978-1259912191 Chapter 9 Lecture Notes

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Chapter Nine: Establishing the Legal Foundation

Table of Contents

Brief Chapter Outline…………………………………………………………………………………..2

Chapter Outline and Lecture notes………………………………………………………………..4

Key Terms……………………………………………………………………………………………….. 14

Suggested Text Responses

…………………………………………………………………………16

Class Activities and Sample Assignments…………………………………………………….19

Discussion Questions for Online/Hybrid classes…………………………………………….21

Lecture Links…………………………………………………………………………………………… 25

Lecture Link 9.1: Commercial Law for the New Entrepreneur……………………….25

Lecture Link 9.2: New Small Business and the IRS………………………………………26

Lecture Link 9.3: The United States Patent and Trademark O&ce (USPTO)…….27

Bonus Internet Exercises……………………………………………………………………………28

Bonus Internet Exercise 9.1: State Rules on Partnerships and the New

Entrepreneur………………………………………………………………………………………… 28

Bonus Internet Exercise 9.2: Business/ Gov’s “Permit Me Tool”…………………….29

Bonus Internet Exercise 9.3: Workers’ Compensation and the New Business….30

Critical Thinking Exercises…………………………………………………………………………. 31

Critical Thinking Exercise 9.1: Copyright, Trademark, and Patents………………..31

Critical Thinking Exercise 9.2: Contracts and the Sole Proprietor………………….33

Critical Thinking Exercise 9.3: Entrepreneurs Evaluate Lease Speci5cations…..35

Bonus Cases……………………………………………………………………………………………. 37

Bonus Case 9.1: Workers’ Compensation Claims Increase……………………………37

Bonus Case 9.2: Board of Directors or Board of Advisors?……………………………38

Bonus Case 9.3: Regulatory Requirements and the New Small Business Owner

…………………………………………………………………………………………………………… 40

Endnotes………………………………………………………………………………………………… 41

Brief Chapter Outline

I. Learning Objectives (text page 162)

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Chapter Nine: Establishing the Legal Foundation

Discuss the various legal forms of business to determine the best design for a

proposed new business.

Explain the basics of contracts.

Define the role of leases in the legal formation of the new business.

List how laws, rules, and regulations benefit new businesses.

Explain the importance of copyrights, trademarks, patents to a new business.

Define the role that insurance plays in the risk portfolio of the new business.

Discuss how to develop an effective board of advisors and board of directors.

II. Various Legal Forms of Business to Determine the Best Design for a Proposed

New Business (text pages 166 through 173)

Learning Objective 9-1: Discuss the various legal forms of business to determine

the best design for a proposed new business.

III. Basics of Contracts (text pages 173 and 174)



Learning Objective 9-2: Explain the basics of contracts.

IV. Role of Leases in the Legal Formation of the New Business (text pages 174 and

175)



Learning Objective 9-3: Define the role of leases in the legal formation of the new

business.

V. How Laws, Rules, and Regulations Benefit New Businesses (text pages 176 and

177)



Learning Objective 9-4: List how laws, rules, and regulations benefit new

businesses.

VI. Importance of Copyrights, Trademarks, and Patents to a New Business (text

pages 177 and 178)



Learning Objective 9-5: Explain the importance of copyrights, trademarks, and

patents to a new business.

VII. Role That Insurance Plays in the Risk Portfolio of the New Business (text pages

178 through 180)

Learning Objective 9-6: Define the role that insurance plays in the risk portfolio of

the new business.

VIII. How to Develop an Effective Board of Advisors and Board of Directors (text

pages 180 and 181)

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Chapter Nine: Establishing the Legal Foundation

Learning Objective 9–7: Discuss how to develop an effective board of advisors or

board of directors.

IX. For Review (text page 181)

Chapter Outline and Lecture notes

1. Learning Objectives (text page 162)

Discuss the various legal forms of business to determine the best design for a

proposed new business.

Explain the basics of contracts.

Define the role of leases in the legal formation of the new business.

List how laws, rules, and regulations benefit new businesses.

Explain the importance of copyrights, trademarks, and patents to a new

business.

Define the role that insurance plays in the risk portfolio of the new business.

Discuss how to develop an effective board of advisors or board of directors.

