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Title / Author: Entrepreneurship Management/Anand Dhutraj Page No. 1

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Entrepreneurship Management

Prof. Anand Dhutraj

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Agenda
• Preparing the Proper Ethical and Legal Foundation
• IPR

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Initial Ethical and Legal Issues Facing a New Firm

• Establishing a strong ethical organizational culture

• Choosing an attorney
• Drafting a founders’ agreement
• Avoiding legal disputes
• Obtaining business licenses and permits
• Choosing a form of business organization

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Establishing a Strong Ethical Culture (1 of 2)

• Lead by Example
‒ The most important thing that any entrepreneur, or team of
entrepreneurs, can do to build a strong ethical culture in their
organization is to lead by example.
• Establish a Code of Conduct
• A code of conduct (or code of ethics) is a formal statement of an
organization’s values on certain ethical and social issues.

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Establishing a Strong Ethical Culture (2 of 2)

• Implement an Ethics Training Program

• Ethics training programs teach business ethics to help employees deal
with ethical dilemmas and improve their overall ethical conduct.
• An ethical dilemma is a situation that involves doing something that is
beneficial to oneself or the organization, but may be unethical.

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Choosing an Attorney for a Firm

• Select an Attorney Early
• It is important for an entrepreneur to select an attorney as early
as possible when developing a business venture.
• It is critically important that the attorney be familiar with start-up
issues.
• Intellectual Property
• For issues dealing with intellectual property (patents,
trademarks, copyrights, and trade secrets), it is essential to use
an attorney who specializes in this field.

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How to Select an Attorney

• Contact the local bar association and ask for a list of attorneys who specialize in start-
ups in your area.
• Interview several attorneys.
• Select an attorney who is familiar with the start-up process.
• Select an attorney who can assist you in raising money for your new venture.
• Make sure your attorney has a track record of completing his or her work on time.
• Talk about fees.
• Select an attorney that you think understands your business.
• Learn as much about the process of starting a business yourself as possible.

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Drafting a Founders’ Agreement

• Founders’ Agreement
• A founders’ agreement (or shareholders’ agreement) is a written document
that deals with issues such as the relative split of the equity among the
founders of the firm, how individual founders will be compensated for the cash
or the “sweat equity” they put into the firm, and how long the founders will
have to remain with the firm for their shares to fully vest.
• The items to include in the founders’ agreement are shown on the following
slide.

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Partial List of Items to Include in a
Founders’ Agreement
• Nature of the prospective business.
• Identity and proposed titles of the founders.
• Legal form of business ownership.
• Apportionment of stock (or division of ownership).
• Consideration paid for stock or ownership share of each of the founders.
• Identification of any intellectual property signed over to the business.
• Description of how the founders will be compensated and how the profits in the
business will be divided.
• Provisions for resolving disputes.
• Buyback clause.

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Avoiding Legal Disputes (1 of 2)

• Most legal disputes are the result of misunderstandings, sloppiness, or a simple
lack of knowledge of the law. Getting bogged down in legal disputes is
something an entrepreneur should work hard to avoid.
• There are several steps that an entrepreneur can take to avoid legal disputes:
‒ Meet all contractual obligations.
‒ Avoid undercapitalization.
‒ Get everything in writing.
‒ Set standards.

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Avoiding Legal Disputes (2 of 2)

• Although it’s tempting to try to
show people you trust them by
not insisting on written
agreements, it’s not a good
practice.
• One of the simplest ways to
avoid misunderstandings and
ultimately legal disputes is to
get everything in writing.

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Nondisclosure and Noncompete Agreements

• Legal Agreements that Many Firms Ask Their Employees to Sign
• A nondisclosure agreement binds an employee or other party
(such as a supplier) to not disclose a company’s trade secrets.
• A noncompete agreement prevents an individual from competing
against a former employer for a specific period of time.

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Obtaining Business Licenses and Permits (1 of 4)

• Business Licenses and Permits

• Depending on the nature of the business, the business may need local, state,
and/or federal licenses and permits to operate.
• Federal Licenses and Permits
• Most businesses do not require a federal license to operate, but some do.
• Examples of businesses that require federal licenses and/or permits to operate
include businesses that sell (or provide):
• Alcohol, Firearms, Animal Transport Across State Lines, Commercial Fisheries,
Preparation of Meat Products, and Radio and Television Broadcasting.

