JWI 575 New Business Ventures & Entrepreneurship, Week7 summary, 8/18/13
This was another excellent week of learning again. I never really thought about the legal aspect of creating a business this deeply until now. I now understand clearly the critical importance of choosing the right legal structure at the very beginning of the venture itself.
After creating the mission, vision, values and strategy for the company, the structure of the firm should be chosen. The right legal form of the business depends on the short-term and long-term needs and goals of the firm (Kaplan & Warren, 2010). Due consideration should be given to the tax laws and cash flow needs of to arrive at the best fit for the legal structure of the company.
Additionally, legal contracts such as Non-Disclosure Agreements, Employment Agreements and Stock Option Agreements (JWI 575, W7L1) are key to enter into proper contracts with employees and create a cohesive and motivated work force. Great people decisions are vital especially in finding competent lawyers and accountants who need to stay ahead and abreast of the changes in laws. To stay on top of the legal issues and ensure compliance with state, federal and international laws a comprehensive checklist (Kaplan & Warren, 2010, pp 144-147) should be used.
Detailed takeaways below
Dr DP
Reference
JWI 575 New Business Ventures & Entrepreneurship, Week7 summary, 8/18/13
I. Choose the legal structure that fits the needs of the company
There are five legal forms of business - the best fit depends on needs of the company
Depending on the short term and long term needs of the company, five legal forms of the business can be considered namely sole proprietorship, C-corporation, S-corporation, Partnership or Limited Liability Company (LLC).
A sole proprietorship is the simplest form of business in which a single owner does business himself or herself. It is easy to set up and involves low start-up fees. The owner gets all the profits and retains total decision-making authority. However disadvantages include unlimited personal liability, limited skills and capabilities of the sole owner, limited access to capital from lending institutions and the lack of continuity for the business when the owner dies or becomes incapacitated.
The C-corporation is the most common form of business ownership and is preferable especially for early-stage companies that are looking to raise capital. The corporation in this case is a separate legal entity apart from its owners and may engage in business, issue contracts, sue and be sued, and pay taxes. Stockholders own the company, a board of directors drives the overall operation of the company, and officers such as the President, CEO and Vice Presidents manage and lead the day to day operations of the company. This form of business provides the most flexible structures for various rounds of private equity investments and venture capitalists demand this for of incorporation.
Advantages of a C-corporation form of business include limited liability of the stockholders, ability to attract capital, ability to continue indefinitely without depending on a single individual or a group of individuals, transferable ownership and a wide base of skills, expertise and knowledge of the employees, officers and the board of directors. Disadvantages of a C-corporation include cost and time involved in the incorporation process, double taxation wherein corporations are taxed on the profits while shareholders who receive dividends also pay tax, high administration and compliance costs.
The S-corporation elects to avoid corporate income tax and gets tax benefits by being a domestic company with only one class of stock which is owned by individuals and certain trusts. Shareholders pay the taxes directly and cannot be nonresident aliens and a maximum of 100 shareholders are allowed. Stringent rules are to be followed to maintain the S-corporation status and there are administrative and cost burdens as well. S-corporation may be beneficial for startup companies that anticipate net losses or highly profitable firms with substantial dividends to payout to shareholders.
A Partnership is defined an association of two or more people carrying on as co-owners of a business for profit. It is easy to establish and benefits from the complementary skills of the partners. Profits can be divided among the partners and each partner's asset base improves the ability of the business to borrow needed funds. So long as there is one general partner who will face unlimited liability, partners with limited liability can come together. As the partnership can react quickly and creatively to changing market conditions new opportunities can be swiftly seized. Like sole proprietorship, a partnership company can avoid double taxation. Consulting groups such as BCG or McKinsey are examples of parternships. Challenges with this form of business is unlimited liability for one partner, inability to attract capital, restrictions of continuity or elimination of general partnership and the potential for personality and authority conflicts.
An LLC is a blend of some of the best characteristics of corporations, partnerships and sole proprietorships. It is a separate legal entity like a corporation but it is entitled to be treated as either a sole proprietorship or a partnership for tax purposes. The owners do not assume liabilities for debt and may offer different classes of memberships and there are no restrictions on the number and types of owners. However there may be difficulties in expanding the business out of state or in transferring the ownership. Requirements may vary by state.
II. Legal contracts - NDA, EA, SOA
Nondisclosure agreements, employment agreements and stock option agreements (JWI 575, W7L1) are key to enter into proper contracts with employees. Nondisclosure agreements help to protect company secrets. Employment agreements spell out the terms under which intellectual property is developed by employees within the company and ultimately owned by the company. Such agreements also clarify grounds under which employment can be terminated. Stock options offer a great way to align the growth of a company with incentives for employees. By sharing the wealth created, a company can motivate long term commitment from its work force.
