�ݺ�ߣ

Legal Issues for EntrepreneursHeather Clark Reynolds, J.D.Business Advisor, SBDCPurdue University

Common Business EntitiesSole ProprietorshipPartnershipS CorporationC CorporationLimited Liability Company

Factors to Consider in Selecting an Appropriate Business EntityLiability - Limited Liability v. Personal LiabilityTax ImplicationsComplexity of Formation and ManagementCapital - effect on ability to raise capital through angel investment, venture capital, or initial public offering (IPO)Credibility in the business world

Sole ProprietorshipAn individual (or husband and wife team) carrying on a business for profitUnlimited personal liabilitySingle level of income tax - all income and expense items reported on Schedule C of the owner’s 1040Relatively simple to startIf business conducted other than under the name of the sole proprietor, assumed name publication neededManaged by the sole proprietorAny transfer of the business would be of the underlying assets as opposed to a transfer of shares in the businessCapital needs - addressed through loan to sole proprietor

General PartnershipAssociation of two or more co-owners carrying on business for profitPartners have unlimited personal liability for partnership debtsPass through tax treatment (partnership files form 1065 but all income and expense items pass through to individual partners on schedule K-1)Relatively easy to start - partnership agreement is typically entered into but is not legally requiredManaged by the partners or as described in the partnership agreement; Problem: any partner can bind the partnershipAbility to raise capital limited since most investors would prefer to invest in an entity offering limited liabilityLLC is almost always the better choice if partnership tax treatment is the goal

S CorporationLimited liability for shareholders even if they participate in managementPass through tax treatment under most circumstances but not as complete as for the LLCFormation steps include filing Articles of Incorporation with the Secretary of State, filing sub s election with the IRS, adoption of bylaws, and, usually, adoption of a shareholder (buy-sell) agreementLimitations on the number of shareholders and the type of shareholders limits ability to raise capitalLimit of 100 shareholdersOnly one class of stock is allowed so ability to give priority return of capital to investors compromisedDifferences in voting rights is allowedPartnerships and corporations cannot be shareholdersOnly citizens or residents of USA can be shareholdersIs easier to convert S corp to C corp than it is LLC to C corp in event venture capital is sought

C CorporationLimited liability for shareholders even if they participate in mgmtTax at both corporate and shareholder level. This double level tax can be avoided to some extent by payment of reasonable salaries to shareholders in exchange for services actually renderedFormation similar to S corporation except sub S election not filed with IRSTypically required for publicly traded corporations, businesses that require venture capital, or if a broad based stock option program is utilizedNo limits on type or numbers of shareholdersDifferent classes of stock allowed thus enabling different priority for return of capitalCommon StockPreferred Stock

Limited Liability CompanyCombines limited liability provided by a corporation with pass through partnership tax treatmentLLC files a partnership tax return with all income and expenses being passed through to individual owners of the LLCFormation steps include filing articles of organization with the Secretary of State, contributing an appropriate amount of capital, and adopting an operating agreementCan be managed by the members or, more often, by managers selected by the members. Can also elect officersSelf employment tax treatment less favorable than for S corporation

Limited Liability CompaniesOffers several advantages over the S corporation:No limitation on the number of membersNo limitation on who may invest (corporations, partnerships, and non US residents can invest)Treatment of gain on distribution of appreciated property more favorableDifferent classes of ownership are allowed so there is the flexibility to provide for a priority return of capital to investors

Bylaws and Shareholder Agreements for CorporationBylawsShareholder AgreementsProcedures for shareholder and directorterms of directors and how elected, typesduties, and indemnification provisionsrestrictions on the transfer of ownershipdisability, or cessation of employment)provisions for resolving deadlock amongmethod of establishing price of sharesrights to purchase additional shares(preemptive rights), rights to sell sharescorporation are sold (co-sale rights),shareholder to sell its interest in themajority votes to do so (drag along rights)ownership of intellectual property

LLC Operating AgreementsTake the place of both the bylaws and shareholder/buy-sell agreement used for a corporationAddress issues such as type of membership interests, who owns the membership interests, rights and duties of members, whether the LLC is member managed or manager managed, rights and duties of any officers, capital accounts, allocation of profits, transferability, and indemnification of managers, employees and agents

Piercing the Corporate VeilLimited liability associated with a corporation or an LLC can be lost if appropriate formalities are not followedCorporation or LLC should be appropriately capitalized upon setupAnnual meetings of shareholders and directors (or members and managers if an LLC) should be conducted and minutes of those meetings placed in the corporate or LLC bookSeparate financial records and bank accounts should be maintained for corporation or LLC

Employment AgreementsNondisclosure of information/trade secretsNoncompetitionNonsolicitation of employees and customersAssignment of ownership of intellectual property to company Employee dutiesCompensationTerm of agreement and ability of parties to terminate

Employee or Independent Contractor?EmployeesIndependent ContractorsEmployees can be terminated at willPayroll taxesTotal control over work productEmployer assumes liabilityOften subject to contract termsNo taxesLittle to no control over work productLiability may be contracted away to Independent Contractor or to Owner

DiscriminationCannot discriminate against an employee for religious, pregnancy, race, color, sex, or national origin -Title VIIApplies in hiring, promotion, discharge, and other aspects of employmentEqual Pay Act – cannot have wage discrimination between men and womenSexual orientation – no federal or state law yet, but some municipalities have these lawsADA – physical/mental impairment which substantially limits one or more of person’s life activities (deaf, blind, rehabilitating alcohol/drug addicts, HIV, severe scars, cancers) – must provide reasonable accomodationAge Discrimination – protects workers over age 40