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Obtaining Business Licenses and Permits (2 of 4)

• State Licenses and Permits
• In most states, there are three different categories of licenses and permits that you may
need to operate a business.
• Business Registration Requirements. Some states require all new businesses to register
with the state.
• Sales Tax Permits. Most states and communities require businesses that sell goods, and
in some cases services, to collect sales tax and submit the tax to the proper state
authorities.
• Professional and Occupational Licenses and Permits. In all states, there are laws that
require people in certain professions to pass a state exam and maintain a professional
license to conduct business. Examples includes barbers, nurses, tattoo artists, and real
estate agents.

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Obtaining Business Licenses and Permits (3 of 4)

• Local Licenses and Permits
• On the local level, there are two categories of licenses and permits that may be
needed.
• The first is to operate a certain type of business.
• Examples include child care, barber shops and salons, automotive repair, and hotels
and motels.
• The second category is permits for engaging in certain types of activities.
• Examples include building permit (required if you are building or remodeling), health
permit (normally required if you are involved in preparing food), and signage permit
(may be required to erect a sign).

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Obtaining Business Licenses and Permits (4 of 4)

• Additional Requirements
• If you plan to use a fictitious name for your business, in most cases you’ll need to
obtain a fictitious business name permit (also called dba or doing business as).
• A fictitious name permit allows a business to operate under a fictitious name,
like Gold Coast Sea Food or Red Rock Bakery.
• All businesses, other than sole proprietorships that do not have employees, are
required to obtain a Federal Employee Identification Number (also called an
EIN).
• The easiest way to obtain an EIN is to go to [Link] and click on Apply for
an EIN online.

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Choosing a Form of Business Ownership

• When a business is launched, a form of legal entity must be chosen.

The most common legal entities are shown below:
• Sole Proprietorship
• Partnership – General & Limited Liability
• Private Limited Company
• Public Limited Company

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Issues to Consider in Choosing a Legal Form
of Business Ownership
Figure 7.2 Factors Critical in Selecting a Form of Business Organization

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Sole Proprietorship
• The simplest form of business entity is the sole proprietorship.
• A sole proprietorship is a form of business organization involving one person,
and the person and the business are essentially the same.
• A sole proprietorship is not a separate legal entity. The sole proprietor is
responsible for all the liabilities of the business, and this is a significant
drawback.

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Advantages and Disadvantages
of a Sole Proprietorship (1 of 2)

Advantages of a Sole Proprietorship

• Creating one is easy and inexpensive.
• The owner maintains complete control of the business and retains all of
the profits.
• Business losses can be deducted against the sole proprietor’s other
sources of income.
• It is not subject to double taxation (explained later).
• The business is easy to dissolve.

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Advantages and Disadvantages
of a Sole Proprietorship (2 of 2)
Disadvantages of a Sole Proprietorship
• Liability on the owner’s part is unlimited.
• The business relies on the skills and abilities of a single owner to be
successful. Of course, the owner can hire employees who have
additional skills and abilities.
• Raising capital can be difficult.
• The business ends at the owner’s death or loss of interest in the
business.
• The liquidity of the owner’s investment is low.

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Partnerships

• If two or more people start a business, they must organize as a

partnership, or private limited company.
• Partnerships are organized as either general or limited liability
partnerships.

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General Partnership

• A form of business organization where two or more people pool their

skills, abilities, and resources to run a business.
• The primary advantage is that the business isn’t dependent on a single
person for its survival and success.
• The primary disadvantage is that all partners are liable for all the
partnership’s debts and obligations.

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Advantages and Disadvantages NLDIMSR

of a General Partnership (1 of 2)

Advantages of a General Partnership

• Creating one is relatively easy and inexpensive compared to a
corporation or limited liability company.
• The skills and abilities of more than one individual are available to
the firm.
• Having more than one owner may make it easier to raise funds.
• Business losses can be deducted against the partners’ other sources
of income.
• It is not subject to double taxation (explained later).

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Advantages and Disadvantages
of a General Partnership (2 of 2)
Disadvantages of a General Partnership
• Liability on the part of each general partner is unlimited.
• The business relies on the skills and abilities of a fixed number of partners. Of
course, the owners can hire employees who have additional skills and abilities.
• Raising capital can be difficult.
• Because decision making among the partners is shared, disagreements can
occur.
• The business ends with the death or withdrawal of one partner unless
otherwise stated in the partnership agreement.
• The liquidity of each partner’s investment is low.

