Entrepreneurship Chapter 7

Founders can establish a strong ethical culture in their entrepreneurial ventures by:
- Leading by example
- Drafting a code of conduct
- Implementing an ethics training program
A code of conduct (or code of ethics) is a formal statement of an organization's values on certain ethical and social issues.
Ethics training programs teach business ethics to help employees deal with ethical dilemmas and improve their overall ethical conduct.

Select an attorney early, familiar with start-up issues
Consider intellectual property issues and use an attorney who specializes in this field
Tips for selecting an attorney:
- Contact the local bar association for a list of attorneys who specialize in start-ups in your area
- Interview several attorneys
- Select an attorney who can assist you in raising money for your new venture
- Check for track record of completing work on time and discuss fees
- Ensure the attorney understands your business
- Learn about the process of starting a business yourself

A founders' agreement (or shareholders' agreement) deals with issues such as:
- Relative split of equity among founders
- Compensation for cash or "sweat equity" invested in the firm
- Vesting period for share ownership
Items to include in a founders' agreement:
- Nature of the prospective business
- Identity and proposed titles of the founders
- Legal form of business ownership
- Apportionment of stock (or division of ownership)
- Consideration paid for stock or ownership share
- Description of how founders will be compensated and how profits will be divided
- Provisions for resolving disputes
- Buyback clause

Most legal disputes result from misunderstandings, sloppiness, or lack of knowledge of the law
Steps to avoid legal disputes:
- Meet all contractual obligations
- Avoid undercapitalization
- Get everything in writing
- Set standards
Written agreements help to avoid misunderstandings and legal disputes

Nondisclosure agreements bind employees or other parties to not disclose a company's trade secrets
Noncompete agreements prevent individuals from competing against a former employer for a specific period of time

Businesses may need local, state, and/or federal licenses and permits to operate
Examples of businesses that require federal licenses and/or permits:
- Selling or providing services related to alcohol, tobacco, firearms, animal transport, commercial fisheries, or radio and television broadcasting
State licenses and permits:
- Business registration requirements
- Sales tax permits
- Professional and occupational licenses and permits
Local licenses and permits:
- Operation of certain types of businesses
- Permits for engaging in certain activities (e.g., building, health, signage)

Common legal entities:
- Sole proprietorship
- Partnership
- Corporation
- Limited liability company
Issues to consider when choosing a form of business ownership:
- Liability
- Control
- Finances
- Growth and exit strategies
- Other factors (e.g., taxes, complexity, flexibility)

Form of business organization where two or more people pool their skills, abilities, and resources
Types of partnerships:
- General partnership
- Limited partnership
General partnership:
- Primary disadvantage is unlimited liability
- Skills and abilities of multiple owners are available
- Raising capital may be easier
- Business losses can be deducted against partners' other income
- Not subject to double taxation
Limited partnership:
- Modified form of general partnership
- Includes two classes of owners: general partners and limited partners
- General partners are liable for partnership debts and obligations
- Limited partners are only liable up to their investment

Separate legal entity, organized under state authority
Types of corporations:
- C corporation
- Subchapter S corporation
C corporation:
- Owners are liable only for their investment
- Easier to raise capital
- No restrictions on number of shareholders
- Stock is liquid if traded on a major stock exchange
- Ability to share stock with employees as motivation
- Double taxation of income
Subchapter S corporation:
- Combines advantages of partnership and C corporation
- Income not subject to double taxation
- Owners not personally liable for business debts or behavior
- Strict standards to qualify as a subchapter S corporation

Form of business ownership that combines advantages of partnership and corporation
Owners (members) are not personally liable for business debts or behavior
Income is not subject to double taxation
More flexible than corporations, with fewer restrictions on ownership and management### Limited Liability Company (LLC)
Combines the limited liability advantage of a corporation with the tax advantages of a partnership
Does not pay taxes; profits and losses are passed through to the tax returns of the owners

Members are liable for debts and obligations only up to the amount of their investment
Unlimited number of shareholders
Can elect to be taxed as a sole proprietor, partnership, S corporation, or corporation, providing flexibility
No double taxation, as profits are taxed only at the shareholder level

Setting up and maintaining an LLC is more difficult and expensive
Tax accounting can be complicated
Regulations governing LLCs vary by state
Limited legal precedent for owners to anticipate how legal disputes might affect their business
Some states levy a franchise tax on LLCs, essentially a fee for the benefit of limited liability