccessSuccess

Partnership AttributesPartnership Attributes•CommitmentCommitment•CoordinationCoordination•InterdependenceInterdependence•TrustTrust

Communication BehaviorCommunication Behavior•QualityQuality•Information SharingInformation Sharing•ParticipationParticipation

Conflict Resolution TechniquesConflict Resolution Techniques•Joint ProblemJoint Problem Solving Solving•PersuasionPersuasion•SmoothingSmoothing

•DominationDomination•Harsh WordsHarsh Words•ArbitrationArbitration

Partnership SuccessPartnership Success•SatisfactionSatisfaction•Dyadic SalesDyadic Sales

CorporationsCorporations• A corporation is “an artificial being, invisible, A corporation is “an artificial being, invisible,

intangible, and existing only in contemplation intangible, and existing only in contemplation of the law”of the law”**. As such, a corporation is a . As such, a corporation is a separate legal entity apart from the separate legal entity apart from the individuals who own it.individuals who own it.

*Supreme Court Justice John Marshall*Supreme Court Justice John Marshall

AdvantagesAdvantages• Limited liabilityLimited liability

• Transfer of ownershipTransfer of ownership

• Unlimited lifeUnlimited life

• Relative ease of securing capital in large Relative ease of securing capital in large amountsamounts

• Increased ability and expertiseIncreased ability and expertise

DisadvantagesDisadvantages• Activity restrictionsActivity restrictions

• Lack of representationLack of representation

• RegulationRegulation

• Organizing expensesOrganizing expenses

• Double taxationDouble taxation

Specific Forms of Specific Forms of Partnerships and Partnerships and

CorporationsCorporations

Limited PartnershipsLimited Partnerships• Permits capital investment without Permits capital investment without

responsibility for management responsibility for management andand without without liability for losses beyond the initial liability for losses beyond the initial investment.investment.

• Limited partnerships are governed by the Limited partnerships are governed by the Uniform Limited Partnerships Act (ULPA).Uniform Limited Partnerships Act (ULPA).

Limited Liability PartnershipsLimited Liability Partnerships• The limited liability partnership (LLP) is a The limited liability partnership (LLP) is a

relatively new form of partnership that allows relatively new form of partnership that allows professionals the tax benefits of a partnership professionals the tax benefits of a partnership while avoiding personal liability for the while avoiding personal liability for the malpractice of other partners.malpractice of other partners.

S CorporationsS Corporations• Formerly termed a Subchapter S corporation, Formerly termed a Subchapter S corporation,

the S corporation takes its name from the S corporation takes its name from Subchapter S of the Internal Revenue Code, Subchapter S of the Internal Revenue Code, under which a business can seek to avoid the under which a business can seek to avoid the imposition of income taxes at the corporate imposition of income taxes at the corporate level yet retain some of the benefits of a level yet retain some of the benefits of a corporate form (especially the limited corporate form (especially the limited liability).liability).

• Commonly known as a “tax option Commonly known as a “tax option corporation,” an S corporation is taxed corporation,” an S corporation is taxed similarly to a partnership.similarly to a partnership.

Limited Liability CompaniesLimited Liability Companies• The LLC is a hybrid form of business The LLC is a hybrid form of business

enterprise that offers the limited liability of a enterprise that offers the limited liability of a corporation but the tax advantages of a corporation but the tax advantages of a partnership.partnership.

• Perhaps the greatest disadvantage is that LLC Perhaps the greatest disadvantage is that LLC statutes differ from state to state, and thus any statutes differ from state to state, and thus any firm engaged in multistate operations may firm engaged in multistate operations may face difficulties.face difficulties.

Other Corporation ClassificationsOther Corporation Classifications

• Domestic and Foreign CorporationsDomestic and Foreign Corporations

• Public and Private CorporationsPublic and Private Corporations

• Nonprofit CorporationsNonprofit Corporations

• Professional CorporationsProfessional Corporations

• Close CorporationsClose Corporations

FranchisingFranchising• A franchise is any arrangement in which the A franchise is any arrangement in which the

owner of a trademark, trade name, or owner of a trademark, trade name, or copyright has licensed others to use it in copyright has licensed others to use it in selling goods or services. A selling goods or services. A franchiseefranchisee (a (a purchaser of a franchise) is generally legally purchaser of a franchise) is generally legally independent but economically dependent on independent but economically dependent on the integrated business system of the the integrated business system of the franchisorfranchisor (the seller of the franchise). (the seller of the franchise).

AdvantagesAdvantages

• Training and guidanceTraining and guidance

• Brand-name appealBrand-name appeal

• A proven track recordA proven track record

• Financial assistanceFinancial assistance

DisadvantagesDisadvantages

• Franchise feesFranchise fees

• Franchisor controlFranchisor control

• Unfulfilled promisesUnfulfilled promises

The Costs of FranchisingThe Costs of Franchising1.1. The Basic Franchise FeeThe Basic Franchise Fee

2.2. InsuranceInsurance

3.3. Opening Product InventoryOpening Product Inventory

4.4. Remodeling and Leasehold ImprovementsRemodeling and Leasehold Improvements

5.5. Utility ChargesUtility Charges

6.6. PayrollPayroll

7.7. Debt ServiceDebt Service

8.8. Bookkeeping and Accounting FeesBookkeeping and Accounting Fees

9.9. Legal and Professional FeesLegal and Professional Fees

10.10. State and Local Licenses, Permits, and CertificatesState and Local Licenses, Permits, and Certificates

Franchise Law: The Uniform Franchise Law: The Uniform Franchise Offering Circular Franchise Offering Circular (UFOC)(UFOC)

The UFOC is divided into 23 items The UFOC is divided into 23 items that provide different segments of that provide different segments of

information for prospective information for prospective franchisees.franchisees.