1. Entrepreneurship Chapter 7
Preparing the Proper Ethical and Legal Foundation
Entrepreneurship
Bruce R. Barringer; R. Duane Ireland

2. The Team: Blazing Fire Name ID Pallab Dey 1530587690
Md. Asadul Islam
S Faisal Chowdhury
Shahiur Rahman
Mahmood Abedin Khan

3. Steps in the Entrepreneurial Process

4. Chapter Objectives 1 of 3
Describe how to create a strong ethical culture in an entrepreneurial venture.
Explain the importance of “leading by example” in terms of establishing a strong ethical culture in a firm.
Explain the importance of having a code of conduct and an ethics training program.
Explain the criteria important to selecting an attorney for a new firm.
Discuss the importance of a founder’s agreement.

5. Chapter Objectives 2 of 3
Provide several suggestions for how entrepreneurial firms can avoid litigation.
Discuss the importance of nondisclosure and non- compete agreements.
Provide an overview of the business licenses and business permits that a start-up must obtain before it starts conducting business.
Discuss the differences among sole proprietorships, partnerships, corporations, and limited liability companies.

6. Chapter Objectives 3 of 3
10. Explain why most fast-growth entrepreneurial ventures organize as corporations or limited liability companies rather than sole proprietorships or partnerships.

7. A explosive detection and neutralization start-up initiated in 2009
Products: Xplosens KT (metal Oxide Particle)
Capable of changing color in presence peroxidase based explosives
Two Professor , Dept. of Chemistry develop the idea and the technology
Dr. Allen Apblett
Dr. Nick Materer
Started by : Shohib Sheikh, Jessie Loeffler and Liviu Pavel 3 MBA student of OK, Sate University
Completed the plan in fall 2008, entered into a venture challenge by San Diago State University and got positive feedback from the judges
Encouraged by Head of school of Entrepreneurship, OK sate
Establish the new farm Xplosafe on a very firm legal base.
Successfully manage the initial ethical and legal challenges
Establish it self as a successful venture in the market

8. The story of Xplosafe
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9. Xplosafe: built on strong legal foundation from the very beginning
Identify and select the a suitable Attorney for firm
Obtain the basic legal document to initiate the operations
Obtained a Tax ID
Registered Xplosafe as Limited Liability Company
Obtained a business license
Obtained a exclusive option to license the Technology behind the xplosafe products
Obtained the internet domain name
Bank account
Legal agreements
Non disclosure agreement
Mutual confidentiality agreements
Formal agreement with distributors
drafted and execute operation agreement between the cofounders
How to operate
Equity split
Exit clause

10. Ethics
Values: Abstract Ideas that shape the individual’s thinking and behaviors –a moral compass
These abstract ideas can result from
Religion
Philosophy
Family teaching
Ethics: Study of moral obligation involving the distinction between right and wrong
Business ethics: Right or wrong in the workplace- value management.

11. How concerned are you about ethics?
How many of you observe some form of misconduct/ un-ethical behavior in your work place in last one year?
What are the most common type of misconduct/ un-ethical behavior you observed?
Did you report those to your boss or to the authority?
Why ethics in business are important?
Who is responsible for establishing a ethical culture in the organization? How?
What are the benefit of an ethical culture in the organization?

12. Common form of misconduct in the Business organization
50 % of the employee observe a misconduct / unethical behavior
63 % reported these to their supervisor/ authority
80% think that they are know what is going on the company
74% trusted the top management that they will keep their promises
89% believes that management talk about the workplace ethics

13. Business Ethics Practices and Programs in Bangladesh: An EmpiricalAnalysis Md. Mahi Uddin1, Dr. Mohammad Aktaruzzaman Khan2 and Dr. Kazi Deen Mohammad3 International Journal of Business and Technopreneurship Volume 5, No. 3, Oct 2015 [ ]
Study objectives: to evaluate ethical practices and programs today and tomorrow in Bangladesh
Corporate scandals were identified as the top-rated business environmental factor to influence business ethics today
Globalization will be more important in future than today in terms of its influence to the business ethics in Bangladesh
Political environment is the primary driver in ethical business practices today
legal issues are the key driver for future.
both corporate social responsibility and environmental issues will become more important over the coming decade.
Organizations must integrate ethics into their goals, business processes and strategies
Leaders must both communicate the importance of ethics and model ethical behavior
Ethics should be further driven by measures in practice to assess the effectiveness of business ethics programs
Codes of conduct are viewed as the most important practices and programs, followed by diversity and direct helpline,
Training for all employees is also necessary to reinforce the code of conduct
The leaders should keep their promises to demonstrate ethical leadership behavior and be a model of ethical behavior

