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Chapter 3

ORGANIZING AND FINANCING A NEW

VENTURE

ENTREPRENEURIAL FINANCE

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Chapter 3: Learning Objectives

Describe the proprietorship, partnership, & corporate forms of business

Identify a limited liability company (LLC) Describe the benefits, risks, & basic tax

aspects of various organizational forms Discuss the use of patents & trade

secrets to protect intellectual property

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Chapter 3: Learning Objectives (continued)

Discuss the use of trademarks & copyrights to protect intellectual property

Describe how confidential disclosure agreements & employment contracts are used to protect intellectual property rights

Explain how financing is obtained via financial bootstrapping & through business angels

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Forms of Business Organization企业组织形式 Proprietorships （独资企业） Partnerships （合资企业）

• General

• Limited Corporations （股份公司）

• C corporations

• S (or Subchapter S) corporations Limited Liability Companies (LLCs) （有限责任公司）

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Proprietorships 独资企业 Proprietorship: 独资企业定义

business venture owned by an individual who is personally liable for the venture’s liabilities

Unlimited liability:personal obligation to pay a venture’s liabilities not covered by the venture’s assets

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Partnerships 合伙（资）企业 Partnership: 合伙（资）企业定义

business venture owned by two or more individuals who are jointly and personally liable for the venture’s liabilities

Joint Liability:legal action treats all partners equally as a group

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Partnerships (continued)合伙（资）企业 Joint and Several Liability:

allows subsets of partners to be the object of legal action related to the partnership

Limited Partnership:limits limited partner liabilities in a partnership to the amount of their equity capital contribution to the partnership

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Corporations 股份制公司 Corporation: 股份制公司定义

a legal entity that separates personal assets of the owners (shareholders) from the firm’s assets

Limited Liability:creditors can seize the corporation’s assets but have no recourse against the shareholders’ personal assets

Corporate Charter: 股份制公司章程legal document that establishes the corporation

S Corporation: 小股份制公司provides limited liability for shareholders plus corporate income is taxed like personal income to the shareholders

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Limited Liability Companies (LLCs)有限责任制公司

Limited Liability Company (LLC): 有限责任制公司定义a business organization owned by “members” (shareholders) with limited liability

Major Incentive for Organizing as an LLC• earnings can be taxed at the personal income tax rates of the

members

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Bases for Comparing Various Business Organizational Forms各类企业组织形式比较基数

Number of Owners & Ease of Startup （企业所有者数量及是否容易组建） Investor Liability （投资者的偿债责任） Equity Capital Sources （股权资本来源） Firm Life & Liquidity of Ownership （企业的生命周期与所有权的流动性） Taxation （企业所得税）

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Number of Owners & Ease of Startup企业所有者数量及是否容易组建

Proprietorshipone; low time & legal costs

Partnership (general)two or more; moderate time & legal costs

Limited Partnershipone or more general & one or more limited partners; moderate time & legal costs

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Number of Owners & Ease of Startup (continued)企业所有者数量及是否容易组建 Corporation (C)

one or more, with no limit; high time & legal costs

S (Subchapter S) Corporationless than 75 owners; high time & legal costs

Limited Liability Company (LLC)one or more, with no limit; high time & legal costs

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Investor Liability 投资者的偿债责任 Proprietorship

unlimited

Partnership (general)unlimited (joint & several liability)

Limited Partnershiplimited partners’ liability limited to their investments

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Investor Liability (continued)投资者的偿债责任 Corporation (C)

limited to shareholders’ investments

S (Subchapter S) Corporationlimited to shareholders’ investments

Limited Liability Company (LLC)limited to owners’ investments

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Equity Capital Sources股权资本来源 Proprietorship

owner

Partnership (general)partners, families, & friends

Limited Partnershipgeneral and limited partners

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Equity Capital Sources (continued) 股权资本来源 Corporation (C)

venture investors & common shareholders

S (Subchapter S) Corporationventure investors & Subchapter S investors

Limited Liability Company (LLC)venture investors & equity offerings to owners

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Firm Life & Liquidity of Ownership企业的生命周期与所有权的流动性 Partnership

life determined by owner; often difficult to transfer ownership

Partnership (general) life determined by partners; often difficult to transfer ownership