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Limited Liability Partnership

• There are a number of reasons why many entrepreneurs prefer to go in for a
Limited Liability Partnership (LLP) registration over a Private Limited Company
incorporation.
• LLPs are considered easier to set up and are comparatively hassle-free in day to
day operations.
• It also has a lower compliance burden if there is minimal activity.
• Hence, many Entrepreneurs see it as advantageous to begin their organization in
this manner. In this article, we look at the various advantages and disadvantages of
an LLP in India.

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Limited Liability Partnership - Advantages

• No requirement of minimum contribution
• No limit on owners of the business
• Lower registration cost
• No requirement of compulsory Audit, except
• The contributions of the LLP exceeds Rs. 25 Lakhs, or
• The annual turnover of the LLP exceeds Rs. 40 Lakhs
• For income tax purpose, LLP is treated on a par with partnership firms.
• Dividend Distribution Tax (DDT) not applicable

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Limited Liability Partnership - Disadvantages

• Penalty for Non-Compliance (LLP Annual Filing)

• Inability to Have Equity Investment

• Higher Income Tax Rate

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Private Limited Company

• A Private Limited Company is formed lawfully with Limited Liability or Legal Protection for
its shareholders but that places restrictions on its ownership.
• A Private Limited Company is a company which is privately held for small businesses. The
liability of the members of a Private Limited Company is limited to the number of shares
respectively held by them. Shares of Private Limited Company cannot be publicly traded.
• Private Limited Company is the simplest and a very popular form of Business Registration
in India. It can be registered with a minimum of two people. Limited liability protection to
shareholders, ability to raise equity funds, separate legal entity status make it the most
recommended type of business entity for millions of small and medium-sized businesses
that are family-owned or professionally managed.

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Private Limited Company - Requirements

• A minimum number of two Directors who are adults.
• One of the Directors of a Private Limited Company has to be an Indian Citizen and Indian
Resident.
• The other Director(s) can be a Foreign National.
• It is also required to have two Shareholders of a company.
• The Shareholders can be natural persons or artificial legal entities.

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Private Limited Company - Advantages

• No Minimum Capital
• Separate Legal Entity
• Limited Liability
• Fund Raising
• Free & Easy transfer of shares
• Uninterrupted existence
• FDI Allowed
• Builds Credibility

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Private Limited Company - Disadvantages

• One of the main disadvantages of a Private Limited Company is that it restricts the
transferability of shares by its articles.
• In a Private Limited Company the number of shareholders, in any case, cannot exceed 50.
• Another disadvantage of a Private Limited Company is that it cannot issue prospectus to
the public.
• In the stock exchange shares cannot be quoted.

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The Importance of Intellectual Property

• Intellectual Property
• Is any product of human intellect that is intangible but has value in the
marketplace.
• It is called “intellectual” property because it is the product of human
imagination, creativity, and inventiveness.
• Importance
• Traditionally, businesses have thought of their physical assets, such as
land, buildings, and equipment as the most important.
• Increasingly, however, a company’s intellectual assets are the most
important.

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Common Mistakes Firms Make in Regard
to Protecting Their Intellectual Property

• Not properly identifying all of their intellectual property.

• Not fully recognizing the value of their intellectual property.
• Not using their intellectual property as part of their overall plan for success.
• Not taking sufficient steps to protect it.

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Determining What Intellectual Property to
Legally Protect

• Criteria 1
• Determine whether the intellectual property in question is directly related
to the firm’s competitive advantage.

• Criteria 2
• Decide whether the intellectual property in question has value in the
marketplace.

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The Four Key Forms of Intellectual Property

• Patents
• Trademarks
• Copyrights
• Trade Secrets

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Patents (1 of 4)
• A patent is a grant from the federal government conferring the rights to
exclude others from making, selling, or using an invention for the term of the
patent. (See the next slide for a full explanation.)
• Increasing Interest in Patents
• There is increasing interest in patents.
• Since Patent #1 was granted in 1790, the U.S. Patent & Trademark
Office has granted 9.6 million patents.
• The patent office is strained. It takes an average of 25.3 months from
the date of first filing to receive a U.S. patent.

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Patents (2 of 4)
Proper Understanding of What a Patent Means
• A patent does not give its owner the right to make, use, or sell an invention; rather, the right granted
is only to exclude others from doing so.
• As a result, if an inventor obtains a patent for a new kind of computer chip, and the chip would
infringe on a prior patent owned by Intel, the inventor has no right to make, use, or sell the chip.
• To do so, the inventor would need to obtain permission from Intel. Intel may refuse permission, or
ask that a licensing fee be paid for the rights to infringe on its patent.
• While this system may seem odd, it is really the only way the system could work. Many inventions
are improvements on existing inventions, and the system allows the improvements to be (patented)
and sold, but only with the permission of the original inventors, who usually benefit by obtaining
licensing income in exchange for their consent.