14. Establishing a Strong Ethical Culture 1 of 2
Lead By Example: The most important thing that any entrepreneur, or team of entrepreneurs, can do to build a strong ethical culture in their organization is to lead by example.
Leader should intentionally make ethics as a part of their daily conversation and decision making
Supervisor should emphasize integrity when working with the direct reports
Peers should encourage each other to act ethically

15. Establishing a Strong Ethical Culture 2 of 2
Establish a Code of Conduct
A code of conduct (or code of ethics) is a formal statement of an organization’s values on certain ethical and social issues.
Implement an Ethics Training Program
Ethics training programs teach business ethics to help employees deal with ethical dilemmas and improve their overall ethical conduct.
An ethical dilemma is a situation that involves doing something that is beneficial to oneself or the organization, but may be unethical.

16. Code of conduct

17. Potential Payoffs for Establishing a Strong Ethical Culture

18. Video Ted talks
Creating ethical cultures in business: Brooke Deterline at TEDxPresidio
mllc

19. How to Select an Attorney
Contact the local bar association and ask for a list of attorneys who
specialize in start-ups in your area.
Interview several attorneys.
Select an attorney who is familiar with the start-up process.
Select an attorney who can assist you in raising money for your new
venture.
Make sure your attorney has a track record of completing his or her work
on time.
Talk about fees.
Select an attorney that you think understands your business.
Learn as much about the process of starting a business yourself as
possible.

20. Choosing an Attorney for a Firm
Select an Attorney Early
It is important for an entrepreneur to select an attorney as early as possible when developing a business venture.
It is critically important that the attorney be familiar with start-up issues.

21. Drafting a Founders’ Agreement
A founders’ agreement (or shareholders’ agreement) is a written document that deals with issues such as the relative split of the equity among the founders of the firm, how individual founders will be compensated for the cash or the “sweat equity” they put into the firm, and how long the founders will have to remain with the firm for their shares to fully vest.

22. Partial List of Items to Include in a Founders’ Agreement
Nature of the prospective business.
Identity and proposed titles of the founders.
Consideration paid for stock or ownership share of each of the founders.
Identification of any intellectual property signed over to the business.
Description of how the founders will be compensated and how the profits
in the business will be divided.
Provisions for resolving disputes.

23. Avoiding Legal Disputes
Most legal disputes are the result of misunderstandings, sloppiness, or a simple lack of knowledge of the law. Getting bogged down in legal disputes is something an entrepreneur should work hard to avoid
There are several steps that an entrepreneur can take to avoid legal disputes:
Meet all contractual obligations.
Get everything in writing.
Set standards.

24. Avoiding Legal Disputes
Although it’s tempting to try
to show people you trust
them by not insisting on
written agreements, it’s not a
good practice.
One of the simplest ways to
avoid misunderstandings
and ultimately legaldisputes
is to get everything in
writing.

25. Nondisclosure and Noncompete Agreements
Legal Agreements that Many Firms Ask Their Employees to Sign
A nondisclosure agreement binds an employee or other party (such as a supplier) to not disclose a company’s trade secrets.
Using secret codes.

26. Obtaining Business Licenses and Permits
Depending on the nature of the business, the business may need local, state, and/or federal licenses and permits to operate.
Federal Licenses and Permits
Most businesses do not require a federal license to operate, but some do.
Alcohol, Tobacco, Firearms, Animal Transport Across State Lines, Commercial Fisheries, and Radio and Television Broadcasting.

27. Obtaining Business Licenses and Permits
State Licenses and Permits
In most states, there are three different categories of licenses and permits that you may need to operate a business.
Business Registration Requirements. Some states require all new businesses to register with the state.
Sales Tax Permits. Most states and communities require businesses that sell goods, and in some cases services, to collect sales tax and submit the tax to the proper state authorities.
Professional and Occupational Licenses and Permits. In all states, there are laws that require people in certain professions to pass a state exam and maintain a professional license to conduct business. Examples includes barbers, nurses, and real estate agents.