Limited Partnershiplife determined by general partner; often difficult to transfer ownership

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Firm Life & Liquidity of Ownership (continued) Corporation (C)

unlimited life; usually easy to transfer ownership

S (Subchapter S) Corporationunlimited life; often difficult to transfer ownership

Limited Liability Company (LLC)life set by owners; often difficult to transfer ownership

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Taxation 公司所得税 Proprietorship

personal tax rate

Partnership (general)personal tax rates

Limited Partnershippersonal tax rates

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Taxation (continued) 公司所得税 Corporation (C)

corporate taxation; dividends subject to personal tax rates

S (Subchapter S) Corporationincome flows to shareholders; taxed at personal tax rates

Limited Liability Company (LLC)income flows to owners; taxed at personal tax rates

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What is Intellectual Property?什么是知识产权？

Intellectual Property: 知识产权定义a venture’s intangible assets and human capital and includes inventions and innovations that can be protected from being freely used or copied by others

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Protecting Valuable Intangible Assets无形资产的保护措施

There are Four Forms of Protection: Patents 专利 Trade Secrets 商业秘密 Trademarks 商标 Copyrights 版权

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Intellectual Property Protection Methods: Basic Definitions

Patents:( 专利）intellectual property rights granted for inventions that are useful, novel, and non-obvious

Trade Secrets: （商业秘密）intellectual property rights in the form of inventions and information not generally known to others that convey economic advantages to the holders

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Intellectual Property Protection Methods: Basic Definitions (cont’d)

Trademarks: （商标）intellectual property rights that allow firms to differentiate their products & services through the use of unique marks

Copyrights: （版权）intellectual property rights to writings in written and electronically stored forms

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Patent Basics 专利基础知识 Intellectual property rights granted for

inventions that are “useful,” “novel,” and “non-obvious.”“ 创新的”、“非显而易见”。

Patents are granted by the U.S. Patent and Trademark Office

Patent law is very complex (you need to hire a patent applications specialist lawyer)

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Four Kinds of Patents: 四种类型的专利

1. Utility Patents: 实用专利cover mechanical or general inventions, chemical inventions, & electrical inventions

2. Design Patents: 外观设计专利cover the “appearance” of items (e.g., sports uniforms, electronic products, & autos)

3. Plant Patents: 植物专利protect discoveries of asexual reproduction methods of new plant varieties 保护无性繁殖方法发现的新植物品种

4. Business Method Patents: 商业模式（方法）专利protect specific ways of doing business and the underlying computer codes and technology.

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Utility Patents: Basic Information实用专利基本信息

A new idea by itself cannot be patented The idea must be part of an invention that

has a “physical form” such as a product The physical form also can exist as a

sequence of steps contained in a process or the delivery of a service

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Utility Patents: Application Process 实用专利：申请程序

Develop or conceive an invention Prepare (you, or a registered patent attorney

on your behalf) a patent application File the application in U.S. Patent & Trademark

Office If successful, the utility patent life will be 20

years (prior to mid-1995 the life was 17 years)

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Utility Patents: Provisional Patent Application 临时专利申请

Beginning in mid-1995, inventors were permitted to file a provisional application

Filing dates can be established more quickly & at lower costs, & small entities are charged lower filing fees

Allows the inventor to use the term “patent pending” on the invention

However, patent rights & protection occur only when a patent is issued

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Provisional Patent Application Requirements & Conditions临时专利申请的要求与条件

An invention title, the inventor’s name, residence, & address for correspondence

Clearly written description and “drawings” A person skilled in the art of the invention’s

area should be able to use or practice the invention

Has a life of 12 months & will be abandoned unless a regular patent application is filed

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Regular Patent Application Requirements常规专利申请要求

A detailed written description of the invention & detailed drawings of how the invention works

One or more claims justifying why the invention should be patented

Inventor must indicate the “best use” or method of practicing or carrying out the invention

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Why Might Your Patent Application be Rejected?