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Patents (3 of 4)
Table 12.2 growth in patent applications in the united states

Blank 2014 2015 2016

Applications received 618,457 618,062 650,411
Patents issued 329,612 322,449 334,107
Patent applications pending 1,127,701 1,099,468 1,070,163
Average time for approval 27.4 months 26.6 months 25.3 months

Source: United States Patent and Trademark Office, Performance and Accountability Report for
Fiscal Year 2016, available at [Link].

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Patents (4 of 4)
Figure 12.2 three basic requirements for a patent

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Types of Patents
Table 12.3 Summary of the Three Forms of Patent Protection, the Types of
Inventions the Patents Cover, and the Duration of the Patents

Type Type of Invention Covered Duration

Utility New or useful process, machine, 20 years from the date of the
manufacture, or composition of original application.
material or any new and useful
improvement thereof.
Design Invention of new, original, and 14 years from the date of the
ornamental design for manufactured original application.
products.
Plant Any new varieties of plants that can be 20 years from the date of the
reproduced asexually. original application.

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Business Method Patents (Special Utility
Patent)
• A business method patent is a patent that protects an invention that is or
facilitates a method of doing business.
• The most notable business method patents that have been awarded:
• [Link]’s one-click ordering system.
• [Link]’s “name-your-price” business model.
• Netflix’s method for allowing customers to set up a rental list of
movies to be mailed to them.

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The Process of Obtaining a Patent

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Patent Infringement
• Takes place when one party engages in the unauthorized use of another party’s
patent.
• The tough part (particularly from a small entrepreneurial firm’s point of view) is
that patent infringement cases are costly to litigate.
• A typical patent infringement case costs each side at least $500,000 to
litigate.

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Trademarks
• A trademark is any word, name, symbol, or device used to identify the source
or origin of products or services and to distinguish those product or services
from others.
• Trademarks also provide consumers with useful information.
• For example, consumers know what to expect when they see a Macy’s
store.
• Think how confusing it would be if any retail store could use the name
Macy’s.

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The Four Types of Trademarks (1 of 2)

Table 12.5 Summary of the Four Forms of Trademark Protection, the Type of
Marks the Trademarks Cover, and the Duration of the Trademarks
Type Types of Marks Covered Duration
Trademark Any word, name, symbol, or device used to Renewable every 10 years, as
identify and distinguish one company’s long as the mark remains in use.
goods from another’s.
Examples: Apple, [Link], GoPro, Athletic
Propulsion Labs, 3Derm
Service mark Similar to trademarks; are used to identify Renewable every 10 years, as
the services or intangible activities of a long as the mark remains in use.
business, rather than a business’s physical
products.
Examples: 1-800-FLOWERS, [Link],
IndieU, Real Time Cases, CoachUp, Dropbox

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The Four Types of Trademarks (2 of 2)

Table 12.5 (continued)
Type Types of Marks Covered Duration
Collective Trademarks or service marks used by the Renewable every 10 years, as
mark members of a cooperative, association, or long as the mark remains in use.
other collective group.
Examples: Information Technology Industry
Council, International Franchise Association,
Rotary International
Certification Marks, words, names, symbols, or devices Renewable every 10 years, as
mark used by a person other than the owner to long as the mark remains in use.
certify a particular quality about a good or
service.
Examples: 100% Napa Valley, Florida
Oranges, National Organic Program,
Underwriters Laboratories

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What is Protected Under Trademark Law? (1 of 2)

Item Example(s)

Words Birchbox, Rent the Runway, National Football

League
Numbers and letters 3M, Boeing 787, AT&T

Designs and logos Nike swoosh logo

Sounds MGM’s lion’s roar

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What is Protected Under Trademark Law? (2 of 2)

Item Example

Fragrances Stationery treated with a special fragrance

Shapes Unique shape of the Apple iPod

Colors Nexium—the “purple pill”

Trade dress The layout and décor of a restaurant

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Exclusions From Trademark Protection

Item Example

Immoral or scandalous matter Profane words

Deceptive matter Labeling oranges “Fresh Florida
Oranges” that aren’t grown in Florida

Descriptive marks Phrases like “golf ball” and “fried

chicken” are descriptive and can’t be
trademarked
Surnames Common surnames like “Anderson” or
“Smith” can’t be trademarked

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The Process of Obtaining a Trademark

Figure 12.4

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Copyrights
• A copyright is a form of intellectual property protection that grants to the owner
of a work of authorship the legal right to determine how the work is used and to
obtain the economic benefits from the work.
• The work must be in a tangle form, such as a book, operating manual, musical
score, or computer software program.
• A work does not have to have artistic merit to be eligible for copyright
protection.
• As a result, things such as operating manuals and sales brochures are
eligible for copyright protection.

