Select a Type of
Ownership
Decide to Purchase, Join, or Start a Business
Choose a Legal Form of Business
Legal Issues and Business Ownership
What do you think?
• Is it easier to:
• Purchase an existing business that is for sale
• Join a family business
• Start a new business from scratch
Buy an Existing Business or
Start Your Own?
• 3 things to consider:
• How much experience do you have?
• What kind of business do you want?
• What kind of financial risks are you willing to take?
Purchase an Existing Business
• Owners sell businesses for a variety of reasons including:
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insufficient profits
new competition
fear of changing economic conditions
retirement
dispute among partners
illness of a partner
Purchase an Existing Business
• There are many ways to find a business that is for sale including:
• advertisements in the newspaper
• consulting a business broker
• networking
Advantages of Buying an Existing
Business
• The equipment, suppliers, and procedures are in place.
• Goodwill may already be established.
• The seller may train the new owner.
• Established financial records exist.
• Financial arrangements may be easier.
Disadvantages of Buying an Existing
Business
• The business may be for sale because it is not profitable.
• Serious problems may be inherited.
• Capital is required.
Steps in Purchasing a Business
• Write specific objectives about the kind of business you want to
buy
• Meet with sellers or brokers to investigate specific opportunities
• Visit during business hours to observe the business in action.
• Obtain accounting records for the prior three years.
Steps in Purchasing a Business
• Get important information in writing.
• reviewed by a lawyer
• reviewed by an accountant
• Determine how you would finance the business.
• Get expert help to determine the price to offer for the business.
• Valuator – an expert on determining the value of a business
Franchise Ownership
• franchise
• a legal agreement that gives an individual the right to
market a company’s products or services in a
particular area
• franchisee
• the person who purchases a franchise
• franchisor
• the company that offers the franchise for purchase
Operating Costs of a Franchise
• initial franchise fee
• the amount the local franchise owner pays in return for the right
to run the franchise
• startup costs
• the costs associated with beginning a business
• royalty fees
• weekly or monthly payments made by the local owner to the
franchise company
• advertising fees
• paid to the franchise company to support television, magazine, or
other advertising of the franchise as a whole
Investigate the Franchise
Opportunity
• Franchise Disclosure Document (FDD)
• a regulatory document describing a franchise opportunity that
prospective franchisees must receive before they sign a contract
• must be provided to franchisee at least 14 days before a
contract is signed
• Information contained in the FDD includes:
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background and experience of the business’s key executives
costs of starting and maintaining the business
terms of the franchise agreement
acceptable reasons for contract termination
the responsibilities you and the seller will have once you have
invested in the opportunity
Evaluate a Franchise
• Study the disclosure document and proposed contract
carefully.
• All costs and royalty fees should be provided.
• Interview current owners.
• Beware of “shills” - business references who are paid to give
favorable reports
• Investigate the franchisor’s history and profitability.
• Investigate claims about your potential earnings.
• Does projected local demand match potential earnings?
• Have the seller provide, in writing, the number and
percentage of owners who have done as well as they claim
you will.
Evaluate a Franchise
• Listen carefully to sales presentations.
• Do not sign up immediately.
• Do not fall for a promise of easy money.
• Shop around.
• Compare to other business opportunities.
• Get the seller’s promises in writing.
• Determine what will happen if you want to cancel the franchise
agreement.
• Remember that it is okay to ask for advice from professionals.
Advantages of Owning a Franchise
• An entrepreneur is provided with an established product or
service.
• Franchisors offer management, technical, and other
assistance.
• Equipment and supplies can be less expensive.
• A guarantee of consistency attracts customers.
Disadvantages of Owning a
Franchise
• Franchise fees can be costly and cut down on profits.
• Owners of franchises have less freedom to make decisions
than other entrepreneurs.
• Franchisees are dependent on the performance of other
franchises in the chain.
• The franchisor can terminate the franchise agreement.
Enter a Family Business
• The U.S. economy is dominated by family businesses.
• Some estimates indicate 90 percent of businesses are family
owned.
