ENTREPRENEURSHIP A PROCESS PERSPECTIVE Robert A. Baron Scott A. Shane A. Rebecca Reuber Slides Prepared by: Sandra Malach, University of Calgary Copyright © 2008 by Nelson, a.
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Transcript ENTREPRENEURSHIP A PROCESS PERSPECTIVE Robert A. Baron Scott A. Shane A. Rebecca Reuber Slides Prepared by: Sandra Malach, University of Calgary Copyright © 2008 by Nelson, a.
ENTREPRENEURSHIP
A PROCESS PERSPECTIVE
Robert A. Baron
Scott A. Shane
A. Rebecca Reuber
Slides Prepared by:
Sandra Malach, University of Calgary
Copyright © 2008 by Nelson, a division of Thomson Canada Limited
1
9
THE LEGAL FORMS AND
LEGAL ENVIRONMENTS OF
NEW VENTURES
LEARNING OBJECTIVES
1.
2.
3.
Describe the major forms of business ownership—
sole proprietorship, partnerships, corporations—and
explain the advantages and disadvantages of each.
Define franchising and describe the advantages and
disadvantages of becoming a franchisee.
Describe the legal principles governing franchise
agreements and the information disclosure that
potential franchisees should insist upon.
Copyright © 2008 by Nelson, a division of Thomson Canada Limited
LEARNING OBJECTIVES
4.
5.
6.
Describe current trends in franchising, such as
smaller outlets in nontraditional locations, cobranding franchising, and international franchising.
Describe the basic components of business
contracts, and explain what happens if these
obligations are not met.
Describe the basic components of a risk
management strategy and how you might go about
selecting a lawyer.
Copyright © 2008 by Nelson, a division of Thomson Canada Limited
“The business of the law is to make sense
of the confusion of what we call human
life—to reduce it to order but at the
same time to give it possibility, scope,
even dignity.”
--Archibald MacLeish, 1978
Copyright © 2008 by Nelson, a division of Thomson Canada Limited
SOLE PROPRIETORSHIP
A business is owned and
managed by one individual.
Almost all of these are small
companies.
Low costs involved
Owner has total control
Copyright © 2008 by Nelson, a division of Thomson Canada Limited
CHARACTERISTICS OF
SOLE PROPRIETORSHIP
Register only if business name is
different than yours.
Unlimited personal liability
Revenue and expenses are taxed
personally
No shares to sell to investors
Financial institutions may be reluctant
to assume risk of a loan
Copyright © 2008 by Nelson, a division of Thomson Canada Limited
PARTNERSHIPS
Two or more people who do
business together for the
purpose of making a profit.
Terms are spelled out in a
Partnership Agreement or
subject to the Partnership Act
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PARTNERSHIP ACT
Each partner has a right to
Share in management and operations
Share in profits
Receive interest on advances
Receive compensation for expenses
Have access to books and records
Receive formal accounting of affairs
Copyright © 2008 by Nelson, a division of Thomson Canada Limited
PARTNERSHIP ACT
Each partner is obligated to
Share in losses
Work without salary
Important matters must be voted upon
Give complete information about
business activities
Provide formal accounting of business
activities
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PARTNERSHIP ADVANTAGES
High level of flexibility (re: equity and
profit sharing)
Partners bring complementary skills
Pool of financial resources is expanded
Income or losses are passed through to
partners
Copyright © 2008 by Nelson, a division of Thomson Canada Limited
PARTNERSHIP
DISADVANTAGES
Unlimited liability
Difficult to continue if one partner is
unable to participate
Can’t sell shares; may experience
difficulties raising capital
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LIMITED PARTNERSHIPS
General partners
Manage the business
Have unlimited liability
Limited partners
Invest but forego right to manage
Share in the profits according to the limited
partnership agreement
Have limited liability
Copyright © 2008 by Nelson, a division of Thomson Canada Limited
LIMITED LIABILITY
PARTNERSHIP
Available to professionals for whom it is
illegal to incorporate
Partners have liability for their own
negligence but not for that of their
partners.
