1 Chapter 3 ORGANIZING AND FINANCING A NEW VENTURE ENTREPRENEURIAL FINANCE

2 Chapter 3: Learning Objectives Describe the proprietorship, partnership, & corporate forms of business Identify a limited liability company (LLC) Describe the benefits, risks, & basic tax aspects of various organizational forms Discuss the use of patents & trade secrets to protect intellectual property

3 Chapter 3: Learning Objectives (continued) Discuss the use of trademarks & copyrights to protect intellectual property Describe how confidential disclosure agreements & employment contracts are used to protect intellectual property rights Explain how financing is obtained via financial bootstrapping & through business angels

4 Forms of Business Organization 企业组织形式 Proprietorships （独资企业） Partnerships （合资企业） General Limited Corporations （股份公司） C corporations S (or Subchapter S) corporations Limited Liability Companies (LLCs) （有限责任公司）

5 Proprietorships 独资企业 Proprietorship: 独资企业定义 business venture owned by an individual who is personally liable for the venture’s liabilities Unlimited liability: personal obligation to pay a venture’s liabilities not covered by the venture’s assets

6 Partnerships 合伙（资）企业 Partnership: 合伙（资）企业定义 business venture owned by two or more individuals who are jointly and personally liable for the venture’s liabilities Joint Liability: legal action treats all partners equally as a group

7 Partnerships (continued) 合伙（资）企业 Joint and Several Liability: allows subsets of partners to be the object of legal action related to the partnership Limited Partnership: limits limited partner liabilities in a partnership to the amount of their equity capital contribution to the partnership

8 Corporations 股份制公司 Corporation: 股份制公司定义 a legal entity that separates personal assets of the owners (shareholders) from the firm’s assets Limited Liability: creditors can seize the corporation’s assets but have no recourse against the shareholders’ personal assets Corporate Charter: 股份制公司章程 legal document that establishes the corporation S Corporation: 小股份制公司 provides limited liability for shareholders plus corporate income is taxed like personal income to the shareholders

9 Limited Liability Companies (LLCs) 有限责任制公司 Limited Liability Company (LLC): 有限责任制公司定义 a business organization owned by “members” (shareholders) with limited liability Major Incentive for Organizing as an LLC earnings can be taxed at the personal income tax rates of the members

10 Bases for Comparing Various Business Organizational Forms 各类企业组织形式比较基数 Number of Owners & Ease of Startup （企业所有者数量及是否容易组建） Investor Liability （投资者的偿债责任） Equity Capital Sources （股权资本来源） Firm Life & Liquidity of Ownership （企业的生命周期与所有权的流动性） Taxation （企业所得税）

11 Number of Owners & Ease of Startup 企业所有者数量及是否容易组建 Proprietorship one; low time & legal costs Partnership (general) two or more; moderate time & legal costs Limited Partnership one or more general & one or more limited partners; moderate time & legal costs

12 Number of Owners & Ease of Startup (continued) 企业所有者数量及是否容易组建 Corporation (C) one or more, with no limit; high time & legal costs S (Subchapter S) Corporation less than 75 owners; high time & legal costs Limited Liability Company (LLC) one or more, with no limit; high time & legal costs

13 Investor Liability 投资者的偿债责任 Proprietorship unlimited Partnership (general) unlimited (joint & several liability) Limited Partnership limited partners’ liability limited to their investments

14 Investor Liability (continued) 投资者的偿债责任 Corporation (C) limited to shareholders’ investments S (Subchapter S) Corporation limited to shareholders’ investments Limited Liability Company (LLC) limited to owners’ investments

15 Equity Capital Sources 股权资本来源 Proprietorship owner Partnership (general) partners, families, & friends Limited Partnership general and limited partners

16 Equity Capital Sources (continued) 股权资本来源 Corporation (C) venture investors & common shareholders S (Subchapter S) Corporation venture investors & Subchapter S investors Limited Liability Company (LLC) venture investors & equity offerings to owners

17 Firm Life & Liquidity of Ownership 企业的生命周期与所有权的流动性 Partnership life determined by owner; often difficult to transfer ownership Partnership (general) life determined by partners; often difficult to transfer ownership Limited Partnership life determined by general partner; often difficult to transfer ownership

18 Firm Life & Liquidity of Ownership (continued) Corporation (C) unlimited life; usually easy to transfer ownership S (Subchapter S) Corporation unlimited life; often difficult to transfer ownership Limited Liability Company (LLC) life set by owners; often difficult to transfer ownership

19 Taxation 公司所得税 Proprietorship personal tax rate Partnership (general) personal tax rates Limited Partnership personal tax rates

20 Taxation (continued) 公司所得税 Corporation (C) corporate taxation; dividends subject to personal tax rates S (Subchapter S) Corporation income flows to shareholders; taxed at personal tax rates Limited Liability Company (LLC) income flows to owners; taxed at personal tax rates

21 What is Intellectual Property? 什么是知识产权？ Intellectual Property: 知识产权定义 a venture’s intangible assets and human capital and includes inventions and innovations that can be protected from being freely used or copied by others

22 Protecting Valuable Intangible Assets 无形资产的保护措施 There are Four Forms of Protection: Patents 专利 Trade Secrets 商业秘密 Trademarks 商标 Copyrights 版权

23 Intellectual Property Protection Methods: Basic Definitions Patents:( 专利） intellectual property rights granted for inventions that are useful, novel, and non-obvious Trade Secrets: （商业秘密） intellectual property rights in the form of inventions and information not generally known to others that convey economic advantages to the holders

24 Intellectual Property Protection Methods: Basic Definitions (cont’d) Trademarks: （商标） intellectual property rights that allow firms to differentiate their products & services through the use of unique marks Copyrights: （版权） intellectual property rights to writings in written and electronically stored forms

