Entrepreneurship BUS 403 - Unit 8

Entrepreneurship: BUS 403 - Unit 8

• Course focuses on preparing a proper ethical and legal foundation for entrepreneurial ventures.

Outline

• Creating an ethical culture in an entrepreneurial venture
• Code of conduct and ethics training program
• Selecting a lawyer for a new firm
• Founders' agreement
• Sole proprietorships, partnerships, corporations, and limited liability companies
• Intellectual property
• Four major forms of intellectual property: patents, trademarks, copyrights, and trade secrets

Objectives

• Discuss actions founders can take to establish strong ethical cultures in their entrepreneurial ventures.
• Describe actions taken in new firms to effectively deal with legal issues.
• Provide an overview of business licenses and permits needed for start-ups.
• Identify and describe different business ownership forms available to new firms.

Importance of the Legal & Ethical Context for Entrepreneurs

• Legal issues are clearer than ethical standards.
• Business ethics is the ability to reflect on values in corporate decision-making processes.
• Ethical practices improve corporate health in areas like productivity, stakeholder relations, and government regulations.
• Many entrepreneurs overestimate their knowledge of the legal issues in starting and running a business.
• Thorough review of legal issues is crucial to avoid costly mistakes.

Ethical and Legal Issues Facing a New Firm

• Establishing a strong ethical culture
• Avoiding legal disputes
• Choosing an attorney
• Drafting a founders' agreement
• Obtaining business licenses and permits
• Choosing a form of business organization

Establishing a Strong Ethical Culture

• Lead by Example: Building a strong ethical culture within the organization through leadership example is crucial.
• Establish a Code of Conduct (Code of Ethics): A formal statement outlining an organization's values on ethical and social issues.
• Implement an Ethics Training Program: This involves teaching business ethics to improve employees' ethical conduct and help resolve dilemmas. An ethical dilemma arises when there's an apparent conflict between moral imperatives.

Potential Payoffs for Establishing a Strong Ethical Culture

• Reduced vulnerability to fines
• Better access to capital
• Improved customer loyalty
• Improved employee commitment
• Enhanced brand reputation

Choosing a Lawyer for a Firm

• Select a lawyer early in the development of a business venture.
• The lawyer should be familiar with start-up issues and, specifically, intellectual property.

Patents, Trademarks, Copyrights, and Trade Secrets

• Patents: Government authority or license conferring exclusive rights for a set period for inventions.
• Trademarks: Legally registered symbols, words, or phrases representing a company or product (like a logo).
• Copyrights: Exclusive legal rights granted to creators for literary, artistic, or musical material.
• Trade Secrets: Secret devices or techniques used by a manufacturing company.

Important Agreements for the Start-Up Entrepreneur

• Founders' Agreement: Outlines the understanding between founders/partners in running the business.
• Charter Documents: Includes the Memorandum of Association (MoA) outlining incorporation details, share capital, and members' liability and the Articles of Association (AoA) detailing the Company's management and governance details.

Drafting a Founders' Agreement

• Used when there are two or more founders.
• A document addressing equity distribution among founders.
• Determines compensation for cash and "sweat equity".
• Outlines how long founders need to remain with the firm for shares to vest.

Partial List of Items to Include in a Founders’ Agreement

• Nature of prospective business
• Identities and titles of founders
• Legal form of ownership
• Stock/ownership distribution and consideration
• Intellectual property signed over
• Founder compensation and profit distribution
• Provisions for dispute resolution
• Buyback clause

Avoiding Legal Disputes

• Most disputes stem from misunderstandings, sloppiness, or lack of legal knowledge.
• Essential steps for avoiding disputes include: meeting contractual obligations, avoiding undercapitalization, getting everything in writing, and setting standards.

Non-Disclosure and Non-Compete Agreements

• Non-disclosure agreements prevent employees and external parties from disclosing company trade secrets.
• Non-compete agreements prevent individuals from competing against a former employer for a specific time frame.

Obtaining Business Licenses and Permits

• Licenses and permits vary depending on business type, needing local, state, or federal approvals.
• Examples include for businesses selling alcohol, tobacco, firearms, commercial fisheries, or broadcasting.
• Business registration requirements, sales tax permits, and professional/occupational licenses (requiring exams and maintaining certifications, e.g., barbers, nurses, real estate agents)

Choosing a Form of Business Ownership

• Common business types (in Jamaica) include sole proprietorships, partnerships, and limited liability companies (LLCs).

Issues to Consider in Choosing a Legal Ownership Form

• Cost of setting up and maintaining the legal form
• Extent to which personal assets can be shielded from business liabilities
• Tax considerations
• Number and types of investors involved

Sole Proprietorship

• Simplest business entity.
• Owner and business are essentially the same.
• Owner is responsible for all business liabilities - a significant drawback.

Advantages of a Sole Proprietorship

• Easy and inexpensive to establish
• Owner fully controls business and profits
• Business losses deductible against other income
• Not subject to double taxation
• Easy to dissolve

Disadvantages of a Sole Proprietorship

• Unlimited liability (owner's personal assets at risk).
• Dependent on owner's skills and abilities, potentially limiting growth.
• Raising capital may be challenging.
• Business ends on owner's death or loss of interest.

Partnerships

• Two or more people pooling resources to operate a business. Can be general or limited.
• General partnerships: All partners share in the business's responsibilities and liabilities, including the ability to hire and fire employees.
• Limited partnerships: Differ in the extent of liability for debt/obligations, with general partners being fully liable while limited partners are responsible only to the extent of their investment.

Advantages of a General Partnership

• Easy and inexpensive to create compared to corporations.
• Skills and abilities of multiple owners available.
• Potential for increased capital.
• Business losses deductible against individual partners' income.
• Not subject to double taxation.

Disadvantages of a General Partnership

• Unlimited liability for general partners.
• Reliance on a fixed number of partners, restricting growth.
• Potential for disagreements among partners. - Business ends upon one partner's death or withdrawal unless otherwise specified. Limited liquidity of investments.

Limited Liability Company (LLC)

• Artificial entity separate from owners/directors, allowing legal action.
• Owners (members) have limited liability; personal assets protected from business debts.
• Flexibility in management and structure.
• Able to buy, sell, and hold property
• Can have private shareholders or be publicly listed.

Advantages of a Limited Liability Company

• Limited liability for members, protecting personal assets
• Continuity of the business across ownership changes
• Easier to raise capital
• Access to a wider pool of talent

Disadvantages of a Limited Liability Company

• More complex and expensive to establish than a sole proprietorship or general partnership
• Fluid control of the business
• Double taxation in some cases

Explore the essential legal and ethical foundations required for successful entrepreneurial ventures in this Unit 8 quiz. Learn about creating an ethical culture, selecting legal representation, and understanding various forms of business ownership. This quiz will help you navigate the complexities of ethical and legal compliance essential for start-ups.