This was another excellent week of learning again. I never really thought about the legal aspect of creating a business this deeply until now. I now understand clearly the critical importance of choosing the right legal structure at the very beginning of the venture itself.
After creating the mission, vision, values and strategy for the company, the structure of the firm should be chosen. The right legal form of the business depends on the short-term and long-term needs and goals of the firm (Kaplan & Warren, 2010). Due consideration should be given to the tax laws and cash flow needs of to arrive at the best fit for the legal structure of the company.
Additionally, legal contracts such as Non-Disclosure Agreements, Employment Agreements and Stock Option Agreements (JWI 575, W7L1) are key to enter into proper contracts with employees and create a cohesive and motivated work force. Great people decisions are vital especially in finding competent lawyers and accountants who need to stay ahead and abreast of the changes in laws. To stay on top of the legal issues and ensure compliance with state, federal and international laws a comprehensive checklist (Kaplan & Warren, 2010, pp 144-147) should be used.
Detailed takeaways below
Dr DP
Reference
Kaplan, J. & Warren, A. (2010).
Patterns in Entrepreneurship Management. Third Edition. John Wiley & Sons, Inc.
JWI 575 New Business Ventures & Entrepreneurship, Week7 summary, 8/18/13
I. Choose the legal structure that fits the needs of the company
There are five legal forms of business - the best fit depends on needs of the company
Depending on the short term and long term needs of the company, five legal forms of the business can be considered namely sole proprietorship, C-corporation, S-corporation, Partnership or Limited Liability Company (LLC).
A sole proprietorship is the simplest form of business in which a single owner does business himself or herself. It is easy to set up and involves low start-up fees. The owner gets all the profits and retains total decision-making authority. However disadvantages include unlimited personal liability, limited skills and capabilities of the sole owner, limited access to capital from lending institutions and the lack of continuity for the business when the owner dies or becomes incapacitated.
The C-corporation is the most common form of business ownership and is preferable especially for early-stage companies that are looking to raise capital. The corporation in this case is a separate legal entity apart from its owners and may engage in business, issue contracts, sue and be sued, and pay taxes. Stockholders own the company, a board of directors drives the overall operation of the company, and officers such as the President, CEO and Vice Presidents manage and lead the day to day operations of the company. This form of business provides the most flexible structures for various rounds of private equity investments and venture capitalists demand this for of incorporation.
Advantages of a C-corporation form of business include limited liability of the stockholders, ability to attract capital, ability to continue indefinitely without depending on a single individual or a group of individuals, transferable ownership and a wide base of skills, expertise and knowledge of the employees, officers and the board of directors. Disadvantages of a C-corporation include cost and time involved in the incorporation process, double taxation wherein corporations are taxed on the profits while shareholders who receive dividends also pay tax, high administration and compliance costs.
The S-corporation elects to avoid corporate income tax and gets tax benefits by being a domestic company with only one class of stock which is owned by individuals and certain trusts. Shareholders pay the taxes directly and cannot be nonresident aliens and a maximum of 100 shareholders are allowed. Stringent rules are to be followed to maintain the S-corporation status and there are administrative and cost burdens as well. S-corporation may be beneficial for startup companies that anticipate net losses or highly profitable firms with substantial dividends to payout to shareholders.
A Partnership is defined an association of two or more people carrying on as co-owners of a business for profit. It is easy to establish and benefits from the complementary skills of the partners. Profits can be divided among the partners and each partner's asset base improves the ability of the business to borrow needed funds. So long as there is one general partner who will face unlimited liability, partners with limited liability can come together. As the partnership can react quickly and creatively to changing market conditions new opportunities can be swiftly seized. Like sole proprietorship, a partnership company can avoid double taxation. Consulting groups such as BCG or McKinsey are examples of parternships. Challenges with this form of business is unlimited liability for one partner, inability to attract capital, restrictions of continuity or elimination of general partnership and the potential for personality and authority conflicts.
An LLC is a blend of some of the best characteristics of corporations, partnerships and sole proprietorships. It is a separate legal entity like a corporation but it is entitled to be treated as either a sole proprietorship or a partnership for tax purposes. The owners do not assume liabilities for debt and may offer different classes of memberships and there are no restrictions on the number and types of owners. However there may be difficulties in expanding the business out of state or in transferring the ownership. Requirements may vary by state.
II. Legal contracts - NDA, EA, SOA
Nondisclosure agreements, employment agreements and stock option agreements (JWI 575, W7L1) are key to enter into proper contracts with employees. Nondisclosure agreements help to protect company secrets. Employment agreements spell out the terms under which intellectual property is developed by employees within the company and ultimately owned by the company. Such agreements also clarify grounds under which employment can be terminated. Stock options offer a great way to align the growth of a company with incentives for employees. By sharing the wealth created, a company can motivate long term commitment from its work force.
No comments:
Post a Comment