Miscellaneous Employment RulesFamily and Medical Leave ActHIPPAReferences (slander/defamation)PrivacyWage garnishment for child supportFail to provide a safe workplaceOSHASexual HarassmentImmigrationChild Labor LawUnemployment CompensationWorkers CompensationJury Duty

Employment at Will in IndianaIn the absence of a contract guaranteeing employment for a specific duration, employers may discharge an employee at any time with or without notice or cause. In the same manner, an employee can quit without or with notice to the employer EXCEPT a statutorily prohibited reason (i.e, discrimination)If employee is discharged without cause, employee may file for unemployment comepensation

Employee HandbooksAdvantagesCommunication tool between company and employeesSets guidelinesAvoids misunderstandingsCan help in unemployment or discrimination claimsDisadvantagesIf not drafted carefully, can be construed as employment contractCan be used against you in unemployment and discrimination suits

Importance of Intellectual Property (“IP”)to a CompanyIncreasingly important as a business assetMay constitute the most valuable asset inearly stage technology based companies

Why do Companies Care about IP?Freedom to Operate - make sure someoneelse’s IP will not prevent your company fromcarrying out its business objectivesCompetitive Advantage - protect yourcompany’s IP so it can be used to gain acompetitive advantage in the marketplacethrough precluding others from utilizing the IP

Ways to Protect IPCopyrights – original works of authorship,including softwareTrademarks – word, symbol or device thatidentifies the source of goods (Company logos)Patents – right to exclude others from making, using, or offering for sale the inventionTrade Secrets – secret information that givesowner a competitive advantage (KFC’s secret recipe)

Hershey’s KissesProtected by Four Types of Intellectual Property ProtectionTrademark for its shape (#1,584,608)Patent for its method of reducing fat levels incocoa used (#5,464,649)Copyright for commercials made to advertise(PAu-697-741)Trade secret on its recipe for producing themilk chocolate candy

CopyrightsExclusive Rights of Copyright OwnerReproductionPrepare derivative worksDistribute copiesPublic performance or display

Copyrights – Ownership of Work of OthersEmployers - gain copyright over works of employees if the work was created within the scope of employmentWork for Hire – company commissioning the work may or may not become the ownerPrudent to document these issues in a signed agreement which also contains language addressing assignment of copyright

Copyrights – How to Gain ProtectionProtection exists from the date the work is created in fixed form even without publication or registrationMarking a work with the © symbol provides notice to the world that the work is protected but is not required for newer worksRegistering a work with the U.S. Government provides the highest degree of protection, allowing for the recovery of statutory damages in addition to injunctive relief

Trademarks – Source of GoodsTrademark: a word, symbol or device that identifies and distinguishes the source of goods of one party from those of othersService Mark – similar to trademark except that it identifies services as opposed to goodsAllows first actual or constructive (i.e. federally registered) user to prevent others from using the trademark for goods or services on same or related goods or services

Trademarks – Items That Can be ProtectedCan protect:product names and logosthe name Nike and the Nike swooshsales sloganscontainer shapes and distinctive packagingShape of a Coke bottleSoundsIntel chime

Trademarks – Obtaining and KeepingPerform a SearchMake sure the potential trademark is not already being usedAvoid generic or descriptive termsArbitrary marks that have no relation to the product stand the best chance of being recognized as a markMake wide use of the trademark and make sure that it is used and marked properlyRegister your trademark at the federal and state levels

Patents – DefinitionRIGHT TO EXCLUDE others from making, using, selling, or offering for sale the invention in the U.S. or importing the invention to the U.S.Can have a patent but not be able to use the invention if it would infringe on another patentGenerally US patents last 20 years from when application filed with USPTO

Patents – RequirementsUseful and fit into one of the following categories:Process, machine, manufacture, composition of matter,ornamental design, or biological plantNovel - must not already be in the public knowledge or in public useNonobvious in the view of prior art and knowledge to a person having an ordinary level of skill in the pertinent area

Patents – Issues Prior to Filing ApplicationIs there already a patent or a patent pending for a similar device?What is the life-span of the invention?A short life-span may make a patent impracticalIs a patent the appropriate protection?Would disclosing the information required to patent give an advantage to competitors?Would company goals be better served by holding the information as a trade secret?

Trade Secrets – DefinitionAny formula, pattern, device or compilation of information used in a business that gives the trade secret owner an opportunity to obtain an advantage over competitors who do not know it. The trade secret can not be public knowledge.Examples: KFC secret recipe, Coke formula

Trade Secrets – ProtectionIf information is secret and reasonable measures are taken to keep it secret , it will be protected by lawThe law does not create a monopoly for use on the secret like other protections of intellectual property, but it only protects the secret from being improperly appropriatedUnlike patents, trade secrets may be “reverse engineered” and thus no longer secret

Trade Secrets - ProtectionBusinesses need to take proper steps to ensure the security of their trade secretsSecurity within the plant or officeContractual safeguards with employees and business partners such as non-competition agreements and confidentiality agreementsWorkplace controls to prevent the dissemination of trade secrets to individuals that do not need access to them

Types of LawsuitsProfessional Negligence – you or one of your employees give bad advice, make product wrong, etcMalpractice and product liabilityPremises LiabilitySomeone falls / gets hurt on your propertyContractual liabilityYou or customer/client violate provisions of contractAdvertisementsSlander/defamation/libelFraud

Miscellaneous Legal Considerations

Contractual AgreementsIndependent ContractorsClient agreementsNo-compete clausesSale contractsLeases (buildings, equipment, vehicles)VendorsBanking ZoningPartnership Agreements

�ݺ�ߣ

Legal Issues For Entrepreneurs

More Related Content

Legal Issues For Entrepreneurs