Chapter 18

Copyright 2011 by the McGraw-Hill Companies, I nc. All rights reserved. McGraw-Hill/I rwin
Legal Issues
Recognizing Your
Small Business Needs
Learning Objectives
LO1 Know when you need legal information
and how to get it.
LO2 Understand legal structures in setting up a
new business.
LO3 Learn how to master the process of
negotiating.
18-2
Learning Objectives
LO4 Recognize potential legal liabilities for
your business.
LO5 Know contract terms and when a
contract is needed.
LO6 Understand the basics of intellectual
property.

18-3
You and the Law
There are always unavoidable risks
In a 2002 poll, less than 1 in 10 small
business had been sued in the prior five
years
It is easy to underestimate the number of
laws that apply to small businesses
State laws applicable to small businesses
are extraordinarily varied
18-4
Selected Laws Applicable to
Growing Businesses
18-5
Table 18.1
You Need a Good Attorney
Usually with legal issues it is best to
confront potential problems before
they have a chance to get serious.
Timely decisions and action may avoid
a problem altogether or may make
solving the problem much easier and
cheaper
18-6
You Need a Good Attorney
Hourly fees
A basis for legal
charges in which
the rate is based
on a price per
hour.
Often lawyers will
charge for
fractions of an
hour.
Flat fees
A method of billing
for lawyers in which
a fixed amount is
paid for a certain
task.

18-7
You Need a Good Attorney
Retainer
A fee paid by a
client to an
attorney to
engage the
attorneys services.
Contingency fee
Fee paid by a
client to an
attorney for legal
services that is
dependent upon
the outcome of a
case.

18-8
Can I Do This for Free?
Three elements to most aspects of
business law:
1. Finding the right information,
2. Negotiating the specific outcome you
want
3. Taking care of the paperwork associated
with it
What can I do for free?
18-9
Can I Do This for Free?
Free information available:
www.business.gov: the general business site
www.reginfo.gov: regulatory information
website
www.dol.gov: for labor laws
www.sba.gov: the Small Business
Administration site
www.business.gov/regions/states: states
offices
18-10
Choosing a Business Name
Trade name or assumed name or a
doing business as (dba)
The name under which a business is
operated.
18-11
Choosing a Business Name
Assumed name filing or a fictitious
name filing
Filing made with a state(s) in which the
business operates disclosing the trade
name or assumed name of the business
along with the owners of the business.

18-12
Choosing a Business Form
Legal entity
A being, human or nonhuman, such as a
corporation, that is recognized as having
rights and duties, such as the right to own
property.
18-13
Legal Forms of Start-
Ups from the PSED
18-14
Figure 18.1
Advantages and Disadvantages
of Corporations
18-15
Table 18.2
Advantages and Disadvantages
of Sole Proprietorships
18-16
Table 18.3
Advantages and Disadvantages
of Partnerships
18-17
Table 18.4
Choosing a Business Form
Articles of organization
Document setting forth information about
a limited liability company that is filed with
the state to establish an LLC.
Articles of partnership
Agreement between the partners of a
firm on matters pertaining to the
formation and operation of the
partnership.
18-18
Choosing a Business Form
Six major factors at play:
Personal liability of the business owner
Taxation of both the entity and its owners
Complexity and organizational costs in
setting up
Control of the business
Continuity of the business
Ability of the business to raise capital

18-19
Choosing a Business Form
Single taxation
Earnings of the
business are taxed
once with the
owners paying the
taxes.
Double taxation
Earnings of the
business are taxed
twice with the
business as well as
its owners being
subject to tax.
18-20
Choosing a Business Form
Pass through
(taxation)
Earnings of the
business are
distributed to the
business owners
and those owners
pay individual tax
on the earnings.
Check the box
taxation
A choice LLCs can
make on their tax
returns to be taxed
as a corporation or
a partnership.
18-21
Choosing a Business Form
Piercing the veil
The dissolution of a corporate form,
making it back into a sole proprietorship
or general partnership, if the court finds
that the owner carelessly mixed up
personal and business assets or finances.
18-22
Tax Rates
18-23
Everything Is Negotiable, and
Negotiation Is Everything
4 steps to structure a negotiation:
Prepare what you need to achieve
Position by putting your best foot forward
Propose solutions that provide value and
balance
Pounce when agreement on any part of
the negotiation appears at hand
18-24
Legal Liabilities
Vicarious (indirect) liability
Indirect liability or responsibility for the
actions of another.
Independent contractors
Persons working to achieve a certain goal
without being subjected to substantial
controls by another.
18-25
The Independent Contractor
Argument
To be an independent contractor the person
has to display three characteristics:
1. Behavioral: The contractor solely decides how the
work is to be done.
2. Financial: The contractor pays his own expenses
directly
3. Relational: The independent contractor is
employed for a project and the service the
contractor provides is not central to the operation
of the business.
18-26
The Scope of Authority Argument
If employees make a decision
requiring more authority than they
really possess, the business can argue
that it was not liable for the problem
Firm must fully train employees of the
exact authority they possess

18-27
The Scope of Authority Argument
Sarbanes-Oxley Act
A federal law describing the steps publicly
traded businesses must take to protect
and provide their key financial
information.
18-28
Litigation vs. Arbitration vs.
Mediation
Litigation
A formal dispute resolution method that
operates using the court system, typically
with a lawyer representing each party.
18-29
Litigation vs. Arbitration vs.
Mediation
Arbitration
A dispute resolution process held instead
of court cases in which both sides present
their case to a legal professional.
Mediation
the dispute is put to a neutral third party
who is not a judge.
18-30
Litigation vs. Arbitration vs.
Mediation
18-31 Table 18.7
Contracting
Contracts
agreements in which the parties
exchange promises
Standard contracts
company can just fill in the blanks as
needed
Specialty contracts
unique contract terms, large dollar
amounts at stake

18-32
Contracting
Noncompete clause
Part of a contract in which a person
agrees not to open a certain type of
business or seek employment doing
certain things in a particular area for a
period of time.
18-33
Contracting
Exculpatory clause
Part of a contract in which a party to the
contract states that he or she will not be
responsible for certain actions.
18-34
Contracting
Hold harmless
A type of waiver in
which a party
agrees not to hold
another party
responsible for
certain events.
Waiver
Part of a contract
in which a party
intentionally gives
up legal rights or
claims.
18-35
Contracting
Subcontract
A contract by which a new party agrees
to perform a duty that one of the original
parties to a contract was already legally
obligated to perform.
18-36
Intellectual Property
Intellectual
property
Property coming
from some sort of
original thought;
for example,
patents, trade
secrets,
trademarks, and
copyrights.
Intangible
property
Property that has
no value of its own
but that represents
value, such as a
stock certificate.
18-37
Intellectual Property
Patent
A grant by the U.S.
government to an
inventor for an idea
that is new, useful,
and non-obvious,
giving the inventor
the exclusive right
to make, use, or sell
his idea
Trade secret
Confidential
information within
a company that
gives that
company a
competitive
advantage
18-38
Intellectual Property
Copyright
Exclusive right
given to the
creator of a literary
or artistic work to
make use of that
work.
Trademark
Distinctive word,
slogan, or image
that identifies a
product and its
origin.

18-39
Intellectual Property
Design patent
A 14-year patent
for a new, original,
and ornamental
design for an
article of
manufacture.
Infringer
Someone who uses
intellectual
property without
the permission of
the owner.
18-40