28. Obtaining Business Licenses and Permits
Local Licenses and Permits
On the local level, there are two categories of licenses and permits that may be needed.
The first is to operate a certain type of business.
Examples include child care, barber shops and salons, automotive repair, and hotels and motels.
The second category is permits for engaging in certain types of activities.
Health permit (normally required if you are involved in preparing food), and signage permit (may be required to erect a sign).

29. Obtaining Business Licenses and Permits
Additional Requirements
If you plan to use a fictitious name for your business, in most cases you’ll need to obtain a fictitious business name permit (also called dba or doing business as).
A fictitious name permit allows a business to operate under a fictitious name, like Gold Coast Sea Food or Red Rock Bakery.
TIN

30. Choosing a Form of Business Ownership
When a business is launched, a form of legal entity must be chosen. The most common legal entities are…
Sole Proprietorship
Partnership
Corporation
Limited Liability
Company

31. Sole Proprietorship Sole Proprietorship
The simplest form of business entity is the sole proprietorship.
A sole proprietorship is a form of business organization involving one person, and the person and the business are essentially the same.
A sole proprietorship is not a separate legal entity. The sole proprietor is responsible for all the liabilities of the business, and this is a significant drawback.

32. Advantages and Disadvantages of a Sole Proprietorship
Creating one is easy and inexpensive.
The owner maintains complete control of the business and retains all of the
profits.
Business losses can be deducted against the sole proprietor’s other sources of
income.
It is not subject to double taxation
The business is easy to dissolve.

33. Advantages and Disadvantages of a Sole Proprietorship
Liability on the owner’s part is unlimited.
Raising capital can be difficult.
The business ends at the owner’s death or loss of interest in the business.
The liquidity of the owner’s investment is low.

34. Partnerships Partnerships
If two or more people start a business, they must organize as a partnership, corporation, or limited liability company.
Partnerships are organized as either general or limited liability partnerships.

35. Partnerships General Partnership
A form of business organization where two or more people pool their skills, abilities, and resources to run a business. The primary disadvantage is that all partners are liable for all the partnership’s debts and obligations.
General Partnership

36. Partnerships Limited Partnership A modified form of general
The major difference between
the two is that a limited
partnership includes two classes
of owners: general partners and
limited partners.
The general partners are liable
for the debts and obligations of
the partnership, but the limited
partners are only liable up to
the amount of their investment.
Limited Partnership

37. Advantages and Disadvantages of a General Partnership
Creating one is relatively easy and inexpensive compared to a corporation or
limited liability company.
The skills and abilities of more than one individual are available to the firm.
Having more than one owner may make it easier to raise funds.
Business losses can be deducted against the partners’ other sources of income.
It is not subject to double taxation (explained later).

38. Advantages and Disadvantages of a General Partnership
Disadvantages of a Partnership
Liability on the part of each general partner is unlimited.
Raising capital can be difficult.
Because decision making among the partners is shared, disagreements can occur.
The business ends with the death or withdrawal of one partner unless otherwise
stated in the partnership agreement.
The liquidity of each partner’s investment is low.

39. Corporations Corporations
A corporation is a separate legal entity organized under the authority of a state.
Corporations are organized as either C corporations or subchapter S corporations.

40. C Corporation C Corporation In most cases a corporation shields
its owners, who are called shareholders,
from personal liability for the debts of
the corporation.
A corporation is governed by a board
of directors, which is elected by the
shareholders.
A corporation is formed by filing
articles of incorporation.
C Corporation

41. C Corporation C Corporation A corporation is taxed as a separate
legal entity.
C Corporation

42. Advantages and Disadvantages of a C Corporation
Owners are liable only for the debts and obligations of the corporation up to
the amount of their investment.
The mechanics of raising capital is easier.
No restrictions exist on the number of shareholders, which differs from
subchapter S corporations.
Stock is liquid if traded on a major stock exchange.

43. Advantages and Disadvantages of a C Corporation
Business losses cannot be deducted against the shareholder’s other sources of
income.
Income is subject to double taxation, meaning that it is taxed at the corporate
and the shareholder levels.
Small shareholders typically have little voice in the management of the firm.

44. Subchapter S Corporation
Combines the advantages of a
partnership and a C corporation.
Is similar to a partnership in that the
income of the business is not subject
to double taxation.
Is similar to a corporation in that the
owners are not subject to personal
liability for the debts or behavior of
the business.
A Subchapter S Corporation does not
pay taxes. Profits and losses are passed
through to the tax returns of the owners.
S Corporation

45. Subchapter S Corporation
The business cannot be a subsidiary of another corporation.
The shareholders must be citizens. Partnerships and C corporations may
not own shares in a subchapter S corporation. Certain types of trusts and estates
are eligible to own shares in a subchapter S corporation.
It can only have one class of stock issued and outstanding (either preferred
stock or common stock).
It can have no more than 100 members. Husbands and wives count as one
member, even if they own separate shares of stock.
All shareholders must agree to have the corporation formed as a subchapter
S corporation.

