I. Establishing a Strong Ethical Culture for a Firm
1.Lead by Example
Three keys to building a strong ethical culture in a firm are:
a.Having leaders who intentionally make ethics a part of their daily conversations and decision making.
b.Supervisors who emphasize integrity when working with their direct reports.
c.Peers who encourage each other to act ethically.
2.Establish a Code of Conduct
A formal statement of an organization’s values on certain ethical and social issues. The advantage is that it provides specific guidance.
3.Implement an Ethics Training Program
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.
II. Dealing Effectively with Legal Issues
1.Choosing an Attorney for a Firm
Critical issues include selecting an attorney familiar with the start-up process, selecting an attorney who can assist you in raising money, and making certain that the attorney has a track record of completing work on time.
2.Drafting a Founder’s Agreement
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.
3.Avoiding Legal Disputes
a.Meet All Contractual Obligations
This includes paying vendors, contractors, and employees as agreed and delivering goods or services as promised.
b.Avoid Undercapitalization
Most entrepreneurs have a goal of retaining as much of the equity in their firms as possible, but equity must often be shared with investors to obtain sufficient investment capital to support the firm’s growth.
c.Get Everything in Writing
There are two important written agreements that the majority of firms ask their employees to sign. A nondisclosure agreement binds on employee or another party (such as a supplier) to not disclosure a company’s trade secrets. A noncomplee agreement prevents an individual from competing against a former employer for a specific period of time.
d.Set Standards
The most common ethical problem areas that occur in an organization are human resource ethical problems, conflicts of interest, customer confidence, and inappropriate use of corporate resources. Policies and procedures should be established to deal with these issues.
III. Obtaining Business Licenses and Permits
Many business require licenses and permits to operate. There are three ways to determine the licenses and permits that are necessary: (1) Ask someone who is running a similar business, (2) Contact the secretary of state’s office, (3) Use one of the search tools available online.
1.Federal Licenses and Permits
Most businesses do not require a federal license to operate.
2.State Licenses and Permits
a.Business Registration Requirements
b.Sales Tax Permits
c.Professional and Occupational Licenses and Permits
3.Local Licenses and Permits
On the local level, there are two categories of licenses and permits that may be needed: (1) A permit to operate a certain type of businesses and (2) Permits for engaging in certain types of activities. If you plan to use a fictitious name for your business, you’ll need to obtain a fictitious business name permit.
IV. Choosing a Form of Business Organization
1.Sole Proprietorship
A form of business organization involving one person, and the person and the business are essentially the same.
a.Advantages of a Sole Proprietorship
Creating one is easy and inexpensive.
The owner maintain complete control of the business and retains all the profits.
Business losses can be deducted against the sole proprietor’s other sources of income.
It is not subject to double taxation.
The business is easy to dissolve.
b.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 death or loss of the interest in the business.
The liquidity of the owner’s investment is low.
2.Partnerships
a.General Partnerships
A form of business organization where two or more people pool their skills, abilities, and resources to run a business.
1)Advantages of a General Partnerships
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.
2)Disadvantages of a General Partnerships
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 partners can hire employees.
Raising capital can be difficult.
Because decision making among the partners is shared, can occur disagreements
The business ends at the death or withdrawal of one partner unless otherwise stated in the partnership agreement.
The liquidity of each partner’s investment is low.
b.Limited Partnerships
Includes two classes of owners: general partners and limited partners.
The limited partners are liable only up to the amount of their investment.
3.Corporations
A separate legal entity organized under the authority of a state.
a.C Corporations
A separate legal entity that, in the eyes of the law, is separate from its owners.
1)Advantages of a C Corporation
Owners are liable only for the debts and obligations of the corporation up to the amount of their investment.
The mechanics of raising capital is easier.
No restrictions exist on the number of shareholders.
Stock is liquid if traded on a major stock exchange.
The ability to share stock with employees through stock option or other incentive plans can be a powerful form of employee motivation.
2)Disadvantages of a C Corporation
Setting up and maintaining is more difficult than sole proprietorship or partnership.
Business losses cannot be deducted against the shareholder’s other sources of incomes.
Income is taxed at the corporate and the shareholder levels
Small shareholders typically have little voice in the management of the firm.
b.Subchapter S Corporation
Combines the advantage of a partnership and a C corporation.
1)Advantage: Not subject to double taxation, profit or losses are passed through to the individual tax returns of the owners, the owners are not subject to personal liability for the behavior of the business.
2)Disadvantage: Restrictions in qualifying, expenses involved with setting up and maintaining the status, limited to 100 shareholders.
4.Limited Liability Company
a.Advantages of a Limited Liability Company
Members are liable for the debts and obligations of the business only up to the amount of their investment.
The number of shareholders is unlimited.
An LLC can elect to be taxed as a sole proprietor, partnership or corporation.
Profits are taxed only at the shareholder level (no double taxation).
b.Disadvantages of a Limited Liability Company
Setting up and maintaining one is more difficult and expensive.
Tax accounting can be complicated.
Some of the regulations governing LLCs vary by state.
LLCs are relatively new type of business entity (not much legal precedent available for owners to anticipate).
Sometime there is a fee that LLCs pays to the state for the benefit of limited liability.
