1. Copyright © 2008 by Nelson, a division of Thomson Canada Limited ENTREPRENEURSHIP A PROCESS PERSPECTIVE Robert A. Baron Scott A. Shane A. Rebecca Reuber Slides Prepared by: Sandra Malach, University of Calgary

2. 9 THE LEGAL FORMS AND LEGAL ENVIRONMENTS OF NEW VENTURES 1

3. Copyright © 2008 by Nelson, a division of Thomson Canada Limited LEARNING OBJECTIVES 1.Describe the major forms of business ownership— sole proprietorship, partnerships, corporations—and explain the advantages and disadvantages of each. 2.Define franchising and describe the advantages and disadvantages of becoming a franchisee. 3.Describe the legal principles governing franchise agreements and the information disclosure that potential franchisees should insist upon.

4. Copyright © 2008 by Nelson, a division of Thomson Canada Limited LEARNING OBJECTIVES 4.Describe current trends in franchising, such as smaller outlets in nontraditional locations, co- branding franchising, and international franchising. 5.Describe the basic components of business contracts, and explain what happens if these obligations are not met. 6.Describe the basic components of a risk management strategy and how you might go about selecting a lawyer.

5. Copyright © 2008 by Nelson, a division of Thomson Canada Limited “The business of the law is to make sense of the confusion of what we call human life—to reduce it to order but at the same time to give it possibility, scope, even dignity.” --Archibald MacLeish, 1978

6. Copyright © 2008 by Nelson, a division of Thomson Canada Limited SOLE PROPRIETORSHIP A business is owned and managed by one individual. Almost all of these are small companies. Low costs involved Owner has total control

7. Copyright © 2008 by Nelson, a division of Thomson Canada Limited CHARACTERISTICS OF SOLE PROPRIETORSHIP Register only if business name is different than yours. Unlimited personal liability Revenue and expenses are taxed personally No shares to sell to investors Financial institutions may be reluctant to assume risk of a loan

8. Copyright © 2008 by Nelson, a division of Thomson Canada Limited PARTNERSHIPS Two or more people who do business together for the purpose of making a profit. Terms are spelled out in a Partnership Agreement or subject to the Partnership Act

9. Copyright © 2008 by Nelson, a division of Thomson Canada Limited PARTNERSHIP ACT Each partner has a right to Share in management and operations Share in profits Receive interest on advances Receive compensation for expenses Have access to books and records Receive formal accounting of affairs

10. Copyright © 2008 by Nelson, a division of Thomson Canada Limited PARTNERSHIP ACT Each partner is obligated to Share in losses Work without salary Important matters must be voted upon Give complete information about business activities Provide formal accounting of business activities

11. Copyright © 2008 by Nelson, a division of Thomson Canada Limited PARTNERSHIP ADVANTAGES High level of flexibility (re: equity and profit sharing) Partners bring complementary skills Pool of financial resources is expanded Income or losses are passed through to partners

12. Copyright © 2008 by Nelson, a division of Thomson Canada Limited PARTNERSHIP DISADVANTAGES Unlimited liability Difficult to continue if one partner is unable to participate Can’t sell shares; may experience difficulties raising capital

13. Copyright © 2008 by Nelson, a division of Thomson Canada Limited LIMITED PARTNERSHIPS General partners Manage the business Have unlimited liability Limited partners Invest but forego right to manage Share in the profits according to the limited partnership agreement Have limited liability

14. Copyright © 2008 by Nelson, a division of Thomson Canada Limited LIMITED LIABILITY PARTNERSHIP Available to professionals for whom it is illegal to incorporate Partners have liability for their own negligence but not for that of their partners.

