1. ©2006 Prentice Hall 8-1 Chapter 8 Entrepreneurship: Successfully Launching New Ventures, 1/e Bruce R. Barringer R. Duane Ireland

2. ©2006 Prentice Hall 8-2 Chapter Objectives (1 of 2) 1.Identify the two most important issues to consider when leaving an employer. 2.Discuss the importance of nondisclosure and noncompete agreements. 3.Explain the criteria important in selecting an attorney for a new firm. 4.Discuss the importance of a founders’ agreement. 5.Provide several suggestions for how new firms can avoid litigation.

3. ©2006 Prentice Hall 8-3 Chapter Objectives (2 of 2) 6.Discuss techniques entrepreneurs use to promote high standards of business ethics in their firms. 7.Discuss the differences between sole proprietorships, partnerships, corporations, and limited liability companies. 8.Explain why most fast-growth entrepreneurial firms organize as corporations or limited liability companies rather than sole proprietorships or partnerships. 9.Explain double taxation. 10.Explain the importance of the Electronic Signatures in Global and International Commerce Act.

4. ©2006 Prentice Hall 8-4 Initial Ethical and Legal Issues Facing a New Firm Ethically departing a former employer Choosing a lawyer Drafting a founders’ agreement Avoiding litigation Choosing a form of business ownership

5. ©2006 Prentice Hall 8-5 Ethically Departing a Former Employer (1 of 2) Ethically Departing from an Employer –Behave in a Professional Manner First, it is important that an employee give proper notice of an intention to quit and that the employee perform all assigned duties until the day of departure. If an employee is leaving a job to start a firm in the same industry, it is vital that he or she not take information that belongs to the current employer. –Honor all Employment Agreements Honor all nondisclosure and noncompete agreements entered into at the time of employment. (see next slide)

6. ©2006 Prentice Hall 8-6 Ethically Departing a Former Employer (2 of 2) Noncompete AgreementNondisclosure Agreement Is a promise made by an employee or another party to not disclose the company’s trade secrets Prevents an individual from competing against a former employer for a specified period of time

7. ©2006 Prentice Hall 8-7 Drafting a Founders’ Agreement (1 of 1) Founders’ Agreement –A founders’ agreement (or shareholders’ agreement) is 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, and how long the founders will have to remain with the firm for their shares to fully vest. –The items to include in the founders agreement are shown on the following slide.

8. ©2006 Prentice Hall 8-8 Avoiding Legal Disputes –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. –There are several steps that an entrepreneur can take to avoid legal disputes: Meet all contractual obligations Avoid undercapitalization Get everything in writing Promote business ethics

9. ©2006 Prentice Hall 8-9 Promoting Business Ethics (1 of 3) Promoting Business Ethics in a New Venture –Code of Ethics A code of ethics describes the firm’s general value system, moral principles, and specific ethical rules that apply. The advantage of having a code of ethics is that it provides specific guidance to managers and employees regarding what is expected of them in terms of ethical behavior. –Ethics Training Programs Many organizations have formal ethics training programs that teach employees how to respond to the types of ethical dilemmas that might arise on their jobs.

10. ©2006 Prentice Hall 8-10 Promoting Business Ethics (2 of 3) Most common types of ethical problems to guard against Type of ethical problemDescription Human resource ethical problems Conflicts of interest These problems relate to the equitable and just treatment of current and prospective employees. Unethical behavior here can range from asking an inappropriate question in a job interview to treating people unfairly because of their gender, ethnic background, religion, and so on. These problems relate to situations that divide the loyalty of employees. For example, it would be inappropriate for an employee of a company to award a business contract to a friend or family member because of their personal relationship rather than for legitimate business reasons.

11. ©2006 Prentice Hall 8-11 Promoting Business Ethics (3 of 3) Most common types of ethical problems to guard against (continued) Type of ethical problemDescription Customer confidence Inappropriate use of corporate resources Problems in this area flare up when a company behaves in a way that shows a lack of respect for customers or a lack of concern with public safety. Examples include misleading advertising and the sale of a product that a company knows is unsafe. Problems in this area typically arise when a employees uses corporate resources for personal gain beyond what is customary and reasonable. For example, an employees who spends two hours of every eight-hour workday surfing the Internet is guilty of excessive or inappropriate use of corporate resources.