• 35% of Fortune 500 companies are family controlled
• 50% of US GDP comes from family businesses
• 60% of US employment
• Many large companies are still owned by relatives of the
company founder.
• Wal*mart
• Ford Motor Company
Advantages of a Family Business
• Benefits of working at a family business include:
• pride and a sense of mission
• a feeling of continuity from keeping the business in the family for
another generation
• enjoyment derived from working with relatives
Disadvantages of a Family Business
• Challenges of working in a family business include:
• Family members, regardless of their ability, often hold senior
management positions
• poor business decisions can be made
• it is difficult to retain non-family employees
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Family politics often enter into business decision making.
Business and private life often affect each other.
Independent decision making is difficult.
It can be challenging to determine what to do with the business
when there is not a family member available to run it.
Starting Your Own Business
• If purchasing a franchise or joining a family business will not
work for you, consider starting your own business.
Advantages of Starting Your Own
Business
• Independent business owners enjoy:
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complete autonomy over all business decisions
the ability to create their own destiny
the challenge of creating something brand new
feeling triumphant when the business turns a profit
Disadvantages of Starting Your Own
Business
• Risks to consider when starting your own business include:
• product demand is uncertain
• you must make decisions that other types of entrepreneurs do
not need to make
Lesson 7.2
Choosing a Legal Form of Business
• Sole Proprietorship
• Partnership
• Corporation
Number of Businesses in US
by Type
6%
19%
Sole Proprietorship
Corporations
Partnerships
75%
Sales Revenue in US by
Business Type
8%
5%
Sole Proprietorships
Corporations
Partnerships
87%
Sole Proprietorship
• Sole Proprietorship
• A business that is owned exclusively by one person
• Easiest and least expensive way to start a business
• No documents or forms needed UNLESS you operate under a
name that is not your own
Sole Proprietorship
• How to Set Up:
• No legal steps required
• Except professional certifications
• Choose a name
• Workman’s Puppies vs. Pampered Puppies
• If you’re reasonably well-known and well-respected, using your own name
is a great marketing tool
• HOWEVER, if your business fails or you get into financial or legal trouble,
it’ll have your name on it and people may associate your name with the
earlier troubles
• Protect your name
• Pick a domain name for your website
• Register your name
• DBA – Doing Business As
• Trademark your name
• US Patent and Trademark Office
Sole Proprietorship
• How to Set Up (continued):
• Keep Finances Separate from your Personal Activities
• Business Bank Account
• Business Credit Card
• Business Record Keeping
• Why is this important?
• Be Prepared for Paying Taxes
• If no employees, can operate under your SSN
• If employees, need a federal Employer Identification Number (EIN)
• If profitable, you will owe self-employment taxes
• Get Insurance
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Property and liability
Auto
Health
Disability
Advantages of a Sole Proprietorship
• Most common form of US business ownership
• Over 17 million in operation
• Easy to set up; minimal government regulation
• Low cost method of entering the business world
• Complete control over all decisions
Disadvantages of a Sole
Proprietorship
• It can be difficult to raise money for the business
• You bear the burden of all the risks
• If the business fails, your personal assets can be
jeopardized
Partnership
• Partnership
• A business owned by two or more people
• Share in the decision-making and management responsibilities
• Share in the risks and rewards
Partnership
• Things to consider:
• Do you really need a partner to make business successful?
• Do they have financial resources or vital skills you lack?
• Can you hire them instead of partner with them?
• Do you really know the other person?
• Do you have similar values, communication styles, ethics, etc.
• Test the partnership out by tackling a small project together first
• Outline in advance critical elements such as:
• Compensation
• Exit Clauses
• Roles and Responsibilities
Partnership Agreement
• Outlines the rights and responsibilities of each of the owners
including
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Business name
Names of partners
Investment by each partner
Delegation of management duties
Accounting methods used
Rights to audit accounting documents
Profit and loss distribution
Salaries
Length of partnership
Conditions under which the partnership can be dissolved
Asset distribution upon dissolution of partnership
Procedure for dealing with the death of a partner
Advantages of a Partnership
• Multiple sources of capital
• Risks are spread among partners
• Minimal government regulation
Disadvantages of a Partnership
• Responsibilities and profits are shared
• Can be held liable for errors of partners
What Went Wrong?
