Unit 8 Preparing Proper Ethical & Legal Foundation PDF

ENTREPRENEURSHIP: BUS 403 Unit 8: Preparing a Proper Ethical and Legal Foundation  Outline 1. Creating an ethical culture in an entrepreneurial venture 2. Code of conduct and an ethics training program 3. Selecting a lawyer for a new firm 4. Founders’ agreement 5....

ENTREPRENEURSHIP: BUS 403 Unit 8: Preparing a Proper Ethical and Legal Foundation  Outline 1. Creating an ethical culture in an entrepreneurial venture 2. Code of conduct and an ethics training program 3. Selecting a lawyer for a new firm 4. Founders’ agreement 5. Sole proprietorships, partnerships, corporations, and limited liability companies 6. Intellectual property 7. Four major forms of intellectual property: patents, trademarks, copyrights, and trade secrets  Objectives 1. Discuss the actions founders can take to establish a strong ethical culture in their entrepreneurial ventures. 2. Describe actions taken in new firms to effectively deal with legal issues. 3. Provide an overview of the business licenses and permits that a start-up must obtain before it begins operating. 4. Identify and describe the different forms of business ownership available to new firms.  Importance of the Legal & Ethical Context for Entrepreneurs  Legal issues are more clear cut and straight forward than ethical standards  Business ethics is the capacity to reflect on certain values in the corporate decision-making process and to determine how these values and decisions will affect the stakeholders  Ethical practices can enhance overall corporate health in 3 areas: 1. Productivity 2. Stakeholder relations 3. Government regulations  Importance of the Legal & Ethical Context for Entrepreneurs Many ethical and legal challenges involved when starting an entrepreneurial firm Most entrepreneurs overestimate their knowledge of the legal issues involved with starting and running a business Itis imperative that entrepreneurs thoroughly review the legal issues involved to make sure that costly mistakes aren’t made Ethical and Legal Issues Facing a New Firm Establishing Drafting a Choosing an a strong founder’s attorney ethical agreement culture Obtaining Choosing a Avoiding business form of legal licenses and business disputes permits organisation  Establishing a Strong Ethical 7-7 Culture 1. Lead by Example Most important thing - build a strong ethical culture in their organization by leading by example 2. Establish a Code of Conduct A code of conduct (or code of ethics) is a formal statement of an organization’s values on certain ethical and social issues  Establishing a Strong Ethical Culture 3. Implement an Ethics Training Program  Teachbusiness ethics to help employees deal with ethical dilemmas and improve their overall ethical conduct.  Anethical dilemma is a situation that involves an apparent conflict between moral imperatives; by obeying one imperative, this could result in you transgressing another. Doing something that is beneficial to one’s self or the organization, but may be unethical Potential Payoffs for Establishing a Strong Ethical Culture  Choosing a Lawyer for a Firm  Choose Early Select a lawyer as early as possible when developing a business venture It is critically important that the lawyeris familiar with start-up issues  Intellectual Property For issues dealing with intellectual property (patents, trademarks, copyrights, and trade secrets), it is essential to use a lawyer specialising in this area  Patents, Trademarks, Copyrights, and Trade 7-11 Secrets  Patent - a government authority or licence conferring a right or title for a set period, especially the sole right to exclude others from making, using, or selling an invention  Trademark - a symbol, word, or words legally registered or established by use as representing a company or product; such as a logo  Copyrights - the exclusive legal right given to the originator for a fixed number of years, to print, publish, perform, film, or record literary, artistic, or musical material  Trade Secret - a secret device or technique used by a company in manufacturing its products Important Agreements for the Start-Up Entrepreneur  Founders’ Agreement Details the understanding that the founders/partners must have in order to run the desired business  Charter Documents - Memorandum of Association (MoA) - Contains information relating to incorporation details, share capital, members’ liability, etc. - Articles of Association (AoA) - Contains the regulations governing the management of the Company like information regarding general meetings, Board of Directors, proceedings by the Board and details on voting rights  Drafting a Founders’ Agreement Founders’ Agreement/Shareholders’ Agreement –  Relevant when there are 2 or more founders A written document that deals with issues such as the relative split of the equity among the founders of the firm  How individual founders will be compensated for the cash or the “sweat equity” they put into the firm,  How long the founders will have to remain with the firm for their shares to fully vest  Partial List of Items to Include 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 of each of the founders Identification of any intellectual property signed over to the business Description of how the founders will be compensated and how the profits in the business will be divided Provisions for resolving disputes Buyback clause  4. Avoiding Legal Disputes 7-15 Most legal disputes are the result of misunderstandings, sloppiness, or a simple lack of knowledge of the law. Getting bogged down in legal disputes is something an entrepreneur should work hard to avoid 4 steps that an entrepreneur can take to avoid legal disputes:  Meet all contractual obligations  Avoid undercapitalization  Get everything in