12. ©2006 Prentice Hall 8-12 Choosing a Form of Business Ownership When a business is launched, a form of legal entity must be chosen. The most common legal entities are… Sole Proprietorship Corporation Partnership Limited Liability Company

13. ©2006 Prentice Hall 8-13 Issues to Consider in Choosing a Legal Form of Business Ownership The cost of setting up and maintaining the legal form of ownership. The extent to which an entrepreneur can shield his or her personal assets from the liabilities of the business. Tax considerations The ease of raising capital

14. ©2006 Prentice Hall 8-14 Sole Proprietorship (1 of 2) Sole Proprietorship –The simplest form of business entity is the sole proprietorship. –A sole proprietorship is a form of business organization 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.

15. ©2006 Prentice Hall 8-15 Sole Proprietorship (2 of 2) Advantages and disadvantages of sole proprietorship

16. ©2006 Prentice Hall 8-16 Partnerships (1 of 2) Partnerships –If two or more people start a business, they must organize as a partnership, corporation, or limited liability company. –Partnerships are organized as either general or limited partnerships. A general partnership is a form of business organization where two or more people pool their skills, abilities, and resources to run a business. A limited partnership is 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 liable only up to the amount of their investment.

17. ©2006 Prentice Hall 8-17 Partnerships (2 of 2) Advantages and disadvantages of a general partnership

18. ©2006 Prentice Hall 8-18 Corporations (1 of 5) Corporations –A corporation is a separate legal entity organized under the authority of a state. –Corporations are organized as either C corporations or subchapter S corporations. C Corporations –A C corporation is a separate legal entity that, in the eyes of the law, is separate from its owners. –In most cases the corporation shields its owners, who are called shareholders, from personal liability for the debts of the corporation.

19. ©2006 Prentice Hall 8-19 Corporations (2 of 5) C Corporations (continued) –A corporation is governed by a board of directors, which is elected by the shareholders. –A corporation is formed by filing articles of incorporation with the secretary of state’s office in the state of incorporation. –A corporation is taxed as a separate legal entity. A disadvantage of corporations is that they are subject to double- taxation, which means that a corporation is taxed on its net income and, when the same income is distributed to shareholders in the form of dividends, is taxed again on shareholders’ personal tax returns.

20. ©2006 Prentice Hall 8-20 Corporations (3 of 5) Advantages and disadvantages of a C Corporation

21. ©2006 Prentice Hall 8-21 Corporations (4 of 5) Subchapter S Corporation –A subchapter S corporation combines the advantages of a partnership and a C corporation. It is similar to a partnership in that the profits and losses of the business are not subject to double taxation. –The subchapter S corporation does not pay taxes; instead, the profits or losses of the business are passed through to the individual tax returns of the owners. –It is similar to a corporation in that the owners are not subject to personal liability for the behavior of the business.

22. ©2006 Prentice Hall 8-22 Corporations (5 of 5) There are strict standards that a business must meet to qualify for status as a subchapter S corporation. The standards are shown below:

23. ©2006 Prentice Hall 8-23 Limited Liability Company (1 of 2) Limited Liability Company –The limited liability company (LLC) is a form of business organization that is rapidly gaining popularity in the U.S. –Along with the subchapter S corporation, it is a popular choice for start-up firms. As with partnerships and corporations, the profits of an LLC flow through to the tax returns of the owners and are not subject to double taxation. The main advantage of the LLC is that all partners enjoy limited liability. –The LLC combines the limited liability advantage of the corporation with the tax advantages of the partnership.

24. ©2006 Prentice Hall 8-24 Limited Liability Company (2 of 2) Advantages and disadvantages of a Limited Liability Company

25. ©2006 Prentice Hall 8-25 The Legal Environment of the Internet Legal Environment of the Internet –Most new businesses will utilize the Internet in their business operations. –When the Internet was introduced in the early 1990s, many businesses approached it with an “anything goes” attitude, believing it was alright to do almost anything online. –As time goes on, however, the legal system is getting a better grip on the Internet, and more laws and regulations are being passed.