2. Various Legal Forms of Business to Determine the Best Design for a Proposed

New Business

Learning Objective 9-1:Discuss the various legal forms of business to determine

the best design for a proposed new business

A. Sole Proprietorship (text pages 166 through 168)

i. The simplest form of business organization, characterized by the

fact that the person who owns the business and the business itself

are treated as the same entity

ii. A key benefit of a sole proprietorship is they are easily formed and

easily dissolved

iii. There are strict record-keeping rules

iv. Business expenses and personal expenses must be kept separate

v. Disadvantages:

1. Limited to one business owner

2. Limited growth potential

3. No equity investors

4. Liability is the responsibility of the business owner

5. Business debt is the owner’s debt

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Chapter Nine: Establishing the Legal Foundation

6. Legitimacy of the business is tied to the owner with

customers and suppliers

vi. Two growth options for sole proprietors:

1. Obtain funds as personal debts

2. Change the legal form of the business

vii. A popular form of business for the following individuals:

1. A speculative business idea or opportunity

2. Time constraints of the owner prevent the business from

substantial growth

3. A low-cost small business that does not require significant

investment or capital

B. Partnerships (text pages 168 through 170)

i. A type of business formed between individuals directly. It includes

both general and limited varieties

1. Two types of partnerships are general partnerships and

limited partnerships

ii. General partnership

1. In an LLP, the individual considered the manager of the firm,

who, as such, has unlimited liability for any debts or

judgements against the firm

2. A general partnership is easily formed with a partnership

agreement and a specific business direction stated in the

partnership agreement

3. Attorney or accountant prepares agreement

4. If there is no viable partnership agreement, the partnership is

governed by the Uniform Partnership Act or the Revised

Uniform Partnership Act. These are governed by the state

where the partnership is located

5. Specifies the individuals in the general partnership and their

individual contribution to the business

6. Describes the draw which is a distribution of funds from the

business.

7. Contains buyout stipulations and new partnership

opportunities

8. Owners report their profits or losses on personal tax returns

in proportion to the percentage of the business owned by

each owner

9. Disadvantage is that partners are jointly liable for all

business debts

10. Each partner is assumed to be involved in all decisions

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Chapter Nine: Establishing the Legal Foundation

11. Relationship between partners is fiduciary

iii. Limited Liability Partnership (LLP)

1. Common for at least two individuals or when one individual

owns the LLP and has declared a full pass-through of all

income on the owner’s federal income taxes

2. Two classes of partners include general partners and limited

partners

a. The general partner is the manager of the business with

unlimited liability for debts incurred from the business

b. The limited partners are passive investors with liability of

the business limited to their investment in the business

c. Limited partners work for the firm but they may not be

active managers

d. If a limited partner becomes an active manager, the

business becomes a general partnership and not a LLP

C. Corporations

i. The business, or corporation, is a separate entity

ii. The owner or president is not personally liable for the debt of a

corporation but is liable for the amount of investment that person

made

iii. The three corporations are Subchapter S Corporation, Subchapter

C Corporation, and Limited Liability Company

iv. A subchapter S Corporation is an organizational form that treats the

firm as an entity separate from the individuals. This allows the

owner to treat the income as they would if the firm were a sole

proprietorship or a partnership. It has limitations in the number and

type of shareholders.

1. Limited liability for the owner

2. Financial statements are combined with personal income for

a tax benefit to the owners

3. Simpler formation compared to a Subchapter C corporation

4. A legitimate form of business since “inc” is included in

company’s name

5. Increased expenses when compared to a sole proprietorship

or partnership because of additional paperwork required

6. Lawyer or accountant is needed to prepare formation

paperwork

7. Limited to a maximum of 75 shareholders

8. Disadvantageous for a growth-focused company that will go

public in the foreseeable future

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Chapter Nine: Establishing the Legal Foundation

v. A subchapter C Corporation is an organizational form that treats the

firm as a unique entity responsible for its own taxes. There are no

limitations to shareholder participation and the “owners” are

protected beyond their equity investment

1. Limited liability for the owners

2. Double taxation on both corporation and owners

3. Corporation pays income tax on profits

4. Owners pay income taxes on their personal tax returns for

the dividends of the corporation

5. Profits after taxes can be paid as dividends to the owners

6. Income tax is mitigated because the owners are employees

who are paid salaries and bonuses

7. Cost of salaries are costs to the business

8. Owners can pay themselves all the profits, reducing the

corporation’s taxable profit and limiting the corporate tax

owed.

