Chapter 18

Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Legal Issues

Recognizing Your Small Business Needs

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.

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Learning Objectives

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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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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Selected Laws Applicable to Growing Businesses

18-5Table 18.1

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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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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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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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 want3.Taking care of the paperwork associated

with it

What can I do for free?

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Can I Do This for Free?

Free information available:– www.business.gov: the general business site– www.reginfo.gov: regulatory information

website– www.dol.gov: for labor laws– www.sba.gov: the Small Business

Administration site– www.business.gov/regions/states: state’s

offices

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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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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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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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Legal Forms of Start-Ups from the PSED

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Figure 18.1

Advantages and Disadvantages of Corporations

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Table 18.2

Advantages and Disadvantagesof Sole Proprietorships

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Table 18.3

Advantages and Disadvantagesof Partnerships

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Table 18.4

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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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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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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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.

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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.

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Tax Rates

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Everything Is Negotiable, andNegotiation 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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Legal Liabilities

Vicarious (indirect) liability– Indirect liability or responsibility for the

actions of another. Independent contractors

– Persons working to achieve a certain goal without being subjected to substantial controls by another.

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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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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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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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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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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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Litigation vs. Arbitration vs. Mediation

18-31Table 18.7

Contracting

Contracts– agreements in which the parties

exchange promises 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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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.

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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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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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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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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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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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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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Intellectual Property

Design patent– A 14-year patent

for a new, original, and ornamental design for an article of manufacture.

Infringer – Someone who

uses intellectual property without the permission of the owner.

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