46. Limited Liability Company
Is a form of business ownership that
is rapidly gaining popularity in the
U.S.
Along with the Subchapter S, it is a
popular choice for start-up firms.
The limited liability company combines
the limited liability advantage of the
corporation with the tax advantages of
a partnership.
A limited liability company does not
pay taxes. Profits and losses are passed
through to the tax returns of the owners.
Limited Liability Company

47. Advantages and Disadvantages of a Limited Liability Company
Members are liable for the debts and obligations of the business only up to the
amount of their investment.
The number of shareholders is unlimited.
An LLC can elect to be taxed as a sole proprietor, partnership, S corporation,
or corporation, providing much flexibility.
Because profits are taxed only at the shareholder level, there is no double
taxation.

48. Advantages and Disadvantages of a Limited Liability Company
Setting up and maintaining one is more difficult and expensive.
Tax accounting can be complicated.
Some of the regulations governing LLCs vary by state.
Because LLCs are a relatively new type of business entity, there is not as
much legal precedent available for owners to anticipate how legal disputes
might affect their business.
Some states levy a franchise tax on LLCs—which is essentially a fee the LLC
pays the state for the benefit of limited liability.

49. Assessing a New Venture’s Financial Strength and Viability
Chapter 8
Assessing a New Venture’s Financial Strength and Viability
Bruce R. Barringer
R. Duane Ireland

50. Chapter Objectives 1 of 2
Explain the two functions of the financial management of a firm.
Identify the four main financial objectives of entrepreneurial ventures.
Explain the difference between historical and pro forma financial statements.
Explain the purpose of an income statement.
Explain the purpose of a balance sheet.

51. Chapter Objectives 2 of 2
Explain the purpose of a statement of cash flows.
Discuss how financial ratios are used to analyze and interpret a firm’s financial statements.
Discuss the role of forecasts in projecting a firm's future income and expenses.
Explain what a completely new firm bases its forecasts on.
Explain what is meant by the term percent of sales method.

52. Financial Management 1 of 2
Why do we manage finance?
Financial management deals with two things: raising money, managing a company’s finances in a way that achieves the highest rate of return & adding company values.
Two functions:
1. Acquision of funds
2. Allocation of funds
This chapter focuses primarily on:
Financial progress
Future income and expenses

53. Financial Management 2 of 2
The financial management of a firm deals with questions such as the following on an ongoing basis:
How are we doing? Are we making or losing money?
How much cash do we have on hand?
Do we have enough cash to meet our short-term obligations?
How efficiently are we utilizing our assets?
How does our growth and net profits compare to those of our industry peers?
Where will the funds we need for capital improvements come from?
Are there ways we can partner with other firms to share risk and reduce the
amount of cash we need?
Overall, are we in good shape financially?

54. Financial Objectives of a Firm 1 of 3

55. Financial Objectives of a Firm
Profitability
Is the ability to earn a profit.
Many start-ups are not profitable during their first one to three years while they are training employees and building their brands.
However, a firm must become profitable to remain viable and provide a return to its owners.

56. Financial Objectives of a Firm
Liquidity
Liquid Money
Is a company’s ability to meet its short-term financial obligations.
Even if a firm is profitable, it is often a challenge to keep enough money in the bank to meet its routine obligations in a timely manner.

57. Financial Objectives of a Firm 3 of 3
Efficiency
Is how productively a firm utilizes its assets relative to its revenue and its profits.
Southwest Airlines, for example, uses its assets very productively. Its turnaround time, or the time its airplanes sit on the ground while they are being unloaded and reloaded, is the lowest in the airline industry.
Stability
Is the strength and vigor of the firm’s overall financial posture.
Analyzing cash flow and a variety of negative scenarios.
For a firm to be stable, it must not only earn a profit and remain liquid but also keep its debt in check.

58. The Process of Financial Management 1 of 4
Importance of Financial Statements
To assess whether its financial objectives are being met, firms rely heavily on analysis of financial statements.
A financial statement is a written report that quantitatively describes a firm’s financial health.
The income statement, the balance sheet, and the statement of cash flows are the financial statements entrepreneurs use most commonly.