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What is Protected by a Copyright? (1 of 2)

Item Example(s)

Literary works Books, poetry, reference works, speeches

Musical compositions Musical score, CD, MP3 file

Computer software All forms of computer programs

Dramatic works Play, comedy routine, newscast, movie, television

show

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What is Protected by a Copyright? (2 of 2)

Item Example(s)

Pantomimes and Arrangements of dance movements, including

choreographic works ballets and mime works
Pictorial, graphic, and Photographs, prints, art reproductions, cartoons,
sculptural works maps, globes, jewelry, fabrics, games, technical
drawings, diagrams, posters, toys, sculptures,
charts

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Exclusions from Copyright Protection

• The Idea-Expression Dichotomy
• The main exclusion is that copyright laws cannot protect ideas.
• For example, an entrepreneur may have the idea to open a soccer-themed
restaurant. The idea itself is not eligible for copyright protection.
However, if the entrepreneur writes down specifically what his or her
soccer-themed restaurant will look like and how it will operate, that
description is copyrightable.
• The legal principle describing this concept is called the idea-expression
dichotomy.
• An idea is not copyrightable, but the specific expression of an idea is.

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Obtaining a Copyright
• How to Obtain a Copyright
• Copyright law protects any work of authorship the moment it assumes a tangible
form.
• Technically, it is not necessary to provide a copyright notice or register work with
the U.S. Copyright Office.
• The following steps can be taken, however, to enhance copyright protection.
• Copyright protection can be enhanced by attaching the copyright notice, or
“copyright bug” © to something.
• Further protection can be obtained by registering the work with the U.S.
Copyright Office.

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Copyright Infringement
• Copyright Infringement
• Copyright infringement occurs when one work derives from another, is an
exact copy, or shows substantial similarity to the original work.
• To prove infringement, a copyright owner is required to show that the
alleged infringer had prior access to the copyrighted work and that the
work is substantially similar to the owner’s.
• The illegal downloading of music is an example of copyright infringement.
• Copyright infringement costs the owners of copyrighted material an
estimated $25 billion per year.

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Fair Use
• Copyright law permits limited infringement of copyrighted material under
certain circumstances.
• The certain circumstances are called fair use. Fair use allows one to use
copyrighted material for purposes such as criticism, comment, news reporting,
teaching or scholarship.
• This provision is what allows movie critics to show clips from movies.

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Trade Secrets
• Trade Secrets
• A trade secret is any formula, pattern, physical device, idea, process, or other
information that provides the owner of the information with a competitive
advantage in the marketplace.
• Trade secrets include marketing plans, product formulas, financial forecasts,
employee rosters, logs of sales calls, and similar types of proprietary
information.
• The federal Economic Espionage Act, passed in 1996, criminalizes the theft of
trade secrets.

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What Qualifies for Trade Secret Protection? (1 of 2)

• Trade Secret Protection

• Not all information qualifies for trade secret protection.
• In general, information that is know to the public or that competitors can
discover through legal means doesn’t qualify for trade secret protection.
• Companies protect trade secrets through physical measures and written
documents.

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NLDIMSR

What Qualifies for Trade Secret Protection? (2 of 2)

The strongest case for trade secret protection is information that is characterized by
the following.
• Is not known outside the company.
• Is known only inside the company on a “need-to-know” basis.
• Is safeguarded by stringent efforts to keep the information confidential.
• Is valuable and provides the company a competitive advantage.
• Was developed at great cost, time, and effort.
• Cannot be easily duplicated, reverse engineered, or discovered.

Title / Author: Entrepreneurship Management/Anand Dhutraj Page No. 62

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 2/12/2024

NLDIMSR
Physical Measures for Protecting
Trade Secrets

Restricting access Labeling documents

Password protecting Maintaining logbooks for
confidential computer files visitors
Maintaining logbooks for access Maintaining adequate overall
to sensitive material security measures

Title / Author: Entrepreneurship Management/Anand Dhutraj Page No. 63

NLDIMSR

Thank you!

Title / Author: Entrepreneurship Management/Anand Page No. 64

Dhutraj

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