Business Legal Structures

Learning Outcomes
• At the end of this session, students should be
able to:
• Choose a legal structure for your business.

• Explain how a business can be franchised.

• Understand the importance of

safeguarding a business idea.
 Business Legal Structures
• Many businesses, no matter how humble their
beginnings, have the potential to grow into much
larger ventures.
• It is important that founders think through every step
of the organization’s development as they form it.
• How the entrepreneur organizes the company—such
as the legal structure chosen, the relationships
developed with suppliers, the managers hired—will
have vital impact on its ability to grow.

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 Business Legal Structures
After you pick the kind of business and industry you
want to be in and you know where you fit in the
production-distribution chain, you will also have to
choose one of the three basic legal structures:
1. sole
proprietorshi 2. partnership 3. corporation
p

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 Business Legal Structures
sole proprietorship - a business owned by one person
who has unlimited liability and unlimited rights to profits.
• This owner earns all the profits from the business and
is also responsible for all losses.
• The sole proprietor is personally liable for any lawsuits
that arise from accidents, faulty merchandise, unpaid
bills, or other business setbacks.
• This means a sole proprietor could lose not only
business assets in a lawsuit but could be forced to sell
private possessions to satisfy a court judgment.
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Advantages of a Sole Proprietorship

Ease of start

Simplicity of registration

Fewer government regulations

Rapid decision making

Greater rights to profits

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Disadvantages of a Sole Proprietorship

Difficult fund raising

Significant time obligations and responsibility

Unlimited personal liability

Lack of emotional support

Taxation of profits

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 How to Register a Sole Proprietorship
• In most states and localities, it is easy and relatively
inexpensive to register a sole proprietorship.
• When you do, you will have a legal business, which is
important for several reasons:
- If you operate a business without registering it, you may
be liable to civil or even criminal penalties.
- Registered sole proprietorships can use the court system
and bring Lawsuits.
- Banks want to see legal business ownership the way
employers like to see that employees have had previous
work experience.

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 Steps to Registering
The registration process varies from state to
state and by locality, but there will be a few
common steps:
• Choose a name for your business.
• Fill out a registration form.
• An official may then conduct a name search,
to make sure the name you have chosen is not
already being used in that jurisdiction.

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 Steps to Registering
• Once your registration is completed satisfactorily, you
will pay the required fee.
• You may be asked to take the form to a notary, an
individual who has been given the authority by the
state to witness the signing of documents, to have it
notarized and then brought back to the registration
office.
notary - a person who has been authorized by the state
to witness the signing of documents.

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Inc.
 Partnership
partnership - a business with two or more owners
that make decisions for the business together and
share the profits, losses, assets, and liabilities.
limited partnership - business partnership
wherein there is a general partner with unlimited
liability, and one or more limited partners with no
official input in daily operations, and limited
liability.

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 Partnership
• As in a sole proprietorship,
partners face unlimited liability in
any lawsuits.
• This means that each partner can
be held responsible for paying
debts or judgments, even those
incurred by other partners without
their knowledge or agreement.
• One or more general partners
manage the company and assume
legal liability.
• There must be at least one general
partner who will be liable for all
partnership debts.

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 Patents/Trademarks/Copyrights
• Patent-grants holder protection from others
making, using, or selling similar idea.

• Trademark- a distinguishing word, name, or symbol

used to identify a product or service.