Copyright © 2008 by Nelson, a division of Thomson Canada Limited
“Corporation: An ingenious device for
obtaining individual profit without
individual responsibility.”
--Ambrose Bierce, 1881
Copyright © 2008 by Nelson, a division of Thomson Canada Limited
CORPORATION
Separate legal entity apart from owners
May engage in business, make contracts,
own property, pay taxes, and sue and be
sued
Limited liability
Shareholders’ liability is limited to the
amount of their investment
Statutory exceptions for directors & officers
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CREATING A CORPORATION
Registration
Articles of incorporation
Shareholders elect directors
Directors appoint corporate officers
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ADVANTAGES OF
CORPORATIONS
Limited liability for shareholders
Continue beyond lives of founders
Increased ability to attract capital
Shares may be transferable
Liquidity can be very high in a publicly
traded company
Copyright © 2008 by Nelson, a division of Thomson Canada Limited
DISADVANTAGES OF
CORPORATIONS
Complex and expensive to start
Profits may be subject to double taxation
Subject to legal and financial requirements
File Annual Returns
Hold annual meetings
Consult with board
File reports with Securities Commission (public
companies)
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FRANCHISING
Independent business owners (franchisees) pay
fees and royalties to a parent company
(franchisor) in return for the right to
Use its trademark
Sell its products or services
Use the business model
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CANADIAN FRANCHISES
Canada constitutes the world’s second
most developed franchise market.
Franchises account for more than $70
billion in annual sales.
950 franchisors operate more than
85,000 separate outlets.
85% of these outlets are located in
Ontario, Quebec, and British Columbia.
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BENEFITS OF FRANCHISING
Training and support
Standardized products and services
National advertising
Buying power
Financial assistance
Site selection and territorial protection
Proven business model
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DRAWBACKS OF
FRANCHISING
Fees and royalties
Enforced standardization
Restricted freedom over purchasing and
product lines
Risk of poor training programs
Market saturation
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LEGAL ASPECTS OF
FRANCHISING
The relationship between a franchisor
and a franchisee is contractual.
In Ontario and Alberta there is specific
franchise legislation.
Legislation mandates disclosure by the
Franchisor to the Franchisee.
Copyright © 2008 by Nelson, a division of Thomson Canada Limited
TRENDS IN FRANCHISING
Smaller outlets in nontraditional
locations
Co-branding franchise
International franchising
Different of types of businesses being
franchised
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BUSINESS CONTRACTS
Promises that are enforceable by law
Contract law—body of laws designed to
assure that parties entering into contracts
comply with their provisions
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ELEMENTS OF A CONTRACT
Legality
Agreement
Consideration
Offer & Acceptance
Something of value must be exchanged
Capacity
Exceptions are minors & those with
diminished mental ability.
Copyright © 2008 by Nelson, a division of Thomson Canada Limited
CONTRACTS IN WRITING
Most contracts do not have to be written
Exceptions:
Sale of real estate or lease greater than 3 years
Paying someone else’s debt
Contracts that have a set term exceeding one year
Contracts that involve the sale of goods that
exceeds the value in the provincial Sales of Goods
Act.
Copyright © 2008 by Nelson, a division of Thomson Canada Limited
ELEMENTS OF A CONTRACT
Legality—intended to accomplish a legal
purpose
Agreement—includes a legitimate offer
and acceptance
Consideration—some of value must be
exchanged
Capacity—persons must have capacity
to enter into agreement
Copyright © 2008 by Nelson, a division of Thomson Canada Limited
OBLIGATIONS UNDER
CONTRACTS
Breach of contract may result in
Compensatory damages
Specific performance
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RISK MANAGEMENT
1. Identify the legal risks
2. Assess the probability and severity of
a loss associated with each risk
3. Implement measures to minimize their
exposure to a risk
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MINIMIZING RISK EXPOSURE
Avoid the Risk
Use tactics to reduce the probability or
severity of a loss.
Avoid business in certain countries
Training and quality control
Transfer Risk
Contracts
Insurance
Copyright © 2008 by Nelson, a division of Thomson Canada Limited