9. Health insurance and other fringe benefits can paid by the C

corporation and not expensed as income to the employees

because they are a business expense charged to the

corporation

10.There is no limit to the number of shareholders

11. Only the number of authorized and distributed shares in the

company are limited

a. The corporation’s Floor value equals the par value

times the number of shares distributed and equals to

the shareholder equity in the firm

b. The par value should be offered at a very low price in

order to increase the number of shares sold

c. A detailed corporate charter can be using a software

package

12.The characteristics of a C corporation include:

a. The corporate name is patented or trademarked

b. The location of a corporate headquarters is

established

c. The general nature of the business is defined for filing

purposes

d. The names, addresses, and titles of each corporate

officer and each initial investor is required

e. The time horizon anticipated for the firm is identified

f. The number of authorized stock and capital

g. By-laws of the organization are established.

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vi. Limited Liability Corporation (LLC) (text page 172)

1. One of the most popular form of incorporation for new

businesses

1. Liability to the owner(s) is limited to the amount invested

2. Unlimited number of investors

3. Other corporations can hold stock in the company

4. Owners flow profits through to their personal taxes to avoid

double taxation

5. Income may not be in proportion to the owner’s holdings.

6. Formed by submitting paperwork to the state government to

issue a charter

7. Formation requirements are established by individual

states

8. States may require the business establishment to be

published in the newspaper

9. Some states prohibit certain professionals from establishing

the business

10.An attorney or other professional should be consulted prior

to the establishment of the LLC

3. Contracts (text pages 173 and 174)

Learning Objective 9-2: Explain the basics of contracts

A. Contract (text pages 173 and 174)

i. An agreement between two parties to perform certain activities for

some consideration

1. A written agreement is preferred; however, some contracts

can be stated or implied

ii. It is strongly recommended that the entrepreneur use an attorney

and a formal written contract

iii. The contract should state the name of the parties involved and the

scope of the transaction

iv. A specific action each party agrees to do and for what

consideration should be stated

v. The timing of a payment if it will not be immediately upon

agreement or acceptance should be stated

vi. The time that the agreed upon transaction or event will occur and

any optional expiration date should be stated

vii. Warranties need to be spelled out should be stated

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Chapter Nine: Establishing the Legal Foundation

viii. Termination agreements, breach of contract penalties, damages,

or restitution agreements should be stated

ix. Whether contract can be transferred should be stated

x. The state law(s) applicable to and specified in the agreement

should be stated

4. Role of Leases in the Legal Formation of the New Business (text pages 174 and

175

Learning objective 9-3: Define the role of leases in the legal formation of the new

business

A. Lease Contract

i. A new business uses lease contracts to secure a building or space

for its operations (text pages 174 and 175)

1. It specifies what the business owner is leasing

2. It describes the length of the lease, the purpose, and

renewable options in the lease agreement

3. It states the authorized party(s) responsible for making

improvements

a. Lower lease payments are included in leases that

include the responsibility for making facility

improvements

4. It describes maintenance and other facility responsibilities

a. Janitorial costs

b. Landscaping

c. Trash removal

d. Utilities

5. It identifies the party responsible for liability insurance

a. It specifies whether or not the owner or tenant is

responsible for insurance

b. The tenant could be liable for landlord liability in

addition to tenant liability

6. It stipulates the landlord’s right of entry

7. It contains procedures that address other issues

a. It addresses the right to cancel the lease

i. Actions taken in case of bankruptcy

b. Problems and disagreements

i. Arbitration agreements

ii. Mediation options

iii. Withholding rent stipulations

c. Subletting may be an option

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5. How Laws, Rules, and Regulations Benefit New Businesses (text pages 176 and

177)

Learning Objective 9-4: List how laws, rules, and regulations benefit new

businesses

A. Laws, Rules and Regulations

i. Small businesses have fewer regulations than a larger business

ii. Some industries are regulated by the business type regardless of

their size

iii. A business that has employees is required to have Employer

Identification Numbers (EIN)

iv. A business with employees is required to pay federal, state, and

perhaps other taxes

v. Some states and some cities may have specific regulations

1. i.e. New York restaurants

vi. There are sources for regulatory requirements

1. Small Business Assistance Centers (SBAC) sponsored by the

Small Business Administration (SBA)