59. The Process of Financial Management 2 of 4
Forecasts
Are an estimate of a firm’s future income and expenses, based on past performance, its current circumstances, and its future plans.
develop operational and staffing plans
Budgets
Are itemized forecasts of a company’s income, expenses, and capital needs and are also an important tool for financial planning and control.
track cash on hand, business expenses, and revenue you need to keep your business growing.

60. The Process of Financial Management 3 of 4
Financial Ratios
Depict relationships between items on a firm’s financial statements.
used to compare different companies in different industries.
Identifying companies strength and weakness
Importance of Financial Management
Many experienced entrepreneurs stress the importance of keeping on top of the financial management of the firm.

61. The Process of Financial Management 4 of 4

62. Financial Statements Historical Financial Statements
Reflect past performance and are usually prepared on a quarterly and annual basis.
Publicly traded firms are required by the SEC to prepare financial statements and make them available to the public.
Pro Forms Financial Statements
Are projections for future periods based on forecasts and are typically completed for two to three years in the future.
Pro forma financial statements are strictly planning tools and are not required by the SEC.

63. Importance of Keeping Good Records
The first step towards prudent financial management is keeping good records.

64. Historical Financial Statements
Three types of historical financial statements
Financial Statement
Purpose
Reflects the results of the operations of a firm over a specified period of time. It records all the revenues and expenses for the given period and shows whether the firm is making a profit or is experience a loss.
Income Statement
Is a snapshot of a company’s assets, liabilities, and owners’ equity at a specific point in time.
Balance Sheet
Summarizes the changes in a firm’s cash position for a specified period of time and details why the changes occurred.
Statement of cash flows

65. Historical Income Statements

66. Historical Balance Sheets 1 of 2

67. Historical Balance Sheets 2 of 2
Liabilities and Shareholder’s Equity

68. Historical Statement of Cash Flows

69. Ratio Analysis Ratio Analysis
The most practical way to interpret or make sense of a firm’s historical financial statements is through ratio analysis, as shown in the next slide.
Comparing a Firm’s Financial Results to Industry Norms
Comparing a firm’s financial results to industry norms helps a firm determine how it stakes up against its competitors and if there are any financial “red flags” requiring attention.

70. Historical Ratio Analysis

71. Forecasts 1 of 4 Forecasts
The analysis of a firm’s historical financial statements are followed by the preparation of forecasts.
Forecasts are predictions of a firm’s future sales, expenses, income, and capital expenditures.
A firm’s forecasts provide the basis for its pro forma financial statements.
A well-developed set of pro forma financial statements helps a firm create accurate budgets, build financial plans, and manage its finances in a proactive rather than a reactive manner.

72. Forecasts 2 of 4 Sales Forecast
A sales forecast is projection of a firm’s sales for a specified period (such as a year).
It is the first forecast developed and is the basis for most of the other forecasts.
A sales forecast for a new firm is based on a good-faith estimate of sales and on industry averages or the experiences of similar start-ups.
A sales forecast for an existing firm is based on (1) its record of past sales, (2) its current production capacity and product demand, and (3) any factors that will affect its future product capacity and product demand.

73. Historical and Forecasted Annual Sales for New Venture Fitness Drinks
Forecasts 3 of 4
Historical and Forecasted Annual Sales for New Venture Fitness Drinks

74. Forecasts 4 of 4 Forecast of Costs of Sales and Other Items
Once a firm has completed its sales forecast, it must forecast its cost of sales (or cost of goods sold) and the other items on its income statement.
The most common way to do this is to use the percentage-of-sales method, which is a method for expressing each expense item as a percentage of sales.

75. Pro Forma Financial Statements
A firm’s pro forma financial statements are similar to its historical financial statements except that they look forward rather than track the past.
The preparation of pro form financial statements helps a firm rethink its strategies and make adjustments if necessary.
The preparation of pro forma financials is also necessary if a firm is seeking funding or financing.

76. Types of Pro Forma Financial Statements
Purpose
Pro Forma Income Statement
Shows the projected results of the operations of a firm over a specific period.
Shows a projected snapshot of a company’s assets, liabilities, and owner’s equity at a specific point in time.
Pro Forma Balance Sheet
Pro Forma Statement of Cash flows
Shows the projected flow of cash into and out of a company for a specific period.

77. Thank you…….