Saturday, October 20, 2018

Preparing the Proper Ethical and Legal Foundation




What do we learn?

a.     Actions founders can take to establish a strong ethical culture.
Ø  Establishing a Strong Ethical Culture for a Firm

·         establish a strong ethical culture for their firms
·         Strong ethical cultures don’t emerge by themselves but it takes entreprenurs who make ethics a priority and organizational policies and procedures that encourage ethical behaviour to make it happen
Ø  Establish a code of conduct
·         A formal statement of an organization’s values on certain ethical and social issues.
·         The advantage of having a code of conduct is that it provides specific guidance to entrepreneurs.

Ø  Implement an ethics training program
·         employees deal with ethical dilemmas and improve their overall ethical conduct.
·         An ethical dilemmma is a situation that involves doing something that is beneficial to oneself or the organization, but maybe unethical.
·        ethical cultures are built through both strong ethical leadership and administrative tools that reinforce and govern ethical behaviour in organization

b.    Describe effective actions taken to deal with legal issues.
Ø   Choosing an Attorney for a Firm
·         Important for an entrepreneur to select an attorney as early as possible when developing a business venture.
·         Selecting an attorney was instrumental in helping tempered mind.
Ø  Drafting a Founders’ Agreement
·         An important issues addressed by most founders’ agreements is what happens to the equity of founder if the founder dies or decides to leave the firm. Most founders’ agreements include a buyback clause, which legally obligates departing founders to sell to the remaining founders their interest in the firm if the remaining founders are interested.
Ø  Avoiding legal disputes
·         Are the result of misunderstandings, sloppiness, or a simple lack of knowledge of the law.
·         several steps entrepreneur can take to avoid legal disputes and complications;
§  Meet all contractual obligations: includes paying vendors, contractors, and employees as agreed and delivering goods or services as promised.
§  Avoid undercapitalizations: should raise the money it needs to effectively conduct business.
§  Get everything in writing: much easier to resolve if the rights and obligations of the parties involved are in writing.
§  Set standards: set the standards that govern employees behaviours beyond what can be expressed via code of conduct.


c.      Overview of the business licenses and permits that start-up must obtain.
Ø  Federal Licenses and Permits
·         Most business do not require a federal license to operate.
Ø  State Licenses and Permits
·         Business Registration Requirements: register the business. Second, place the business on the radar screen of the tax authorities, and last, make sure the business is aware of and complies with certain regulation.
·         Sales tax permits: must get a permit from the state.
·         Profesional and Occupational licenses and permits: there are laws that require people in certain professions to pass a state examination and maintain a professional license to conduct business.
Ø  Local Licenses and Permits
·         Building permit: typically required if you are constructing or modifying your place business.
·         Health permit: normally required if you are involving in preparing or selling food.
·         Signage permit: may be required to erect sign.
·         Street vendor permit:  may be required for anyone wanting to sell food or merchandize in city street.
·         Sidewalk cafe permit: maybe requiired if tables and chairs are placed in a city right of way.
·         Alarm permit: required when you install a burglar or fire alarm.
·         Fire permit :may be required if a business sells or stores highly flammable material or hadnles hazardous substances.

d.    Identify the different forms of organization available to new firms.
Ø  The major differences among sole propietorships, partnerships, corporations, and limited liability companies are the most common legal entities from which entrepreneurs make a choice.
Ø  Choosing a legal entity is not a one-time event. As a business grows and matures, it is necessary to periodically review wether the current form of business organization remains appropriate.
Ø  4 legal entities:


1.      Propiertorship
·         Form of business organization involving one person, and the person and the business are essentially the same.
·         Advantage of a sole propiertorship :
§  Creating one is easy and inexpensive
§  The owner maintains complete control of the business and retains all the profits.
§  Business losses can be deducted against the sole propiertors’ other sources of income
§  It is not subject to double taxation
§  The business is easy to dissolve
·         Disadvantages of a sole propiertorship :
§  Liability on the owner’s part is unlimited
§  The business relies on the skills and abilities of a single owner to be succesfull.
§  Raising capital can be difficult
§  The business ends at the owner’s death or loss interest in the business
§  The liquidity of the owner’s investment is low.
2.      General Partnerships
·         A form of business organization where two or more people pool  their skills, abilities, and resources to run a business.
·         Advantage of general partnerships:
§  Creating one is relatively easy and inexpensive to a corporation or limited liability companies.
§  The skills and abilities of more than one individual are available to the firm.
§  Having more than one individual are available to the firm
§  Having more than one owner may take it easier to raise funds
§  Business losses can be deducted against the partners’ other sources of income.
§  It is not subject to double taxation
·         Disadvantages :
§  Liability on the part of each general partner is unlimited.
§  The business relies on the skills and abilities of fixed number of partners.
§  Raising capital can be difficult.
§  Because the decision making among partners is hsared, disagreements can occur.
§  The liquidity of each partner’s investment is low.
3.      Corporations
·         A seperate legal entity organized under the authority of a state. Corporations are organized as either C corporations or subschpter S corporations.
·         C corporations is a seperate legal entity that, in the eyes of the law, is seperate from its owners.
·         Advantage of corporations:
§  Owners are liable only for debts and obligation od the corporation up to the amount of their investment.
§  The mechanics of raising capital is easier.
§  No restriction exist on the number of shareholders, which differs from subschapter S corporations.
§  Stock is liquid if traded on a major stock exchange.
§  The ability to share stock with employees throug stock option or other incentive plans can be a powerful form employee motivation.
·         Disadvantage of corporations :
§  Setting up and maintaining one is more difficult than for a sole propietorship or partnership.
§  Business losses cannot be deducted against the shareholders other sources of income.
§  Income is subject to double taxation, meaning that is taxed at the corporate and the shareholder levels.
§  Small shareholder typically have little voice in the management.
·         Subschapter S corporation: combine the advantage of a partnership and a C corporation. T
·         he subschapter S corporation does not pay taxes: instead, the profit or losses of the business are passed through to the individual tax returns of the owners.
4.      Limited Liability Company
·         A form of business organization that is rapidly gaining popularity in the United States.
·         Advantages of 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 propietor, partnership, S corporation or corporation, providing much flexibility.
§  Because profits are taxed only at shareholder level, there is no double taxation.
·         Disadvatage of limited liability company:
§  Setting up and maintaing one is more difficlut and expensive.
§  Tax accounting can be complicated.
§  Some of the regulations governing LLCs vary by state.
§  Because LLCs are relatively new type of business entity, there is not as legal precedent available.

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