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

© Mark T. Schenkel 1

Foundations of Entrepreneurship

Mark T. Schenkel, PhD Belmont University


Today’s Agenda

• Legal Representation in New Ventures

• Ownership Structures

• Other Legal Issues


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


Ownership Structures


Legal Forms

• Sole Proprietorship

• Partnership

• Corporation

Case 12.2: A Question of Incorporation


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)


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)


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


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


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


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!)


Non-profit Corporation

• Requires approval• Regulated• Limited scope of activity• Can fund raise• Some governmental funding limited to

non-profits


Other Legal Issues


Intellectual Property

• Patents

• Copyrights

• Trademarks

• Trade Secrets


Other Legal Issues . . .

• Licensing

• Product Liability

• Insurance

• Contracts (aka “tort”)


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.

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

Documents

business transferability

person business

small consulting business

public mark

structure mark

liable continuity of

basic filing fees

direct legal costs liability