1.Lead by Example
Three keys to building a strong ethical culture in a firm are:
a.Having leaders who intentionally make ethics a part of their daily conversations and decision making.
b.Supervisors who emphasize integrity when working with their direct reports.
c.Peers who encourage each other to act ethically.
2.Establish a Code of Conduct
A formal statement of an organization’s values on certain ethical and social issues. The advantage is that it provides specific guidance.
3.Implement an Ethics Training Program
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.
II. Dealing Effectively with Legal Issues
1.Choosing an Attorney for a Firm
Critical issues include selecting an attorney familiar with the start-up process, selecting an attorney who can assist you in raising money, and making certain that the attorney has a track record of completing work on time.
2.Drafting a Founder’s Agreement
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.
3.Avoiding Legal Disputes
a.Meet All Contractual Obligations
This includes paying vendors, contractors, and employees as agreed and delivering goods or services as promised.
b.Avoid Undercapitalization
Most entrepreneurs have a goal of retaining as much of the equity in their firms as possible, but equity must often be shared with investors to obtain sufficient investment capital to support the firm’s growth.
c.Get Everything in Writing
There are two important written agreements that the majority of firms ask their employees to sign. A nondisclosure agreement binds on employee or another party (such as a supplier) to not disclosure a company’s trade secrets. A noncomplee agreement prevents an individual from competing against a former employer for a specific period of time.
d.Set Standards
The most common ethical problem areas that occur in an organization are human resource ethical problems, conflicts of interest, customer confidence, and inappropriate use of corporate resources. Policies and procedures should be established to deal with these issues.
III. Obtaining Business Licenses and Permits
Many business require licenses and permits to operate. There are three ways to determine the licenses and permits that are necessary: (1) Ask someone who is running a similar business, (2) Contact the secretary of state’s office, (3) Use one of the search tools available online.
1.Federal Licenses and Permits
Most businesses do not require a federal license to operate.
2.State Licenses and Permits
a.Business Registration Requirements
b.Sales Tax Permits
c.Professional and Occupational Licenses and Permits
3.Local Licenses and Permits
On the local level, there are two categories of licenses and permits that may be needed: (1) A permit to operate a certain type of businesses and (2) Permits for engaging in certain types of activities. If you plan to use a fictitious name for your business, you’ll need to obtain a fictitious business name permit.
IV. Choosing a Form of Business Organization
1.Sole Proprietorship
A form of business organization involving one person, and the person and the business are essentially the same.
a.Advantages of a Sole Proprietorship
Creating one is easy and inexpensive.
The owner maintain complete control of the business and retains all the profits.
Business losses can be deducted against the sole proprietor’s other sources of income.
It is not subject to double taxation.
The business is easy to dissolve.
b.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 death or loss of the interest in the business.
The liquidity of the owner’s investment is low.
2.Partnerships
a.General Partnerships
A form of business organization where two or more people pool their skills, abilities, and resources to run a business.
1)Advantages of a General Partnerships
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.
2)Disadvantages of a General Partnerships
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 partners can hire employees.
Raising capital can be difficult.
Because decision making among the partners is shared, can occur disagreements
The business ends at the death or withdrawal of one partner unless otherwise stated in the partnership agreement.
The liquidity of each partner’s investment is low.
b.Limited Partnerships
Includes two classes of owners: general partners and limited partners.
The limited partners are liable only up to the amount of their investment.
3.Corporations
A separate legal entity organized under the authority of a state.
a.C Corporations
A separate legal entity that, in the eyes of the law, is separate from its owners.
1)Advantages of a C Corporation
Owners are liable only for the debts and obligations of the corporation up to the amount of their investment.
The mechanics of raising capital is easier.
No restrictions exist on the number of shareholders.
Stock is liquid if traded on a major stock exchange.
The ability to share stock with employees through stock option or other incentive plans can be a powerful form of employee motivation.
2)Disadvantages of a C Corporation
Setting up and maintaining is more difficult than sole proprietorship or partnership.
Business losses cannot be deducted against the shareholder’s other sources of incomes.
Income is taxed at the corporate and the shareholder levels
Small shareholders typically have little voice in the management of the firm.
b.Subchapter S Corporation
Combines the advantage of a partnership and a C corporation.
1)Advantage: Not subject to double taxation, profit or losses are passed through to the individual tax returns of the owners, the owners are not subject to personal liability for the behavior of the business.
2)Disadvantage: Restrictions in qualifying, expenses involved with setting up and maintaining the status, limited to 100 shareholders.
4.Limited Liability Company
a.Advantages of a Limited Liability Company
Members are liable for the debts and obligations of the business only up to the amount of their investment.
The number of shareholders is unlimited.
An LLC can elect to be taxed as a sole proprietor, partnership or corporation.
Profits are taxed only at the shareholder level (no double taxation).
b.Disadvantages of a Limited Liability Company
Setting up and maintaining one is more difficult and expensive.
Tax accounting can be complicated.
Some of the regulations governing LLCs vary by state.
LLCs are relatively new type of business entity (not much legal precedent available for owners to anticipate).
Sometime there is a fee that LLCs pays to the state for the benefit of limited liability.
Comments
Post a Comment