1. Prepared by Ron Knowles Algonquin College & Jennifer Rouse Barbeau Canadore College Legal Concerns Anticipate Potential Surprises 8-1Copyright © 2011 Nelson Education Ltd. chapter 88

2. Chapter Overview Chapter 8 will:   Introduce you to the legal issues of small business.   Help you decide which legal form of business—sole proprietorship, partnership, corporation, or cooperative—is best for you.   Help you get started on the management and personnel sections of your business plan. 8-2Copyright © 2011 Nelson Education Ltd. chapter 88

3. Learning Opportunities  Decide which legal form (sole proprietorship, partnership, corporation or cooperative is best for your business.  Anticipate potential legal surprises.  Explore the pros and cons of incorporating.  Conduct secondary research into corporations and incorporating.  Explore legal regulations that may affect business. 8-3Copyright © 2011 Nelson Education Ltd. chapter 88

4. Learning Opportunities  Understand patents, copyrights and trademarks.  Develop tactics for finding the right lawyer and accountant.  Develop questions for probing the mind of a lawyer or accountant.  Understand the importance of having a will and succession planning.  Describe and understand the bankruptcy process. 8-4Copyright © 2011 Nelson Education Ltd. chapter 88

5. Legal Forms of Ownership Standard legal forms of ownership are:   Sole proprietorship. A business that is owned by one person.   Partnership. An association of two or more individuals carrying on a business to earn an income.   Corporation. A legal entity with the authority to act and have liability separate and apart from its owners.   Cooperative. An organization owned by the members who use its services. 8-5Copyright © 2011 Nelson Education Ltd.

6. Sole Proprietorship Advantages   Relatively easy & inexpensive to set up.   Directly controlled by the owner or operator.   Flexible, with little paperwork.   Business losses can be deducted from other income. 8-6 Disadvantages   Owner can be held personally liable for debts and obligations of the business.   Opportunity for continuity is restricted.   Owner’s ability to raise capital is restricted.   Income is taxed at a personal rate. Copyright © 2011 Nelson Education Ltd.

7. Partnership General Partnership   Each partner manages the business.   Each partner assumes unlimited personal liability for debts and obligations. 8-7 Limited Partnership   Composed of one or more limited partners and at least one general partner.   The general partner manages and assumes the downside risk.   The limited partner does not manage; liability is limited to the amount of his or her original investment. Copyright © 2011 Nelson Education Ltd.

8. Partnership: Advantages & Disadvantages Advantages   It is easy to set up   New partners can be easily added   It involves few legal requirements   Risk is generally shared 8-8 Disadvantages   Tax and estate planning options are limited   Partners can be personally liable   Decision-making and dissolution can be difficult Copyright © 2011 Nelson Education Ltd.

9. Partnerships: Cautionary Notes  Get everything in writing  Each partner must have their own lawyer  Have a written partnership agreement.  Consider a shotgun clause:  Example: One partner can make a buyout offer to the other partner for his or her share of the business. The receiving partner has the option of either accepting the offer or buying out the partner under the same terms. 8-9Copyright © 2011 Nelson Education Ltd.

10. Corporation Advantages   There is greater potential for limited liability   There are possible tax advantages   It can upgrade image   It offers ease of continuity 8-10 Disadvantages   There are potentially fewer tax write-offs at the beginning   There are higher start-up costs   There is increased paper work and complexity Copyright © 2011 Nelson Education Ltd.

11. Shareholders Agreement A shareholders agreement is a legal document which establishes: 1.the rights of shareholders (owners) and 2.the duties and powers of the board of directors. 8-11Copyright © 2011 Nelson Education Ltd.

12. Shareholders Agreement   A shareholders agreement is not legally required but is strongly recommended   Keep the agreement simple   Consult professional advisors (especially a lawyer and accountant) before you sign any agreement   Include a buy-sell option:  as with partnerships, consider a shotgun provision 8-12Copyright © 2011 Nelson Education Ltd.

13. Cooperatives: Seven Principles All cooperatives are guided by the same 7 principles: 1.Voluntary and open membership 2.Democratic member control 3.Member economic participation 4.Autonomy and independence 5.Education, training, and information 6.Cooperation among cooperatives 7.Concern for community 8-13Copyright © 2011 Nelson Education Ltd.

