© Mark T. Schenkel 1 Foundations of Entrepreneurship Mark T. Schenkel, PhD Belmont University

© Mark T. Schenkel2 Today’s Agenda Legal Representation in New Ventures Ownership Structures Other Legal Issues

© Mark T. Schenkel3 Legal Representation Why Have It? –Determine What Is Needed –Search For Lawyer With Special Expertise How to Select Lawyer –One-Time Service or On-Going? –Set-Up Comfortable Working Relationship –Determine Costs Up-Front

© Mark T. Schenkel 4 Ownership Structures

© Mark T. Schenkel5 Legal Forms Sole Proprietorship Partnership Corporation Case 12.2: A Question of Incorporation

© Mark T. Schenkel6 Sole Proprietorship Ownership: one person (business = person) Set up costs: minimal (e.g., basic filing fees for trade name) Liability: individual liable for business liabilities Continuity of business: death dissolves business Transferability of interest: complete freedom to sell/transfer Management control: owner has total Profit distribution: through individual tax return Implications: –Easy and inexpensive if no significant liability risk (e.g., small consulting business)

© Mark T. Schenkel7 General Partnership Ownership: more than one owner (no limit on #) Set up costs: basic trade name filing fees, partnership agreement, direct legal costs Liability: all partners equally liable Continuity of business: death/partner withdrawal dissolves business unless agreement stipulates otherwise Transferability of interest: GPs can sell only with consent of all other GPs Management control: all partners have equal rights; majority rules Profit distribution: f(partnership agreement) Implications: –State/Fed tax ID required –Partnership agreement highly recommended –Must follow employment laws –Files tax returns (informational)

© Mark T. Schenkel8 Limited Partnership Ownership: run by a “general partner”, but rules are more complex and regulated Set up costs: basic trade name filing fees, partnership agreement (more comprehensive = higher cost), direct legal costs Liability: limited partners liable for amount of capital contributions Continuity of business: death/limited partner withdrawal has no affect Transferability of interest: LPs can sell w/o consent of GPs Management control: only GPs Profit distribution: f(membership agreement) Implications: –Only recommended for specific situations –Use experts to structure

© Mark T. Schenkel9 C Corporation Ownership: No limit on # of shareholders (= Traditional corporation) Set up costs: filing fees, taxes, articles of incorporation Liability: limited for shareholders to amount of capital contributions Continuity of business: death withdrawal of owner(s) has no affect on legal existence of the business Transferability of interest: Shareholders can sell/buy stock at will, although some transfers might be restricted Management control: major stockholders via key management appointments Profit distribution: dividends Implications: –Attractive fund raising potential –Double taxation –Simplest to take public

© Mark T. Schenkel10 S Corporation Ownership: limited to 75 shareholders Set up costs: filing fees, taxes, articles of incorporation Liability: limited for shareholders to amount of capital contributions Continuity of business: death withdrawal of owner(s) has no formal affect on legal existence of the business Transferability of interest: Shareholder can only sell stock to an individual Management control: major stockholders Profit distribution: through individual tax return Implications: –Good for start-ups with limited ownership; with simple financing –Large body of tax law exists –No double taxation, but cannot deduct most fringe benefits for shareholders

© Mark T. Schenkel11 LLC (Limited Liability Corporation) Ownership: members (Vs. shareholders or partners) with interests designated in articles of organization Set up costs: filing fees, articles of organization Liability: limited for members to amount of capital contributions Continuity of business: management rules may create complexity Transferability of interest: requires unanimous written consent of members Management control: based on articles of organization Profit distribution: through individual tax return Implications: –More expensive –Less tax law on books –More documentation required –Attorneys and accountants like (see “More expensive” above!)

© Mark T. Schenkel12 Non-profit Corporation Requires approval Regulated Limited scope of activity Can fund raise Some governmental funding limited to non-profits

© Mark T. Schenkel 13 Other Legal Issues

© Mark T. Schenkel14 Intellectual Property Patents Copyrights Trademarks Trade Secrets

© Mark T. Schenkel15 Other Legal Issues... Licensing Product Liability Insurance Contracts (aka “tort”)

© Mark T. Schenkel16 Key Takeaways.... In selecting legal counsel, be sure to determine costs and key selection criteria in advance. It is critical to understand the advantages and disadvantages of legal form choice – both at the inception and throughout the growth of the venture, noting that specific needs are likely to change.