ENTREPRENEURSHIP
A PROCESS PERSPECTIVE
Robert A. Baron
Scott A. Shane
A. Rebecca Reuber
Slides Prepared by:
Sandra Malach, University of Calgary
Copyright © 2008 by Nelson, a division of Thomson Canada Limited
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9
THE LEGAL FORMS AND
LEGAL ENVIRONMENTS OF
NEW VENTURES
LEARNING OBJECTIVES
1.
2.
3.
Describe the major forms of business ownership—
sole proprietorship, partnerships, corporations—and
explain the advantages and disadvantages of each.
Define franchising and describe the advantages and
disadvantages of becoming a franchisee.
Describe the legal principles governing franchise
agreements and the information disclosure that
potential franchisees should insist upon.
Copyright © 2008 by Nelson, a division of Thomson Canada Limited
LEARNING OBJECTIVES
4.
5.
6.
Describe current trends in franchising, such as
smaller outlets in nontraditional locations, cobranding franchising, and international franchising.
Describe the basic components of business
contracts, and explain what happens if these
obligations are not met.
Describe the basic components of a risk
management strategy and how you might go about
selecting a lawyer.
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
Copyright © 2008 by Nelson, a division of Thomson Canada Limited
SOLE PROPRIETORSHIP


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A business is owned and
managed by one individual.
Almost all of these are small
companies.
Low costs involved
Owner has total control
Copyright © 2008 by Nelson, a division of Thomson Canada Limited
CHARACTERISTICS OF
SOLE PROPRIETORSHIP
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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
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
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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
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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
Copyright © 2008 by Nelson, a division of Thomson Canada Limited
PARTNERSHIP ADVANTAGES

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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
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
Copyright © 2008 by Nelson, a division of Thomson Canada Limited
LIMITED PARTNERSHIPS

General partners

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Manage the business
Have unlimited liability
Limited partners

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Invest but forego right to manage
Share in the profits according to the limited
partnership agreement
Have limited liability
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.
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“Corporation: An ingenious device for
obtaining individual profit without
individual responsibility.”
--Ambrose Bierce, 1881
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
Copyright © 2008 by Nelson, a division of Thomson Canada Limited
CREATING A CORPORATION

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Registration
Articles of incorporation
Shareholders elect directors
Directors appoint corporate officers
Copyright © 2008 by Nelson, a division of Thomson Canada Limited
ADVANTAGES OF
CORPORATIONS
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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
Copyright © 2008 by Nelson, a division of Thomson Canada Limited
DISADVANTAGES OF
CORPORATIONS
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Complex and expensive to start
Profits may be subject to double taxation
Subject to legal and financial requirements

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File Annual Returns
Hold annual meetings
Consult with board
File reports with Securities Commission (public
companies)
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

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Use its trademark
Sell its products or services
Use the business model
Copyright © 2008 by Nelson, a division of Thomson Canada Limited
CANADIAN FRANCHISES
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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.
Copyright © 2008 by Nelson, a division of Thomson Canada Limited
BENEFITS OF FRANCHISING
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Training and support
Standardized products and services
National advertising
Buying power
Financial assistance
Site selection and territorial protection
Proven business model
Copyright © 2008 by Nelson, a division of Thomson Canada Limited
DRAWBACKS OF
FRANCHISING
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Fees and royalties
Enforced standardization
Restricted freedom over purchasing and
product lines
Risk of poor training programs
Market saturation
Copyright © 2008 by Nelson, a division of Thomson Canada Limited
LEGAL ASPECTS OF
FRANCHISING
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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.
Copyright © 2008 by Nelson, a division of Thomson Canada Limited
TRENDS IN FRANCHISING

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Smaller outlets in nontraditional
locations
Co-branding franchise
International franchising
Different of types of businesses being
franchised
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
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ELEMENTS OF A CONTRACT

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Legality
Agreement
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Consideration
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Offer & Acceptance
Something of value must be exchanged
Capacity

Exceptions are minors & those with
diminished mental ability.
Copyright © 2008 by Nelson, a division of Thomson Canada Limited
CONTRACTS IN WRITING
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Most contracts do not have to be written
Exceptions:
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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.
Copyright © 2008 by Nelson, a division of Thomson Canada Limited
ELEMENTS OF A CONTRACT

Legality—intended to accomplish a legal
purpose
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Agreement—includes a legitimate offer
and acceptance
Consideration—some of value must be
exchanged
Capacity—persons must have capacity
to enter into agreement
Copyright © 2008 by Nelson, a division of Thomson Canada Limited
OBLIGATIONS UNDER
CONTRACTS
Breach of contract may result in

Compensatory damages

Specific performance
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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
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MINIMIZING RISK EXPOSURE

Avoid the Risk
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Use tactics to reduce the probability or
severity of a loss.
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Avoid business in certain countries
Training and quality control
Transfer Risk
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
Contracts
Insurance
Copyright © 2008 by Nelson, a division of Thomson Canada Limited