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Chapter Seven

Establishing the Legal Foundation

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Learning Outcomes7.1 Discuss the various legal forms of

business in order to determine the best design for a proposed new business

7.2 Explain the basics of contracts7.3 Define the role of leases in the

legal formation of a new business7.4 List how laws, rules, and

regulations benefit new businesses

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Learning Outcomes7.5 Explain the importance of

copyrights/trademarks/patents to small businesses

7.6 Define the role that insurance plays in the risk portfolio of the new business

7.7 Discuss how to develop an effective Board of Advisors and Board of Directors

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Forms of BusinessSole Proprietorship-the simplest form of

business to establish, characterized by the fact that the person who owns the business and the business itself are treated as the same entity and is popular among individuals who:

1.Are unsure about their business idea2.Have a small business where the

limitations of the founder will keep the business from growing.

3.Have a small business where the costs of equipment are low

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Forms of BusinessPartnerships-a type of business formed

between individuals directly1.General Partnership

A draw is a distribution of funds from the business.

2.Limited PartnershipIn a Limited Liability Partnership (LLP), the

General Partner has unlimited liability for any debts or judgments against the firm.

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Forms of BusinessCorporation-treated as a separate entity,

it limits the investment of investors to their initial investment. There are many types, we consider:1. Subchapter S Corporation2. Subchapter C Corporation3. Limited Liability Corporation

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ContractsA contract is an agreement between

two parties to perform certain activities for some consideration.

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LeasesOne of the most significant contracts that a

new business is initially involved in is the lease where the business will operate. Consider:

1.What exactly is the new business owner leasing?

2.Is there an ability to renew the lease?3.Who is responsible for improvements?4.Who has responsibility for maintenance

and other facilities issues?

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Leases5. Who has to carry the liability insurance

and at what level?6. Can your landlord enter your place of

business?7. If there are problems, what are the

procedures for resolving them?

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RegulationsRegulation-related issues must be

extensively considered when the new business is developed including:– The industry where the business will

operate– Employer Identification Number– Payroll requirements– Locale regulations– The Americans with Disabilities Act

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LicensingA license can be as simple as a business

license or it may be specifically related to the fundamental operations of the business. Examples include:1. Alcoholic Beverage Control License2. Occupancy permits3. Federal liquor license4. Business license5. Sign permits6. OSHA permit for food handling7. Fire safety permit

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Copyrights, Trademarks, and Patents

• Copyright-the legal means to protect intellectual property.

• Trademark-a claim of intellectual property that is associated with a specific business

• Patent-a claim of intellectual property that covers a specific innovation.

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Insurance• One means to limit liability concerns

is through the effective application of insurance, including:– Property– Liability– Employee Bonding– Workers’ Compensation

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Board of Advisors and/or Board of Directors

• Board of Directors-individuals who have a fiduciary responsibility to the shareholders of the organization

• Board of Advisors-a group formed at the discretion of the founders and composed of individuals outside the small business that advise the firm.

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SummaryThis chapter covered:• The legal form the business will take• Regulations• Licenses• Contracts• Leases• Insurance• Boards

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