For a patent application to be accepted, the invention must be:

•Useful有用the invention cannot just “do nothing”

•Novel新创the invention was not previously produced, described in a publication, or patented

•Non-Obvious“非显而易见”invention should be “non-obvious” to a person with ordinary skills in the art of the invention’s area or subject

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Why Might Your Patent Application be Rejected (cont’d)?

Timing of filing the application• must be filed within one year of first introduction to the

public

• in the future, it may be necessary to file prior to any public disclosure or use

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What Does Having a Patent do for the Inventor?

The government does not enforce your rights The burden of enforcing the patent lies with the

inventor and enforcement can be costly Records indicate that over one-half of patent

infringement suits taken to court are not upheld on behalf of the inventor

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Trade Secrets 商业秘密 Trade secrets:

intellectual property rights in the form of inventions & information (e.g., formulas, processes, customer lists, etc.)

Trade secrets are not generally known to others & convey economic advantages to the holders

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Trade Secrets (continued)

Why Consider Protection as a Trade Secret instead of as a Patent?• trade secret law can sometimes protect inventions that

did not qualify for patents

• some inventors want to avoid the detailed disclosure required by the U.S. Patent and Trademark Office

• there are no time restrictions on trade secrets (in contrast to patents)

Other Methods

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Trade Secrets (continued)

What are Drawbacks of Seeking Protection under Trade Secrets Law?

寻求商业秘密法律保护的缺陷是什么？• there is no formal procedure for obtaining protection as a

trade secret

• protection is established by the secret’s characteristics & efforts to protect it

• holders do not have exclusive “rights” to what comprises the secret (someone could independently replicate the secret)

Other Methods

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Trademarks 商标

What are Trademarks?Intellectual property rights that allow firms or others to differentiate their products & services through the use of unique “marks”

Marks allow consumers to easily identify the source & quality of products/services

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Trademarks (continued) 商标 Most trademarks take the form of names,

words, or graphic designs Trademarks also can be on the shape of

packages, colors, odors, & sounds Trademarks are the most valuable form of

intellectual property for many firms A trademark should be suggestive of (but not

describe) a product or product line

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Trademarks (continued) 商标

How do You Obtain or Disclose a Trademark (or ™)?• no formal government procedure exists for establishing a

trademark

• ownership is established by being first to use the mark on products

• a trademark can be lost if the mark becomes a generic term or label (e.g., “aspirin” or “cellophane”)

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Trademarks (continued) 商标

How do You Register a Trademark? • a trademark can be registered in individual states or with

the U.S. Patent and Trademark Office

• a federal registration should be used if a product is sold in more than one state

• products with federally registered trademarks show the trademark accompanied by ®

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Copyrights 版权 Intellectual property rights to “writings” in

written and electronically-stored forms Protects the “form of expression of an idea”

and not just words themselves Traditional way to establish a copyright is to

“publish” your book or other work accompanied by a copyright notice using the word “Copyright” or the symbol ©

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Seed & Startup Financing孵化（种子）期及启动期经费的筹措 Financial Bootstrapping

minimizing need for financial capital & finding unique ways of financing a new venture

Business Angel Funding 天使资金 wealthy individuals who invest money in fledgling ventures in exchange for the excitement of launching a business & a share in any financial rewards

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Other Methods for Protecting Intellectual Property Rights

Confidential Disclosure Agreements:documents used to protect an idea or other forms of intellectual property when disclosure must be made to another individual or organization

Employment Contracts:agreements between an employer and employee whereby the employer employs the employee in exchange for the employee agreeing to keep confidential information secret and to assign ideas and inventions to the employer