14. Cooperatives Advantages   There are potentially more sources of start- up capital   As owners, members are potentially more motivated than employees   There is increased opportunity to network and share ideas   There is limited liability 8-14 Disadvantages   It is sometimes difficult to get agreement   There may be management conflicts   External financing may be difficult Copyright © 2011 Nelson Education Ltd.

15. Your Business Name: “Red” Tape 8-15 Your Business Name Protect your business name Do a name search Request a NUANS Canada Revenue Agency—Major Start-Up Requirements Business Number Payroll deductions Federal Income Taxes GST or HST Provincial Sales Taxes Provincial sales taxes (PST) differ for each province Register to collect PST Copyright © 2011 Nelson Education Ltd.

16. Patents and Copyrights 8 -16 Patent: Patent: federal government grant that gives an inventor exclusive rights to his/her inventions.  cover new inventions, or any new and useful improvement of an existing invention Copyrigh t : Copyrigh t : exclusive right to copy a creative work or allow someone else to do so.  provide protection for artistic, dramatic, musical or literary works Copyright © 2011 Nelson Education Ltd.

17. Trademarks 9-17 Trademark: Trademark: word, symbol or design, or a combination of these, used to distinguish the goods or services of one person or organization from those of others in the marketplace. Three basic types of trademarks are: 1.ordinary marks 2.certification marks 3.distinguishing guise Copyright © 2011 Nelson Education Ltd.

18. Get a Lawyer, Accountant & Will Get a Lawyer & Accountant Network your contacts Consider including a lawyer in your team of advisors Action Step 40 will help you get started 8-18 Get a Will Don't do your own will Get a lawyer Make your lawyer aware of all your business arrangements Decide what you want to happen if you should die Choose an executor Don’t procrastinate; Do it now! Copyright © 2011 Nelson Education Ltd.

19. What is Succession Planning? The process of establishing the procedures to change or transfer ownership or control of a business. Be proactive. Key issues to confront:  Do you want a family member to continue the business?  Who should be included in the decision-making?  What is your vision for the family business?  What qualities should the next company leader have?  How can you make a graceful exit and not look back?  If you die, how should control and ownership be transferred? 8-19Copyright © 2011 Nelson Education Ltd.

20. Bankruptcy Ten questions you should be able to answer: 1. What is bankruptcy and what are the benefits to the debtor? 2. How do you become bankrupt? 3. What happens to your possessions? 4. What kind of forms will I have to sign? 5. Does the bankruptcy affect my co-signers? 6. When is a bankrupt discharged? 7. What is the effect of a bankruptcy discharge? 8. How does bankruptcy affect employment? 9. What happens to your credit rating? 10. Does it cost anything to go bankrupt? 8-20Copyright © 2011 Nelson Education Ltd.

21. Chapter 8 helps complete Parts F & G of your business plan:  Management &  Personnel 8-21Copyright © 2011 Nelson Education Ltd. Business Plan Business Plan Building Block

22. q q Explain why you selected your legal form of ownership. q q Do you plan to protect your idea, product, or service by obtaining a patent or copyright and/or by registering a trademark? q q What professionals have you referenced in your business plan, and did you allow for the appropriate cost? 8-22Copyright © 2011 Nelson Education Ltd. Your Business Plan Checklist for Your Business Plan

23. q q What are the major legal risks for your industry, and how will you address them? q q Are you prepared for the legal red tape? q q Do you have a will and a succession plan? 8-23Copyright © 2011 Nelson Education Ltd. Your Business Plan Checklist for Your Business Plan

24. Case 1: Your Pal Steve This case study will help you to decide what legal structure is best for your business. Answer the Chapter 8 case study questions to learn:  Would a partnership agreement have protected Phil?  What are the advantages and disadvantages of a partnership agreement?  Would you have advised Phil to have a corporate structure and a shareholders agreement? Why? Why not? 8-24Copyright © 2011 Nelson Education Ltd. Case Study

25. Case 1: Cooperatives   What are the major reasons for considering a cooperative?   Why did Mountain Equipment Co-op (MEC) choose the cooperative legal form?   How do you become an owner of MEC? 8-25Copyright © 2011 Nelson Education Ltd. Case Study

26. Case 2: Fatal Accident George Lopez’s fury over his friend’s unnecessary death led him to invent the IV Click Lock. Answer the Chapter 8 case study 2 questions to learn:  What are the three legal forms of protection?  Which form of intellectual property would you advise George Lopez to use?  How would you patent a new product or service? 8-26Copyright © 2011 Nelson Education Ltd. Case Study