Because learning changes everything.

Part 4

Building the Business

Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 Because learning changes everything. ®

Chapter 9

Legal Issues with a

New Business
 Learning Objectives

• Discuss the various legal forms of business to determine the best

design for a proposed new business.
• Explain the basics of contracts.
• Define the role of leases in the legal formation of the new business.
• List how laws, rules, and regulations benefit new businesses.
• Explain the importance of copyrights, trademarks, and patents to a
new business.
• Define the role that insurance plays in the risk portfolio of the new
business.
• Discuss how to develop an effective board of advisors or board of
directors.

© McGraw Hill 3
 Chapter Overview

The chapter examines the following legal issues:

• Forms of business.
• Contracts.
• Leases.
• Regulations, including licensing requirements.
• Copyrights, trademarks, and patents.
• Insurance.
• Board of advisors or directors.

© McGraw Hill 4
 Legal Forms of Business

• Sole proprietorship.
• Partnership, including both general and limited liability.
• Corporation: C, S, and limited liability company.

© McGraw Hill 5
 Sole Proprietorship 1

• Simplest form of business organization characterized by the fact that

the person who owns the business and the business itself are treated
as the same entity.
• Major benefit: Easy to form and dissolve.
• Disadvantages: Only one owner is allowed, there is liability for the
owners associated with it, and the value of the business is limited.
• Popular among individuals who are unsure, have a very small
business, and have a business with low costs and low risks.

© McGraw Hill 6
 Sole Proprietorship 2

• Many single-person businesses are set up as sole proprietorships.

• Do you know anyone who is a sole proprietor?
• Do you frequent any business that is a sole proprietorship?

© McGraw Hill 7
 Partnership

• Type of business formed between individuals directly.

• Includes both general and limited varieties.

© McGraw Hill 8
 General Partnership 1

Formed by two or more people.

Formation is simple but may require a partnership agreement specifying:

• Who is involved and each party's contributions.

• How profits, losses, and draws are to be treated.
• How one partner can buy out the others.
• How new partners are brought into the partnership.
• How disputes are to be settled.

© McGraw Hill 9
 Draw

Distribution of funds from the business.

Forms.
• Cash dispersion in advance of salary.
• Bonus.
• Expected year-end distribution.

© McGraw Hill 10
 General Partnership 2

Advantages.
• Owners report profits or losses on their personal income tax.
• Business expenses have some flow through to personal tax forms, but
the restrictions are significant.

Disadvantages.
• Partners are jointly liable for all debts incurred by the partnership.
• Partners have a responsibility to watch out for the best interests of
other partners.

© McGraw Hill 11
 Limited Liability Partnership (LLP)

Has at least two individuals who are partners in a venture.

Classes of partners.
• General partner: In an LLP, the individual considered the manager of
the firm, who, as such, has unlimited liability for any debts or
judgments against the firm.
• Limited partners who can work for the firm but cannot actively
manage.

Requirement: At least one partner must be the general partner.

© McGraw Hill 12
 Corporations

Viewed as separate entities.

• If a corporation suffers substantial losses, the founders will lose only
their investment in the business.

Common forms.
• S Corporation.
• C Corporation.
• Limited Liability Corporation (LLC).

© McGraw Hill 13
 Working for a Corporation

• Amazon’s corporate headquarters are in Seattle, Washington.

• What are the advantages of working for a corporation?

© McGraw Hill 14
 S Corporation

Organizational form that treats the firm as an entity separate from the
individuals.
• Allows the owners to treat the income as they would if the firm were a
sole proprietorship or a partnership.
• Has limitations in the number and type of shareholders.

© McGraw Hill 15
 S Corporation: Advantages

• Limited liability for owners.

• Potential to consolidate financial statements of business and personal
income for the tax benefit of the owners.
• Relatively easy formation compared with a C Corporation.
• Legitimacy in the market as a more established form of business.

© McGraw Hill 16
 S Corporation: Disadvantages

Formation process is cumbersome and expensive.

Limited number of shareholders, which is set at a maximum of 100

shareholders.
• Significant limitation for a company that wishes to go public.

© McGraw Hill 17
 C Corporation

• Organizational form that treats the firm as a unique entity responsible

for its own taxes.
• No limitations to shareholder participation.
• Owners are protected beyond their equity investment.

© McGraw Hill 18
 Requirements for S or C Corporation

• Corporate name.
• Location of the corporate headquarters.
• General nature of the business.
• Names, addresses, and titles of all founders.
• Time horizon for the firm’s existence.
• Authorized stock and capital.
• By-laws of the organization.

© McGraw Hill 19
 Limited Liability Corporation (LLC)

• Relatively new.
• Has limited liability feature.
• Allows more investors and other corporations to hold stock.
• May have as few as one member.
• Allows profits to be handled flexibly and owners to flow the profits
through to their personal returns to avoid double taxation.
• Has a low cost of formation.
• Limited by some states.

