Part IV – Initiating

Entrepreneurial Ventures
Chapter 11 – Assessment and Evaluation of
Entrepreneurial Opportunities
Chapter 12 – Legal Structures for New
Business Ventures
Chapter 13 – Legal Issues Related to
Emerging Ventures
Chapter 14 – Sources of Capital for
Entrepreneurs

Copyright (c) 2004 by South-Western, a division of Thomson Learning. All rights reserved.
Chapter 12 – Legal Structures
For New Business
Ventures
 Sole Proprietorships
A sole proprietorship is a business
that is owned and operated by
one person. The enterprise has
no existence apart from its
owner.
 Advantages
• Ease of formation
• Sole ownership of profits
• Decision making and control vested in one
owner
• Flexibility
• Relative freedom from governmental control
• Freedom from corporate business taxes
 Disadvantages
• Unlimited liability
• Lack of continuity
• Less available capital
• Relative difficulty obtaining long-term
financing
• Relatively limited viewpoint and experience
 Partnerships
• A partnership is an association of two or
more persons acting as co-owners of a
business for profit.
• The Uniform Partnership Act is generally
followed by most states as the guide for legal
requirements in forming partnerships.
• The articles of partnership clearly outline the
financial and managerial contributions of the
partners and carefully delineate the roles in
the partnership relationship.
 Advantages
• Ease of formation
• Direct rewards
• Growth and performance facilitated
• Flexibility
• Relative freedom from governmental control
and regulation
• Possible tax advantage
 Disadvantages
• Unlimited liability of at least one partner
• Lack of continuity
• Relative difficulty obtaining large sums of
capital
• Bound by the acts of just one partner
• Difficulty of disposing of partnership interest
 Factors Associated with Partnership
Success
Partnership Attributes
•Commitment
•Coordination
•Interdependence
•Trust

Communication Behavior Partnership Success

•Quality •Satisfaction
•Information Sharing •Dyadic Sales
•Participation

Conflict Resolution Techniques

•Joint Problem •Domination
Solving •Harsh Words
•Persuasion •Arbitration
•Smoothing
 Corporations
• A corporation is “an artificial being, invisible,
intangible, and existing only in contemplation
of the law”*. As such, a corporation is a
separate legal entity apart from the
individuals who own it.

*Supreme Court Justice John Marshall

 Advantages
• Limited liability
• Transfer of ownership
• Unlimited life
• Relative ease of securing capital in large
amounts
• Increased ability and expertise
 Disadvantages
• Activity restrictions
• Lack of representation
• Regulation
• Organizing expenses
• Double taxation
Specific Forms of
Partnerships and
Corporations
 Limited Partnerships
• Permits capital investment without
responsibility for management and without
liability for losses beyond the initial
investment.
• Limited partnerships are governed by the
Uniform Limited Partnerships Act (ULPA).
 Limited Liability Partnerships
• The limited liability partnership (LLP) is a
relatively new form of partnership that allows
professionals the tax benefits of a partnership
while avoiding personal liability for the
malpractice of other partners.
 S Corporations
• Formerly termed a Subchapter S corporation,
the S corporation takes its name from
Subchapter S of the Internal Revenue Code,
under which a business can seek to avoid the
imposition of income taxes at the corporate
level yet retain some of the benefits of a
corporate form (especially the limited
liability).
• Commonly known as a “tax option
corporation,” an S corporation is taxed
similarly to a partnership.
 Limited Liability Companies
• The LLC is a hybrid form of business
enterprise that offers the limited liability of a
corporation but the tax advantages of a
partnership.
• Perhaps the greatest disadvantage is that LLC
statutes differ from state to state, and thus any
firm engaged in multistate operations may
face difficulties.
 Other Corporation Classifications
• Domestic and Foreign Corporations
• Public and Private Corporations
• Nonprofit Corporations
• Professional Corporations
• Close Corporations
 Franchising
• A franchise is any arrangement in which the
owner of a trademark, trade name, or
copyright has licensed others to use it in
selling goods or services. A franchisee (a
purchaser of a franchise) is generally legally
independent but economically dependent on
the integrated business system of the
franchisor (the seller of the franchise).
 Advantages
• Training and guidance
• Brand-name appeal
• A proven track record
• Financial assistance
 Disadvantages
• Franchise fees
• Franchisor control
• Unfulfilled promises
 The Costs of Franchising
1. The Basic Franchise Fee
2. Insurance
3. Opening Product Inventory
4. Remodeling and Leasehold Improvements
5. Utility Charges
6. Payroll
7. Debt Service
8. Bookkeeping and Accounting Fees
9. Legal and Professional Fees
10. State and Local Licenses, Permits, and Certificates
 Franchise Law: The Uniform
Franchise Offering Circular
(UFOC)
The UFOC is divided into 23 items
that provide different segments of
information for prospective
franchisees.