Organizing & Financing a New

Venture
CHAPTER 3
BOOK: LEACH, J. C., & MELICHER, R. W. (2011). ENTREPRENEURIAL
FINANCE
CHAPTER LEARNING OBJECTIVES
1. Describe the proprietorship, partnership, and corporate forms of business organization.
2. Identify the differentiating characteristics of a limited liability company (LLC).
3. Describe the benefits, risks, and basic tax aspects of various organizational forms.
4. Discuss the use of patents and trade secrets to protect intellectual property.
5. Discuss the use of trademarks and copyrights to protect intellectual property.
6. Describe how confidential disclosure agreements and employment contracts are used
to protect intellectual property rights.
7. Explain how financing is obtained via financial bootstrapping and through business
angels.
8. Describe first-round financing sources.
FORMS OF BUSINESS
ORGANIZATION
The first question addresses legal forms of organization. We specifically consider:
Sole proprietorships
Partnerships (general and limited)
Corporations (regular and subchapter S)
Limited liability companies
General and Limited Partnerships
The term partnership refers to a general partnership, which is a business venture owned by two
or more individuals, called partners, who are each personally liable for the venture’s liabilities.
Because there are multiple owners, a partnership agreement spells out how business decisions
are to be made and how profits and losses will be shared.
In cases of joint liability, legal actions must treat all partners as a group. If
Partnership by Estoppel
Partnership by estoppel means that a person who is not technically a partner can be held liable
as a general partner would be for any debts and damages owed to a third party.
Ordinarily, if two people are not legally partners, then third parties cannot so regard them. For
example, Mr. A and Mr. B own equal shares of a house that they rent but do not regard it as a
business and are not in fact partners. They do have a loose “understanding” that since Mr. A is
mechanically adept, he will make necessary repairs whenever the tenants call. On his way to the
house one day to fix its boiler, Mr. A injures a pedestrian, who sues both Mr. A and Mr. B Since
they are not partners, the pedestrian cannot sue them as if they were; hence Mr. B has no
partnership liability.
Class Discussion Question
Jacob rents farmland from Davis and pays Davis a part of the profits from the crop in rent. Is
Davis a partner? What if Davis offers suggestions on what to plant and when? Now is he a
partner?
Answer?
Corporations
A legal entity that separates personal assets of the owners, called shareholders, from the
assets of the business.
Corporations
The corporate charter is the legal document that establishes the corporation. The articles of
incorporation are the basic legal declarations contained in the corporate charter.
For example, each corporation must have a name and an office address, indicate its intended
business activities, state the initial size and names of the board of directors, and provide the
founders’ names and addresses. The corporate bylaws are the rules and procedures established
to govern the corporation.
The bylaws indicate how the corporation will be managed, give the procedures for electing
directors, and specify shareholder rights.
S Corporation
One special form of corporate organization is an S corporation (sometimes called a subchapter S
corporation). “S corps” are named for the section of the Internal Revenue Service (IRS) tax code
laying out the related requirements. An S corporation provides limited liability for its
shareholders, while its income is taxed only at the personal level of its shareholders (i.e., no
corporate taxes).
Class Participation (10 Marks)
Share your today’s Lecture Notes at Teams Conversation box before 4:50 pm.
Prepare a summary or highlight (ALL) key points.
Corporations
Professional corporations (PCs) and service corporations (SCs) are corporate structures that
states provide for professionals such as physicians, dentists, lawyers, and accountants.
Members of a PC or SC must ordinarily be licensed professionals.
They remain personally liable for their wrongful professional acts and those of their professional
employees
Limited Liability Companies
A company owned by shareholders with limited liability.
Forming an LLC requires organizational time and legal costs roughly comparable to those of
organizing as a corporation.
An LLC typically requires the preparation of two documents. The certificate of formation or the
articles of organization, lay out the LLC’s name, address, a formal agent for receiving legal
documents, the duration of the firm, and whether members or their appointees will govern the
LLC.
The operating agreement plays the role of the partnership agreement in specifying in more
detail how the LLC will be governed, the financial obligations of members, the distribution of
profits and losses, and other organizational details.
What Is a Limited Liability Company
(LLC)?
A limited liability company (LLC) is a business structure in the U.S. that protects its owners
from personal responsibility for its debts or liabilities. But can also be opened in Pakistan
and other Asian countries. 
Limited liability companies are hybrid entities that combine the characteristics of a
corporation with those of a partnership or sole proprietorship.
An LLC is a formal partnership arrangement that requires articles of organization to be filed
with the state. An LLC is easier to set up than a corporation and provides more flexibility
and protection for its investors.
LLCs may elect not to pay federal taxes directly. Instead, their profits and losses are reported
on the personal tax returns of the owners.
LLC
If fraud is detected or if a company fails to meet its legal and reporting requirements,
creditors may be able to go after the members.
Advantages and Disadvantages of LLCs
The primary reason business owners opt to register their businesses as LLCs is to limit the
personal liability of themselves and their partners or investors. Many view an LLC as a blend
of a partnership, which is a straightforward business agreement between two or more
owners, and a corporation, which has certain liability protections.
Although LLCs have some attractive features, they also have several disadvantages.
Depending on state law, an LLC may have to be dissolved upon the death or bankruptcy of a
member. A corporation can exist till infinity. An LLC may not be a suitable option if the
founder's ultimate objective is to launch a publicly traded company.
Limited Liability Company vs. Partnership