Stan and Pete met while working at a video production company. Stan was in
charge of editorial and production. Pete ran the sales force. Stan decided to begin his own
company and invited Pete to join him. SP Communications seemed like a perfect partnership.
Pete would handle sales and administration while Stan managed clients and directed
production.
Things seemed to be going well until Pete decided he wanted to be a part of the
creative process. He spent most of his time producing videos rather than looking for new
business. Because of their friendship, Stan trusted that Pete was taking care of his side of the
business.
As it turned out, Pete wasn’t very good at the creative tasks he attempted. He made
mistakes that reduced expected profits. In addition, he wasn’t making new sales contacts,
which was supposed to be his main job.
By the time Stan realized what was happening to the business, it was too late.
There weren’t any new sales. What Stan thought were profits were the result of Pete not
paying their bills. Stan was left with more than $150,000 in unpaid bills and other debts. Pete
left the business. It took Stan 3 years to dig out of the financial mess and get his new company
up and running successfully.
Questions:
1.
How might Stan and Pete have avoided the problems that led to the end of their
partnership?
2.
Why is this situation a good example of the difficulty in maintaining partnerships
between friends?
3.
What types of things should be spelled out completely between partners at the
beginning of the partnership?
Corporation
• Corporation
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Most common form of business organization
Must be chartered by a state
Has many legal rights as an entity separate from its owners
Ownership determined by how many shares of stock you have
• Board of Directors – elected group of individuals who make important
decisions about company
• Company Officers – responsible for the day-to-day management of the
business
• The corporation, not the owners, transacts business
How to Form a Corporation
• Choose an available business name that complies with your
state’s corporation rules
• Appoint the initial Directors of your corporation
• File formal paperwork, or Articles of Incorporation, and pay
filing fee
• Create corporate “bylaws”, which lay out the operating rules
for your corporation
• Hold the first meeting of the Board of Directors
• Issue Stock Certificates to the initial owners (shareholders)
• Obtain licenses and permits that may be required for your
business
Disadvantages of a Corporation
• A lawyer is required to establish a corporation because a
corporation is complex
• Costly
• Articles of incorporation must be filed
• Corporations are subject to more government regulation than
other types of businesses
• Income is taxed twice
• Corporate income
• Individual income
Advantages of a Corporation
• Personal liability is limited to the amount of money each
shareholder invested in the company
• Personal assets of shareholders are protected
• Corporations can raise money by selling stock
• Reputation and backing of recognized name
S Corporation
• A corporation organized under Subchapter S of the Internal
Revenue Code
• Used for smaller businesses
• Many new businesses lose money in the first years
• S Corporation not taxed as a business
• Pay taxes if make a profit, but if the business looses money, owners
can use the losses to offset other sources of personal income
• tax break
Limited Liability Company
• Limited Liability Company (LLC)
• Provides the benefits of partnership taxation and limited personal
liability
• Not subjected to the rules of an S corporation
• Members can participate in business management
• LLCs have restrictions
• Limited by state law
• Single owner cannot establish an LLC
• Some states limit the life of an LLC
Lesson 7.3
Legal Issues and Business
Ownership
Lesson 7.3
Legal Issues and Business
Ownership
Goals
• Recognize how laws promote competition
• Describe how entrepreneurs protect intellectual property
• Identify regulations that protect the public and how they affect
businesses
• Describe when and how a business owner should seek legal advice
Regulations That Promote
Competition
• The government has enacted various laws to help protect
businesses.
• Antitrust Legislation
• Consumer Protection
• Financial Accuracy
Antitrust Legislation
• Antitrust laws ban business activities that do not promote
competition.
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Sherman Act
Clayton Act
Robinson-Patman Act
Wheeler-Lea Act
Antitrust Legislation
• Sherman Act
• Competitors can not get together to set prices at a
certain level.
• Discussing pricing with competitors is illegal.