2. Economic Development Centers in various states

3. Chambers of Commerce

4. Americans with Disabilities Act (ADA) (text page 176)

a. This law pertains to a business with more than 15

employees in order to prevent discrimination in the

hiring, management, or dismissal of an employee with

disabilities

vii. Businesses are required to make reasonable accommodations for

individuals with disabilities

viii. Businesses are required to make their facilities accessible to

individuals with disabilities

ix. Requirements can change so the law must be constantly monitored

B. Licensing (text page 177)

i. The businesses may be required to purchase a business license

from its city or county in order to operate a legal establishment in

the community

ii. To obtain a business license

1. A business license application or other required form can be

obtained from the courthouse or other designated agency

2. A nominal fee to purchase business license may be charged

by the city or county

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3. The business must agree to report earnings quarterly or at

other designated time intervals if required

iii. An entrepreneur should consult with an attorney if a challenging l

license is required for the new business

iv. Certain types of businesses are required to obtain specific licenses

or permits

1. Local ABC (Alcohol Beverage Control) requires a liquor

license

2. Occupancy permits

3. Federal liquor licenses

4. Local business licenses

5. Sign permits

6. OSHA

7. Fire safety permits

6. Importance of Copyrights, Trademarks, and Patents to a New Business

Learning Objective 9-5: Explain the importance of copyrights, trademarks,

patents to a new business

A. Copyright

i. It is the legal means to protect intellectual property. It grants

ownership on creative materials generated, such as books,

magazines, advertising copy, music, artwork, or virtually any other

creative product, whether published or unpublished.

ii. It is filed with the US Government

iii. It is valid for the life of the author plus 70 years

B. Trademark

i. This is a claim of intellectual property that is associated with a

specific business. It may be the name of the firm, a symbol that

represents it or the names of its products or services.

ii. Entrepreneurs are required to renew their trademarks every 10

years

C. Patent

i. This is a claim of intellectual property that covers a specific

innovation

ii. Patents are expensive and they last for 20 years

iii. An entrepreneurs file their patent application with the United States

Patent and Trademark Office

iv. Entrepreneur obtains a competitive advantage in an industry

because it prevents direct imitation of products for a period of time

v. There are types of patents

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Chapter Nine: Establishing the Legal Foundation

a. Utility – a patent for a new process, machine, article

of manufacture or composition of matter, or any new

and useful improvement to those.

b. Design – a patent for a new, original, and ornamental

design associated with an article of manufacture

c. Plant – a patent for someone who invents or

discovers or asexually reproduces any distinct and

new variety of plant.

vi. A patent provides a strong barrier to prevent direct imitation for the

time period of the patent.

vii. Copyrights, trademarks and patents filed in the US only apply in

the United states

7. Role That Insurance Plays in the Risk Portfolio of the New Business (text pages

178 and 179)



Learning objective 9–6: Define the role that insurance plays in the risk portfolio

of the new business

A. Insurance limits the liability concerns associated with the business

B. There are different types of insurance based on the needs of the firm.

An entrepreneur must evaluate if the insurance covers replacement

costs or current value

8. How to Develop an Effective Board of Advisors and Board of Directors (text

pages180 and 181)

Learning Objective 9-7: Discuss how to develop an effective board of advisors or

board of directors

A. Board of Directors

i. A group formed as a legal requirement for a corporation and

composed of individuals outside the business who advise the

business owner

B. Board of Advisors

i. A group formed at the discretion of the founders (regardless of the

legal form chosen) and composed of individuals outside the

business who advise the founders

C. The experience of the board members enhance the new small business’s

initiatives

i. Knowledge of the industrial licensing required in the location of the

new small business

ii. Knowledge of regulations of the specific industry

iii. Having success in another new start-up business

iv. Having financial and accounting background

v. Having human resource experience

D. Preferred boards consist of approximately five individuals or less

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Chapter Nine: Establishing the Legal Foundation

i. A boards meets when appropriate

ii. A boards typically meets three times per year

9. Review (text page 181)

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