25 Patent Basics 专利基础知识 Intellectual property rights granted for inventions that are “useful,” “novel,” and “non-obvious.”“ 创新的 ” 、 “ 非显而易见 ” 。 Patents are granted by the U.S. Patent and Trademark Office Patent law is very complex (you need to hire a patent applications specialist lawyer)

26 Four Kinds of Patents: 四种类型的专利 1. Utility Patents: 实用专利 cover mechanical or general inventions, chemical inventions, & electrical inventions 2.Design Patents: 外观设计专利 cover the “appearance” of items (e.g., sports uniforms, electronic products, & autos) 3.Plant Patents: 植物专利 protect discoveries of asexual reproduction methods of new plant varieties 保护无性繁殖方法发现的新植物品种 4.Business Method Patents: 商业模式（方法）专利 protect specific ways of doing business and the underlying computer codes and technology.

27 Utility Patents: Basic Information 实用专利基本信息 A new idea by itself cannot be patented The idea must be part of an invention that has a “physical form” such as a product The physical form also can exist as a sequence of steps contained in a process or the delivery of a service

28 Utility Patents: Application Process 实用专利：申请程序 Develop or conceive an invention Prepare (you, or a registered patent attorney on your behalf) a patent application File the application in U.S. Patent & Trademark Office If successful, the utility patent life will be 20 years (prior to mid-1995 the life was 17 years)

29 Utility Patents: Provisional Patent Application 临时专利申请 Beginning in mid-1995, inventors were permitted to file a provisional application Filing dates can be established more quickly & at lower costs, & small entities are charged lower filing fees Allows the inventor to use the term “patent pending” on the invention However, patent rights & protection occur only when a patent is issued

30 Provisional Patent Application Requirements & Conditions 临时专利申请的要求与条件 An invention title, the inventor’s name, residence, & address for correspondence Clearly written description and “drawings” A person skilled in the art of the invention’s area should be able to use or practice the invention Has a life of 12 months & will be abandoned unless a regular patent application is filed

31 Regular Patent Application Requirements 常规专利申请要求 A detailed written description of the invention & detailed drawings of how the invention works One or more claims justifying why the invention should be patented Inventor must indicate the “best use” or method of practicing or carrying out the invention

32 Why Might Your Patent Application be Rejected? For a patent application to be accepted, the invention must be: Useful 有用 the invention cannot just “do nothing” Novel 新创 the invention was not previously produced, described in a publication, or patented Non-Obvious“ 非显而易见 ” invention should be “non-obvious” to a person with ordinary skills in the art of the invention’s area or subject

33 Why Might Your Patent Application be Rejected (cont’d)? Timing of filing the application must be filed within one year of first introduction to the public in the future, it may be necessary to file prior to any public disclosure or use

34 What Does Having a Patent do for the Inventor? The government does not enforce your rights The burden of enforcing the patent lies with the inventor and enforcement can be costly Records indicate that over one-half of patent infringement suits taken to court are not upheld on behalf of the inventor

35 Trade Secrets 商业秘密 Trade secrets: intellectual property rights in the form of inventions & information (e.g., formulas, processes, customer lists, etc.) Trade secrets are not generally known to others & convey economic advantages to the holders

36 Trade Secrets (continued) Why Consider Protection as a Trade Secret instead of as a Patent? trade secret law can sometimes protect inventions that did not qualify for patents some inventors want to avoid the detailed disclosure required by the U.S. Patent and Trademark Office there are no time restrictions on trade secrets (in contrast to patents) Other Methods

37 Trade Secrets (continued) What are Drawbacks of Seeking Protection under Trade Secrets Law? 寻求商业秘密法律保护的缺陷是什么？ there is no formal procedure for obtaining protection as a trade secret protection is established by the secret’s characteristics & efforts to protect it holders do not have exclusive “rights” to what comprises the secret (someone could independently replicate the secret) Other Methods

38 Trademarks 商标 What are Trademarks? Intellectual property rights that allow firms or others to differentiate their products & services through the use of unique “marks” Marks allow consumers to easily identify the source & quality of products/services

39 Trademarks (continued) 商标 Most trademarks take the form of names, words, or graphic designs Trademarks also can be on the shape of packages, colors, odors, & sounds Trademarks are the most valuable form of intellectual property for many firms A trademark should be suggestive of (but not describe) a product or product line

40 Trademarks (continued) 商标 How do You Obtain or Disclose a Trademark (or ™)? no formal government procedure exists for establishing a trademark ownership is established by being first to use the mark on products a trademark can be lost if the mark becomes a generic term or label (e.g., “aspirin” or “cellophane”)

41 Trademarks (continued) 商标 How do You Register a Trademark? a trademark can be registered in individual states or with the U.S. Patent and Trademark Office a federal registration should be used if a product is sold in more than one state products with federally registered trademarks show the trademark accompanied by ®

42 Copyrights 版权 Intellectual property rights to “writings” in written and electronically-stored forms Protects the “form of expression of an idea” and not just words themselves Traditional way to establish a copyright is to “publish” your book or other work accompanied by a copyright notice using the word “Copyright” or the symbol ©

43 Seed & Startup Financing 孵化（种子）期及启动期经费的筹措 Financial Bootstrapping minimizing need for financial capital & finding unique ways of financing a new venture Business Angel Funding 天使资金 wealthy individuals who invest money in fledgling ventures in exchange for the excitement of launching a business & a share in any financial rewards

44 Other Methods for Protecting Intellectual Property Rights Confidential Disclosure Agreements: documents used to protect an idea or other forms of intellectual property when disclosure must be made to another individual or organization Employment Contracts: agreements between an employer and employee whereby the employer employs the employee in exchange for the employee agreeing to keep confidential information secret and to assign ideas and inventions to the employer