Legal Issues:
Recognizing Your
Small Business
Needs
Chapter 18
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Learning Objectives
LO1 Know when you need legal information and how to
get it.
LO2 Understand legal structures in setting up a new
business.
LO3 Learn how to master the process of negotiating.
LO4 Recognize potential legal liabilities for your business.
LO5 Know contract terms and when a contract is needed.
LO6 Understand the basics of intellectual property.
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18-2
You and the Law
There are always unavoidable risks
In a 2002 poll, less than 1 in 10 small business
had been sued in the prior five years
It is easy to underestimate the number of
laws that apply to small businesses
State laws applicable to small businesses are
extraordinarily varied
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
18-3
You Need a Good Attorney
Usually with legal issues it is best to confront
potential problems before they have a chance
to get serious.
Timely decisions and action may avoid a
problem altogether or may make solving the
problem much easier and cheaper
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
18-4
You Need a Good Attorney
Hourly fees
 A basis for legal charges in which the rate is
based on a price per hour.
 Often lawyers will charge for fractions of an hour.
Flat fees
 A method of billing for lawyers in which a fixed
amount is paid for a certain task.
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
18-5
You Need a Good Attorney
Retainer
 A fee paid by a
client to an attorney
to engage the
attorney’s services.
Contingency fee
 Fee paid by a client
to an attorney for
legal services that is
dependent upon
the outcome of a
case.
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
18-6
Can I Do This for Free?
Three elements to most aspects of
business law:
1. Finding the right information,
2. Negotiating the specific outcome you want
3. Taking care of the paperwork associated with
it
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
18-7
Can I Do This for Free?
Free information available:




www.nolo.com Legal direction
www.reginfo.gov: regulatory information website
www.dol.gov: for labor laws
www.sba.gov: the Small Business Administration
site
 www.business.usa.gov/statesandlocal : state’s
offices
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
18-8
Choosing a Business Name
Trade name or assumed name or a doing
business as (dba)
 The name under which a business is operated.
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
18-9
Choosing a Business Name
Assumed name filing or a fictitious
name filing
 Filing made with a state(s) in which the business
operates disclosing the trade name or assumed
name of the business along with the owners of
the business.
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
18-10
Choosing a Business Form
Legal entity
 A being, human or nonhuman, such as a
corporation, that is recognized as having rights
and duties, such as the right to own property.
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
18-11
Legal Forms of StartUps from the PSED
Figure 18.1
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
18-12
Advantages and Disadvantages of
Corporations
Table 18.2
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
18-13
Advantages and Disadvantages
of Sole Proprietorships
Table 18.3
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
18-14
Advantages and Disadvantages
of Partnerships
Table 18.4
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
18-15
Choosing a Business Form
Articles of organization
 Document setting forth information about a
limited liability company that is filed with the
state to establish an LLC.
Articles of partnership
 Agreement between the partners of a firm on
matters pertaining to the formation and
operation of the partnership.
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
18-16
Choosing a Business Form
Six major factors at play:






Personal liability of the business owner
Taxation of both the entity and its owners
Complexity and organizational costs in setting up
Control of the business
Continuity of the business
Ability of the business to raise capital
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
18-17
Choosing a Business Form
Single taxation
 Earnings of the
business are taxed
once with the
owners paying the
taxes.
Double taxation
 Earnings of the
business are taxed
twice with the
business as well as
its owners being
subject to tax.
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
18-18
Choosing a Business Form
Pass through (taxation)
 Earnings of the business are distributed to the
business owners and those owners pay individual
tax on the earnings.
Check the box taxation
 A choice LLCs can make on their tax returns to be
taxed as a corporation or a partnership.
© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
18-19
Choosing a Business Form
Piercing the veil
 The dissolution of a corporate form, making it
back into a sole proprietorship or general
partnership, if the court finds that the owner
carelessly mixed up
personal and business
assets or finances.
© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
18-20
Everything Is Negotiable, and
Negotiation Is Everything
4 steps to structure a negotiation:




Prepare what you need to achieve
Position by putting your best foot forward
Propose solutions that provide value and balance
Pounce when agreement on any part of the
negotiation appears at hand
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
18-21
The Independent Contractor Argument
To be an independent contractor the person has to
display three characteristics:
1. Behavioral: The contractor solely decides how the
work is to be done.
2. Financial: The contractor pays his own expenses
directly
3. Relational: The independent contractor is employed
for a project and the service the contractor provides
is not central to the operation of the business.
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
18-22
The Scope of Authority Argument
If employees make a decision requiring more
authority than they really possess, the
business can argue that it was not liable for
the problem
Firm must fully train employees of the exact
authority they possess
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
18-23
The Scope of Authority Argument
Sarbanes-Oxley Act
 A federal law describing the steps publicly traded
businesses must take to protect and provide
their key financial information.
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
18-24
Litigation vs. Arbitration vs. Mediation
Litigation
 A formal dispute resolution method that
operates using the court system, typically with a
lawyer representing each party.
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
18-25
Litigation vs. Arbitration vs. Mediation
Arbitration
 A dispute resolution process held instead of
court cases in which both sides present their
case to a legal professional.
Mediation
 the dispute is put to a neutral third party who is
not a judge.
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18-26
Litigation vs. Arbitration vs. Mediation
Table 18.7
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
18-27
Contracting
Contracts
 agreements in which the parties exchange
promises
 Can be and are revised all the time
 Standard contracts
 company can just fill in the blanks as needed
 Specialty contracts
 unique contract terms, large dollar amounts at stake
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
18-28
Contracting
Noncompete clause
 Part of a contract in which a person agrees not to
open a certain type of business or seek
employment doing certain things in a particular
area for a period of time.
 Aimed at present employees
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
18-29
Contracting
Exculpatory clause
 Part of a contract in which a party to the contract
states that he or she will not be responsible for
certain actions.
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
18-30
Contracting
Hold harmless
 A type of waiver in
which a party
agrees not to hold
another party
responsible for
certain events.
Waiver
 Part of a contract in
which a party
intentionally gives
up legal rights or
claims.
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
18-31
Contracting
Subcontract
 A contract by which
a new party agrees
to perform a duty
that one of the
original parties to a
contract was
already legally
obligated to
perform.
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
18-32
Intellectual Property
Intellectual property
 Property coming from some sort of original
thought; for example, patents, trade secrets,
trademarks, and copyrights.
Intangible property
 Property that has no value of its own but that
represents value, such as a stock certificate.
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
18-33
Intellectual Property
Patent
 A grant by the U.S. government to an inventor for
an idea that is new, useful, and non-obvious,
giving the inventor the exclusive right to make,
use, or sell his idea
Trade secret
 Confidential information within a company that
gives that company a competitive advantage
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
18-34
Intellectual Property
Copyright
 Exclusive right given
to the creator of a
literary or artistic
work to make use of
that work.
Trademark
 Distinctive word,
slogan, or image
that identifies a
product and its
origin.
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
18-35
Patents and Trade Secrets
Design patent
 A 14-year patent for a new, original, and
ornamental design for an article of manufacture.
Utility patent
 A 20-year patent covering a process, machine,
article of manufacture, composition of matter, or
any new or useful improvement of an existing
one.
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
18-36
Patents and Trade Secrets
Infringer
 Someone who uses intellectual
property without the permission of
the owner.
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
18-37