• Copyright-right given to prevent, copying, or

publishing any original works of authorship.
 Licensing/Safety and Liability
• Licensing-Contractual agreement giving rights
to others to use intellectual property in return
for a royalty or fee.
• Safety and Liability- Responsibility of a business
to meet any legal specifications regarding a new
product covered by the consumer health and
safety.
• Business Insurance- to cover for all apcts of the
business opearation.
 Taxation
• Value Added Tax (VAT)- turnover above stated
threshold must either register for VAT or
charge VAT on all goods and services.
• Corporation Tax – legally entitled to avoid
taxes but illegal to evade paying taxes.
• Income tax for sole traders and partnerships
 Franchising
• Franchising:
– A system in which semi-independent
business owners (franchisees) pay fees and
royalties to a parent company (franchiser) in
return for the right to become identified
with its trademark, to sell its products or
services, and often to use its business
format and system.
 Franchising Basics
• Franchisee gets the right to use all of the
elements of a fully integrated business
operation.
• Essence of what franchisees purchase from
the franchisors: Experience.
• Key Question: “What can a franchise do for
me that I cannot do for myself?”
 Types of Franchising
• Trade-Name:
– A franchisee purchases the right to use the franchisor’s trade name
without distributing particular products exclusively under the
franchisor’s name.
• Product Distribution:
– A franchisor licenses a franchisee to sell its products
under the franchisor’s brand name and trademark
through a selective, limited distribution network.
• Pure:
– A franchisor sells a franchisee a complete business format and system.
 Benefits of Franchising
• A business system
• Management training and support
– Start-up
– Ongoing
• Brand name appeal
– “Cloning”
• Standardized quality of goods and services
 Benefits of Franchising (2 of 3)
• National advertising programs
– Franchisees contribute 1% to 5% of sales.
• Financial assistance
– About 20% of franchisors offer direct financial assistance
to franchisees.
 Franchising and the Law
• Franchise Disclosure Document (FDD)
– Established in 2008 to replace the Uniform Franchise
Offering Circular (UFOC)
– Requires franchisors to disclose to potential franchisees
information on 23 important topics
– Objective: To give franchisees the information they need to
protect themselves from dishonest franchisees and to
make good investment decisions.
• Joint Employer Liability
– Browning-Ferris Industries (BFI) decision
 Franchising and the Law
• Part of the process of franchising a business
will be to create a franchise agreement, which
is the contract between the franchisor and
franchisee.
• This contract establishes the standards that
assure uniformity of product (or service)
throughout the franchise chain
 Bibliography
Mariotti, S. and Glackin, C. (2016)
Entrepreneurship: Starting and Operating A
Small Business,GlobalEdition
http://catalogue.pearsoned.co.uk/educator/pro
duct/Entrepreneurship-Starting-and-Operating-
A-Small-Business-Global-Edition/
9781292097411.page#sthash.aYMoG2T9.dpuf
 Bibliography
• Mariotti, S. and Glackin, C. (2016) Entrepreneurship: Starting and Operating
a Small Business, Global Edition. 4th ed. Person Education. Upper Saddle
River, N.J.
Issues
Issues that articles of partnership should address
Your Business Response

The name of the partnership

The purpose of the business

The domicile
/location of the business

The duration of the partnership

The partners and their legal addresses

An agreement on how the profits (or losses) of the partnership will be distributed.

Sale of partnership interest

Absence or disability of one of the partners

 In your group, list some behaviours that are almost
certain to destroy a partnership.
1.

2.

3.

4.

5.

6.

7.

8.

9.

10.
 Lists of the behaviours that are almost certain to destroy
a partnership.
 Lack of follow through the agreed division of partner responsibilities and duties.

 Lack of communication — talking and listening.

 Lack of mutual respect.

 Misuse of company funds and resources.

 Dishonesty and actions that lead to mistrust.

 Conflicting behavior when interacting with people — employees and customers.

 Divergent behaviors regarding the management of business finances

 Lists of the behaviors that are almost certain to
destroy a partnership
 Determine what may help manage stressful or conflict-oriented situations to help manage those situations as
they arise.

 A common vision of what the venture is to become with a shared work ethic.
.
 Establish clear guidelines regarding what each partner will invest in the relationship, from a financial and time
perspective.

 Talk through possible “what if” scenarios to share the ideas and problem-solving skills of each partner.

 A common and clear vision for the venture.

Advantages of a franchisee or franchisor
Advantages Franchisee Franchisor
 Disadvantages of a franchisee or
franchisor
Disdvantages Franchisee Franchisor
 Business Idea Pitch Due On 03/03/2013

• Introduction: Group and the business idea. (10%)

• Me- (Attractiveness of the idea) – idea solution to problem statement,

problem statement, partner’s goal motivation and experience of partners,
start-up logo. (30%)

• Market- Belief that market exist (demand), the target market, the
competitors, social networks, and the start-up. (30%)

• Money- Resources available and required, partners contribution to the

business. (20%)

• Presentation: Coherent, confidence and appropriateness of visual aids.

(10%)