• Clayton Act
• It is illegal for a business to:
• require a customer to buy exclusively from it
• force a customer to purchase one good in order to be
able to purchase another good
Antitrust Legislation
• Robinson-Patman Act
• It is illegal to discriminate by charging different prices
to different customers.
• Some economically sound reasons that allow for
different prices include:
• volume discounts
• special distribution
• legal requirements that vary by location
• Wheeler-Lea Act
• Unfair or deceptive actions or practices by businesses
that may cause an unfair competitive advantage are
banned.
• false advertising
• Businesses are required to warn consumers about
possible negative features of their product.
• potential side effects of medication
Is this false advertising?
False Advertising
• Models
Consumer Protection
Legislation
• Laws and organizations designed to ensure the rights of
consumers as well as fair trade competition and the free flow
of truthful information
• These laws protect the public from harmful products
• FERPA
• HIPPA
• Other Laws that Protect Consumers
FERPA
• Federal Educational Rights and Privacy Act
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Established in 1974
Gives students access to their education records
The opportunity to seek to have the records amended
Control over the disclosure of information from the records
Only applies to educational institutions that receive funding from
the U.S. Department of Education
• Why would this apply to business?
HIPAA
• Health Insurance Portability and Accountability Act
• Established in 1996
• Privacy of individuals health information
• Includes information on:
• Medical records
• Medical billing
• Clinical or research databases
• Why would this apply to business?
Other Laws that Protect Consumers
• Licenses
• State and local governments require some businesses to have
licenses.
• training may be required
• inspections may be required
• Zoning Laws
• Local governments often establish zoning regulations that control
what types of buildings can be built in specific areas.
Other Laws that Protect Consumers
• The Federal Food, Drug, and Cosmetic Act of 1938
• Covering food, drugs, and cosmetics, this law bans selling
products that are:
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impure
improperly labeled
falsely guaranteed
Unhealthful
• The Consumer Product Safety Act of 1972
• sets safety standards for products other than food and drugs
• The Truth-In-Lending Act of 1968
• requires all banks to calculate credit costs in the same way
Laws Concerning Financial
Accuracy
• Sarbanes-Oxely Act
• Introduced in 2002 as a direct result of Enron
scandal
• Improved the accuracy and reliability of corporate
disclosures made pursuant to the securities laws
• Created new standards for corporate
accountability as well as new penalties for acts of
wrongdoing
Government Agencies that Protect
Competition
• Justice Department
• The Antitrust Division takes legal action against any
business it believes has tried to monopolize an industry
• Prosecutes businesses that violate antitrust laws
• Federal Trade Commission
• The FTC administers most of the laws dealing with fair
competition
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false advertising
price setting by competitors
price discrimination
product misrepresentation
How to Protect Business
• Intellectual Property
• The original creative work of an artist or inventor
• songs, novels, artistic designs, inventions
• No one can use someone else’s original work to make
money.
• Patent
• The grant of a property right to an inventor to exclude
others from making, using, or selling his or her
invention
• Lasts for 20 years
• Provisional patent application
• Allows inventor one year to research details of an idea
prior to filing a patent
How to Protect Business
• Copyright
• an intellectual property law
• protects works of authorship
• remains in effect for 70 years after the death of an
author
• Trademark
• name, symbol, or special mark used to identify a
business or brand of product
Legal Issues Affecting Business
• Learning some basics about the laws affecting businesses will
help you handle minor legal issues independently.
• Sometimes you will need to hire a lawyer.
Contracts
• Contract - a legally binding agreement between two or more
persons or parties
• Offer and Acceptance
• one party offers or agrees to something and the other party accepts
• Consideration
• what is exchanged for the promise
• Capacity
• the parties are legally able to enter into a binding agreement
• Legality
• a contract cannot have anything in it that is illegal or that would result
in illegal activities
• Genuine Assent
• the agreement is not based on deceit, mistakes, or unfair pressure
Torts Relating to Business
Enterprises
• Tort
• a wrong against people or organizations for which the law grants
a remedy
• liability can be established through
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duty
breach
injury
causation
Hire a Lawyer
• At some point, you will probably need to hire a lawyer to
assist you with legal issues affecting your business.