writing  Set standards  Avoiding Legal Disputes Although it’s tempting to try to show people you trust them by not insisting on written agreements, it’s not a good practice One of the simplest ways to avoid misunderstandings and ultimately legal disputes is to get everything in writing Non-disclosure and Non-compete Agreements A non-disclosure agreement binds an employee or other party (such as a supplier) to not disclose a company’s trade secrets A non-compete agreement prevents an individual from competing against a former employer for a specific period of time Obtaining Business Licenses and Permits  Depending on the nature of the business, the business may need local and international (state, and/or federal) licenses and permits to operate  Examples of businesses that require licenses and/or permits to operate include businesses that sell (or provide)  Alcohol, Tobacco, Firearms, Commercial Fisheries, Radio and Television Broadcasting  Obtaining Business Licenses and 7-19 Permits There are three different categories of licenses and permits that you may need to operate a business.  Business Registration Requirements.  Sales Tax Permits.  Professional and Occupational Licenses and Permits - Laws that require people in certain professions to pass a state exam and maintain a professional license to conduct business. Examples includes barbers, nurses, and real estate agents. Obtaining Business Licenses and Permits  On the local level, there are two categories of licenses and permits that may be needed.  The first is to operate a certain type of business  Examples include child care, barber shops and salons, automotive repair, and hotels and motels.  The second category is permits for engaging in certain types of activities  Examples include building permit (required if you are building or remodeling), health permit (normally required if you are involved in preparing food), and signage permit (may be required to erect a sign) Choosing a Form of Business Ownership When a business is launched, a form of legal entity must be chosen. The most common legal entities in Jamaica are… Sole Proprietorship Partnership Limited Liability Company Issues to Consider in Choosing a Legal Form of Business Ownership  Sole Proprietorship  The simplest form of business entity A form of business organisation involving one person, and the person and the business are essentially the same A sole proprietorship is not a separate legal entity. The sole proprietor is responsible for all the liabilities of the business, and this is a significant drawback  Advantages of a Sole Proprietorship Creating one is easy and inexpensive The owner maintains complete control of the business and retains all of the profits Business losses can be deducted against the sole proprietor’s other sources of income It is not subject to double taxation The business is easy to dissolve 7-24 Disadvantages of a Sole Proprietorship Liability on the owner’s part is unlimited The business relies on the skills and abilities of a single owner to be successful although the owner can hire employees who have additional skills and abilities Raising capital can be difficult The business ends at the owner’s death or loss of interest in the business The liquidity of the owner’s investment is low  Partnerships  If two or more people start a business, they must organise as a partnership, corporation, or limited liability company  Partnerships are organised as:  General Partnership - A form of business organization where two or more people pool their skills, abilities, and resources to run a business. The primary disadvantage is that all partners are liable for all the partnership’s debts and obligations  Limited Partnership - A modified form of general partnership  The major difference between the two is that a limited partnership includes two classes of owners: general partners and limited partners  The general partners are liable for the debts and obligations of the partnership, but the limited partners are only liable up to the extent/amount of their investment.  Advantages of a General Partnership Creating one is relatively easy and inexpensive compared to a corporation or limited liability company The skills and abilities of more than one individual are available to the firm Having more than one owner may make it easier to raise funds Business losses can be deducted against the partners’ other sources of income It is not subject to double taxation Disadvantages of a General Partnership Liability on the part of each general partner is unlimited The business relies on the skills and abilities of a fixed number of partners. Of course, the owners can hire employees who have additional skills and abilities Raising capital can be difficult Because decision making among the partners is shared, disagreements can occur The business ends with the death or withdrawal of one partner unless otherwise stated in the partnership agreement The liquidity of each partner’s investment is low  Limited Liability Company  “An artificial being, invisible, intangible and existing only in the contemplation of the law”  A legal considered entity separate from its owners/directors. Can: Sue and be sued Buy, hold and sell property Make and sell products Commit crimes and be tried and punished for them  The primary focus is the limited liability advantage  Can either have private shareholders or be listed on the stock exchange  Advantages of a Limited Liability Company Members are liable for the debts and obligations of the business only up to the amount of their investment in the business Continuity Stronger fundraising and capability Stronger access to talent Disadvantages of a Limited Liability Company Fluid control Complicated and relatively expensive to form Double taxation Questions?