15. Copyright © 2008 by Nelson, a division of Thomson Canada Limited “Corporation: An ingenious device for obtaining individual profit without individual responsibility.” --Ambrose Bierce, 1881

16. Copyright © 2008 by Nelson, a division of Thomson Canada Limited CORPORATION Separate legal entity apart from owners May engage in business, make contracts, own property, pay taxes, and sue and be sued Limited liability Shareholders’ liability is limited to the amount of their investment Statutory exceptions for directors & officers

17. Copyright © 2008 by Nelson, a division of Thomson Canada Limited CREATING A CORPORATION Registration Articles of incorporation Shareholders elect directors Directors appoint corporate officers

18. Copyright © 2008 by Nelson, a division of Thomson Canada Limited ADVANTAGES OF CORPORATIONS Limited liability for shareholders Continue beyond lives of founders Increased ability to attract capital Shares may be transferable Liquidity can be very high in a publicly traded company

19. Copyright © 2008 by Nelson, a division of Thomson Canada Limited DISADVANTAGES OF CORPORATIONS Complex and expensive to start Profits may be subject to double taxation Subject to legal and financial requirements File Annual Returns Hold annual meetings Consult with board File reports with Securities Commission (public companies)

20. Copyright © 2008 by Nelson, a division of Thomson Canada Limited FRANCHISING Independent business owners (franchisees) pay fees and royalties to a parent company (franchisor) in return for the right to Use its trademark Sell its products or services Use the business model

21. Copyright © 2008 by Nelson, a division of Thomson Canada Limited CANADIAN FRANCHISES Canada constitutes the world’s second most developed franchise market. Franchises account for more than $70 billion in annual sales. 950 franchisors operate more than 85,000 separate outlets. 85% of these outlets are located in Ontario, Quebec, and British Columbia.

22. Copyright © 2008 by Nelson, a division of Thomson Canada Limited BENEFITS OF FRANCHISING Training and support Standardized products and services National advertising Buying power Financial assistance Site selection and territorial protection Proven business model

23. Copyright © 2008 by Nelson, a division of Thomson Canada Limited DRAWBACKS OF FRANCHISING Fees and royalties Enforced standardization Restricted freedom over purchasing and product lines Risk of poor training programs Market saturation

24. Copyright © 2008 by Nelson, a division of Thomson Canada Limited LEGAL ASPECTS OF FRANCHISING The relationship between a franchisor and a franchisee is contractual. In Ontario and Alberta there is specific franchise legislation. Legislation mandates disclosure by the Franchisor to the Franchisee.

25. Copyright © 2008 by Nelson, a division of Thomson Canada Limited TRENDS IN FRANCHISING Smaller outlets in nontraditional locations Co-branding franchise International franchising Different of types of businesses being franchised

26. Copyright © 2008 by Nelson, a division of Thomson Canada Limited BUSINESS CONTRACTS Promises that are enforceable by law Contract law—body of laws designed to assure that parties entering into contracts comply with their provisions

27. Copyright © 2008 by Nelson, a division of Thomson Canada Limited ELEMENTS OF A CONTRACT Legality Agreement Offer & Acceptance Consideration Something of value must be exchanged Capacity Exceptions are minors & those with diminished mental ability.

28. Copyright © 2008 by Nelson, a division of Thomson Canada Limited CONTRACTS IN WRITING Most contracts do not have to be written Exceptions: Sale of real estate or lease greater than 3 years Paying someone else’s debt Contracts that have a set term exceeding one year Contracts that involve the sale of goods that exceeds the value in the provincial Sales of Goods Act.

29. Copyright © 2008 by Nelson, a division of Thomson Canada Limited ELEMENTS OF A CONTRACT Legality—intended to accomplish a legal purpose Agreement—includes a legitimate offer and acceptance Consideration—some of value must be exchanged Capacity—persons must have capacity to enter into agreement

30. Copyright © 2008 by Nelson, a division of Thomson Canada Limited OBLIGATIONS UNDER CONTRACTS Breach of contract may result in Compensatory damages Specific performance

31. Copyright © 2008 by Nelson, a division of Thomson Canada Limited RISK MANAGEMENT 1.Identify the legal risks 2.Assess the probability and severity of a loss associated with each risk 3.Implement measures to minimize their exposure to a risk

32. Copyright © 2008 by Nelson, a division of Thomson Canada Limited MINIMIZING RISK EXPOSURE Avoid the Risk Avoid business in certain countries Use tactics to reduce the probability or severity of a loss. Training and quality control Transfer Risk Contracts Insurance