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FIN510 - Chapter #3.docx

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Ryerson University
ECN 204
Christopher Gore

Chapter #3 – Financing and Organizing a New Venture Organization ­ An entrepreneur is usually unable to perform all business functions by himself/herself ­ If more than one person is involved in an enterprise, this constitutes an organization o a social group which distributes tasks for a collective goal. ­ Organizations operate according to known principles (take an organization theory class) ­ This lecture is about setting up a new business organization Forms of Business Organization ­ Sole Proprietorships ­ Partnerships o General o Limited ­ Corporations o C corporations o S (or Subchapter S) corporations ­ Limited Liability Companies (LLCs) EXAMPLE: Phil Young, founder of the Pedal Pushers Company, has developed several prototypes of a pedal replacement for children’s bicycles. The Pedal Pusher will replace existing bicycle pedals with an easy release stirrup to help smaller children hold their feet on the pedals. The Pedal Pusher will glow in the dark and will provide a musical sound as the bicycle is pedaled. Solution: • Capital intensity of production: low • Required investment: not much • If Phil wants easy set up: sole proprietorship • If Phil wants to limit liability: S corporation Proprietorships ­ Proprietorship: business venture owned by an individual who is personally liable for the venture’s liabilities ­ The primary advantage of a proprietorship is that it allows an entrepreneur to conduct the full range of business activities with almost no additional expense to the organization ­ Unlimited liability: personal obligation to pay a venture’s liabilities not covered by the venture’s assets which is a drawback ­ the only source of equity capital is owner’s funds ­ the proprietor of a failed venture with outstanding obligations may be forced into personal bankruptcy to protect personal assets from the venture’s creditors **Partnerships ­ Partnership: business venture owned by two or more individuals who are jointly and personally liable for the venture’s liabilities ­ partnership agreement: spells out how business decisions are to be made and how profits and losses will be shared ­ If the partnership agreement does not state otherwise, each general partner has complete managerial discretion over the conduct of business ­ Equity capital sources for general partnerships are restricted to funds supplied by partners ­ The costs associated with forming a general partnership are usually moderate in terms of time and legal fees ­ A general partner’s personal financial liability for the venture’s obligations mirrors that of the sole proprietor— unlimited ­ Joint Liability: legal action treats all partners equally as a group ­ Joint and Several Liability: allows subsets of partners to be the object of legal action related to the partnership ­ The body of law normally governing partnerships is the Uniform Partnership Act (UPA) ­ In cases where the partnership agreement is silent, the UPA provides the precedence in general partnership law ­ Limited Partnership: limits limited partner liabilities in a partnership to the amount of their equity capital contribution to the partnership **Corporations ­ Corporation: a legal entity that separates personal assets of the owners (shareholders) from the assets of the business ­ Limited Liability: creditors can seize the corporation’s assets but have no recourse against the shareholders’ personal assets ­ Corporate Charter: legal document that establishes the corporation ­ S Corporation: provides limited liability for shareholders; plus, corporate income is taxed like personal income to the shareholders **Limited Liability Companies (LLCs) ­ Limited Liability Company (LLC): a business organization owned by “members” (shareholders) with limited liability ­ Major Incentive for Organizing as an LLC o Earnings can be taxed at the personal income tax rates of the members Bases for Comparing Various Business Organizational Forms ­ Number of Owners and Ease of Startup ­ Investor Liability ­ Equity Capital Sources ­ Firm Life and Liquidity of Ownership ­ Taxation Intellectual Property ­ Intellectual Property: a venture’s intangible assets and human capital, including inventions that can be protected from being freely used or copied by others (knowledge in particular) ­ Protecting Valuable Intangible Assets o There are Four Forms of Protection:  Patents  Trade Secrets  Trademarks  Copyrights Intellectual Property Protection Methods ­ Patents: intellectual property rights granted for inventions that are useful, novel, and non-obvious o Intellectual property rights granted for inventions that are “useful,” “novel,” and “non-obvious.” o Patents are granted by the U.S. Patent and Trademark Office o Patent law is very complex (you most likely need to hire a patent applications specialist lawyer) o Four Kinds of Patents:  Utility Patents: cover mechanical or general inventions, chemical inventions, and electrical inventions  Design Patents: cover the “appearance” of items (e.g., sports uniforms, electronic products, and autos)  Plant Patents: protect discoveries of asexual reproduction methods of new plant varieties  Business Method Patents: protect specific ways of doing business and the underlying computer codes and technology o Utility Patents: Basic Information  A new idea by itself cannot be patented  The idea must be part of an invention that has a “physical form” such as a product  The physical form also can exist as a sequence of steps contained in a process or the delivery of a service o Utility Patents: Application Process  Develop or conceive an invention  Prepare (you, or a registered patent attorney on your behalf) a patent application  File the application in U.S. Patent and Trademark Office  If successful, the utility patent life will be 20 years (prior to mid-1995 the life was 17 years)
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