The primary difference between a partnership and an LLC is that an LLC separates the
business assets of the company from the personal assets of the owners, insulating the
owners from the LLC's debts and liabilities.
Both LLCs and partnerships are allowed to pass through their profits, along with the
responsibility for paying the taxes on them, to their owners
In an LLC, a business continuation agreement can be used to ensure the smooth transfer of
interests when one of the owners leaves or dies.
Without such an agreement in place, the remaining partners must dissolve the LLC and
create a new one.
LLC
Pakistan allows companies to incorporate as a limited liability company (LLC),
limited liability partnership (LLP), public limited company (joint stock company),
representative office, and more.
The most common is an LLC, but each entity has its own steps for incorporation.
Examples of LLC in Pakistan
1. SJ Holdings
2. Real Estate - LLC (Limited Liability Company)
3. Nopex Services (Marketing and Advertising) - LLC (Limited Liability Company)
4. Purple House Design (Design - LLC) (Limited Liability Company)
Intellectual Property Rights
FOUR TYPES OF INTELLECTUAL PROPERTY RIGHTS
The four types of intellectual property include:
Trade Secrets
Trademarks
Copyrights, and
Patents.
What is Patent?
What is patent?
A patent is the granting of a property right by a supreme authority to an inventor. This
grant provides the inventor exclusive rights to the patented process, design, or
invention for a designated period in exchange for a comprehensive disclosure of the
invention.
For an invention to qualify for a patent, it must be novel. An invention is novel if it is
different from other similar inventions in one or more of its parts. It also must not have
been publicly used, sold, or patented by another inventor within a year of the date the
patent application was filed.
Patent Examples
Pen with scanner
With a machine as small as a pen, you can transfer text from paper directly into a computer.
Christer invented the C-pen.
System for shorter flight times
With his invention, Håkan has made it possible to shorten flight times. Thanks to his invention, a
pilot can see the exact positions of other aircraft.
Jewelry and Furniture design etc
What is the trade mark, trade secret, and
copyright of Coca Cola?
Solution
A can of Coca-Cola®. The brand, “Coca-Cola” is a trademark. The formula for the actual soda is a
trade secret, while copyright law protects the packaging art.
Key Concepts
Financial Bootstrapping
minimizing the need for financial capital and finding unique ways of financing a new venture.
Business Angel Funding
A wealthy individuals who invest in early-stage ventures in exchange for the excitement of
launching a business and a share in any financial rewards
From the Headlines—The Fantasticks

1. If you are an angel investor, what business features may attract you to invest?
2. Describe the reasons leading to wrong investment by an angel investor?
3. Access the http://www.garage.com Web site. Identify the angel matchmaking services that
are provided. Determine the site’s focus in terms of early-stage versus later-stage financing,
as well as the typical range of financing that is provided.
Other Methods for Protecting Intellectual Property
Rights
Before receiving confidential information from you, the potential receiver can be asked to sign a
written agreement not to disclose any of the confidential information.
Confidential disclosure agreements
documents used to protect an idea or other forms of intellectual property when disclosure must
be made to another individual or organization
Other Methods for Protecting Intellectual Property
Rights
Employment Contracts
Employer employs the employee in exchange for the employee’s agreeing to keep confidential
information secret and to assign ideas and inventions to the employer.
Contracts with consultants represent a special form of employment contract. For example, you
may find it necessary to hire a consultant who has expertise in a particular area, such as
marketing or production.