© McGraw Hill 20
 Contract

• Agreement between two parties to perform certain activities for some

consideration.
• Does not have to be written, but writing it is advisable.

© McGraw Hill 21
 Inclusions in Contracts

• Who the parties are in the contract.

• What each party agrees to do and for what consideration.
• When the transaction is to take place.
• Timing of payment.
• Timing of activities and length of the contract.
• Warranties.
• How the contract can be terminated.
• Whether the contract is transferrable.
• Which state’s laws apply if the firms are in different states.

© McGraw Hill 22
 Role of Leases

Issues to consider:

• What exactly is being leased?

• Can the lease be renewed?
• Who is responsible for improvements?
• Who is responsible for maintenance?
• Who carries liability insurance and at what level?
• Can the landlord enter your place of business?
• What are procedures for addressing or resolving problems?

© McGraw Hill 23
 Leases

• Are multidimensional and should be carefully crafted before signing.

• Prevent problems by investigating legal issues and employing experts
when needed.

© McGraw Hill 24
 How Laws, Rules, and Regulations Benefit New
Businesses

New small businesses deal with fewer regulations than established larger
businesses.

Some regulations apply regardless of size.

• Employer Identification Number.
• Payroll requirements.

Specific cities may have unique regulations.

Most locations have local information resources.

© McGraw Hill 25
 Americans with Disabilities Act (A D A)

• Specifies protections in business for those with disabilities.

• Applies to firms with more than 15 employees and in some
communities has been applied to all businesses.
• Requires that there be no discrimination in the hiring, management, or
dismissal of employees with disabilities.
• Businesses must make reasonable accommodation for people with
disability.
• Retail and office businesses must make their places of business
accessible to people with physical disabilities.
• Requirements of the law change and must be monitored constantly.

© McGraw Hill 26
 Food Regulations

• COVID-19 pandemic significantly increased public awareness

regarding food regulations and the safety of food manufacturing and
supply.
• How does this impact your business?

© McGraw Hill 27
 Examples of Licenses and Permits

• Business license.
• Local ABC, or Alcoholic Beverage Control, liquor license.
• Occupancy permits.
• Federal liquor license from the Bureau of Alcohol, Tobacco, Firearms,
and Explosives.
• Business license from the local city and county authorities.
• Sign permits.
• OSHA permits for food handling.
• Fire safety permit.

© McGraw Hill 28
 Copyright

• Legal means to protect intellectual property.

• Grants ownership on creative materials generated, such as books,
magazines, advertising copy, music, artwork, or virtually any other
creative product, whether published or unpublished.

© McGraw Hill 29
 Trademark

• Claim of intellectual property that is associated with a specific

business.
• May be the name of the firm, a symbol representing the firm, or the
names of its products.

© McGraw Hill 30
 Patent

• Claim of intellectual property that covers a specific innovation.

• Valid for 20 years from the point that it is filed.
• Currently granted on a “first to file” basis.
• Expensive to obtain and maintain.
• Types: Utility, design, and plant.
• Can be a potent entry barrier for a business.
• Only recognized in the countries where it is filed.

© McGraw Hill 31
 The Role of Insurance

Insurance is one way to limit liability concerns.

Basic types.
• Property insurance covers the building, fixtures, and inventory.
• Key concern: Whether the insurance covers replacement cost or only
current value.

• Coverage for fire, windstorms, hail, and smoke is standard.

• Special policies cover floods and earthquakes.

© McGraw Hill 32
 Other Forms of Insurance

Liability insurance.

• Covers lawsuits resulting from accidents.

• Product liability insurance is obtainable.

Bonding.

• Covers damage done by employees.

Workers’ compensation insurance.

• Covers liability for workers who are injured on the job.

• Can be a major expense.

© McGraw Hill 33
 Developing an Effective Board

Boards of advisors and boards of directors help the new

businessperson foresee potential legal liabilities.
• New business should have at least one of these entities that will
advise the founder.
• Corporations must have a board of directors.
• In new corporations, the shareholders and the board of directors are
often the same individuals.

© McGraw Hill 34
 Board of Advisors

Group formed at the discretion of the founders, regardless of the legal

form chosen, and composed of individuals outside the business who
advise the founders.

Advisors need to have experience in:

• Local licensing requirements.

• Industry regulations.
• New start-up experience and success.
• Financial and accounting background with new start-ups.
• Human resources experience, especially establishing personnel
criteria.

© McGraw Hill 35
 Chapter Review

New venture owners must:

• Be aware of and deal with regulations imposed by local, state, and

federal authorities.
• Obtain all relevant licenses.
• Be sufficiently savvy regarding the evaluation of contracts, leases, and
insurance.

Business must constantly monitor and be aware of their legal

environment and ensure they are addressing the legal requirements of all
levels of government even after the new business has opened.

© McGraw Hill 36
 End of Main Content

Because learning changes everything. ®

www.mheducation.com

Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.