26. ©2006 Prentice Hall 8-26 The World Wide Web (1 of 3) Three Types of Web Sites Type of Web SiteDescriptionPrimary Legal Issues Involved Shop-Window Web Site This type of Web site provides information about a company and its products but encourages very little interaction. All content placed on the Web site should be original, unless permission has been obtained. Pricing information should be updated frequently. Misleading product descriptions can cause repercussions. Misleading advertising should be avoided.

27. ©2006 Prentice Hall 8-27 The World Wide Web (2 of 3) Three Types of Web Sites (continued) Type of Web SiteDescriptionPrimary Legal Issues Involved Contributed Content Web Sites Web sites that encourage visitors to interact are exposed to several additional forms of legal risks. The most common problem in this area arises when sites encourage visitors to interact by making discussion boards or chat rooms available. Reasonable measures should be taken to control the material that appears on the Web site. These measures need to be addressed in a Web site’s “terms and conditions” so that anyone viewing the Web site is aware of the steps taken to prevent problems from occurring.

28. ©2006 Prentice Hall 8-28 The World Wide Web (3 of 3) Three Types of Web Sites (continued) Type of Web SiteDescriptionPrimary Legal Issues Involved Full E-Commerce Web Site Full E-Commerce Web sites sell goods and services via the Web. New businesses that plan to sell products or services via the Web should consult with an attorney to be sure they know all the current laws and regulations that apply. An important caveat of selling online is to make sure to form a legally binding contract with the purchaser. To do this, many sites require their customers to scroll through a list of terms and conditions and click on an “I accept” button before a purchase can be completed.

29. ©2006 Prentice Hall 8-29 Trademarks and Domain Names (1 of 3) Trademarks –The emergence of the Internet has led to a variety of issues in trademark law and practice. –Because it is so easy to find a company with the same name as your company’s name on the Internet, trademark disputes often arise. For example, in the past, a consulting firm in Michigan operating under the name Ivey Consulting may have never known that a similar firm in California operated under the same name. Now, its easy for the firms to stumble across one another surfing the Internet, which could result in a trademark infringement suit by the company that first registered the name.

30. ©2006 Prentice Hall 8-30 Trademarks and Domain Names (2 of 3) Domain Names –A domain name is a company’s Internet address (e.g., www.intel.com). www.intel.com –Most companies want their domain name to be the same as their company’s name. –It is easy to register a domain name through an online registration service (www.networksolutions.com).www.networksolutions.com Until recently, some people, called cybersquatters, registered the domain names of companies and people for the sole purpose of trying to resell the names (for a substantial profit) to those companies or individuals. (Next slide)

31. ©2006 Prentice Hall 8-31 Trademarks and Domain Names (3 of 3) Domain Names –To stop the practice of cybersquatting, Congress passed the Anticybersquatting Consumer Protection Act in 1999. Probably the most famous domain name dispute in the history of the Internet involved the actress Julia Roberts. In June 2000, an international arbitration panel ruled that an accused cybersquatter who registered the domain name (www.juliaroberts.com) had no legitimate interest in the name and registered it in bad faith. The panel awarded the name to Julia Roberts. In finding bad-faith intent, the arbitration panel cited evidence that the defendant had registered the names of several famous movie and sports figures and even tried to auction off the name Julia Robert’s domain name on eBay’s Web site.www.juliaroberts.com

32. ©2006 Prentice Hall 8-32 Electronic Contracts and Digital Signatures Legally Binding Contracts Online –As a result of the Electronic Signatures in Global and International Commerce Act, contracts negotiated online have the same legal standing as traditional legal contracts signed in ink. –Online contracts are often signed with digital signatures. A digital signature is a computer-generated block of text that accurately identifies both the signer and the content, helping to ensure the authenticity and integrity of electronic documents.