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Forms of Business Organization

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Bases for Comparing Business Types 1 Organizational Forms 2 Number of Owners/Ease of Startup 3 Investor Liability 4 Equity Capital Sources 5 Firm Life/ Liquidity of Ownership 6 Taxation

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Number of Owners & Ease of Startup

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Proprietorship one; low time and legal costs

General Partnership two or more; moderate time and legal costs

Limited Partnership one or more general and one or more limited partners; moderate time and legal costs

C Corporation one or more, with no limit; high time and legal costs

S Corporation one or more, 100 max. (since 2005); high time and legal costs

Limited Liability Company (LLC) one or more, with no limit; high time and legal costs

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Investment Liability

Proprietorship unlimited

General Partnership unlimited (joint and several liability)

Limited Partnership limited partners’ liability limited to their investments

Corporation Corp limited to shareholders’ investments

S Corporation limited to shareholders’ investments

Limited Liability Company (LLC) limited to owners’ investments

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Equity Capital Sources

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Proprietorship owner

Partnership partners

Limited Partnership general and limited partners

C Corporation venture shareholders/investors

S Corporation venture Subchapter S investors/investors

Limited Liability Company (LLC) venture owners(members)/investors

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Firm Life & Liquidity of Ownership

Proprietorship life determined by owner’s life; often difficult to transfer ownership

Partnership life determined by partners; often difficult to transfer ownership

Limited Partnership life determined by general partner; often difficult to transfer ownership

C Corporation unlimited life; usually easy to transfer ownership

S Corporation unlimited life; often difficult to transfer ownership

Limited Liability Company (LLC) life set by owners; often difficult to transfer ownership

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Taxation

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Proprietorship personal tax rate General Partnership personal tax rates Limited Partnership personal tax rates C Corp corporate taxation; plus dividends subject to personal tax rates of owners S Corp income flows to shareholders; taxed at personal tax rates LLC income flows to owners; taxed at personal tax rates

United States Business Forms

Proprietorship71.65%

Partnership8.05%

S Corp11.28%

C Corp8.97%

Public0.06%

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Franchise is not an actual form of business organization, but a proven business model for success

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What is Intellectual Property?

Intellectual Property is a venture’s intangible assets and human capital, including inventions and innovations that can be protected from being freely used or copied by others

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Ways of Protecting Intellectual Property

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Basic Definitions

Patents inventions that are useful, novel, and non-obvious

Trade Secrets inventions and information, not generally known to others, that convey economic advantages to the holders

Trademarks allow firms to differentiate their products & services through the use of unique marks

Copyrights writings in printed and electronically stored forms

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Patents

4 Kinds of Patents Utility Patents cover mechanical or general inventions, chemical inventions, and electrical inventions Design Patents cover the “appearance” of items 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

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Patents Application Process Develop or conceive an invention Prepare 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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For a patent application to be accepted, the invention must be Useful the invention cannot just “do nothing” Novel the invention was not previously produced, described in a publication, or patented Non-Obvious invention should be “non-obvious” to a person with ordinary skills in the art of the invention’s area or subject and the timing of filing the application must be filed within one year of first introduction to the public – in the future, you may need to file prior to any public disclosure or use

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3 Things a Patent does for the Inventor?

The government does not enforce your rights, The burden of enforcing the patent lies with the inventor and enforcement can be costly, Records indicate that over ½ of patent infringement suits taken to court are not upheld on behalf of the inventor

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Trade Secrets

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Trade secrets intellectual property rights in the form of inventions and information (e.g., formulas, processes, customer lists, etc.) that are

not generally known to others so they convey economic advantages to the holders

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Why Consider Protection as a Trade Secret instead of as a Patent?

– trade secret law can sometimes protect inventions that did not qualify for patents

– some inventors want to avoid the detailed disclosure required by the U.S. Patent and Trademark Office

– there are no time restrictions on trade secrets (in contrast to patents)

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What are Drawbacks of Seeking Protection under Trade Secrets Law?

– there is no formal procedure for obtaining protection as a trade secret

– protection is established by the secret’s characteristics and efforts to protect it

– holders do not have exclusive “rights” to what comprises the secret (someone could independently replicate the secret)

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Trademarks

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Trademarks are intellectual property rights that allow firms or others to differentiate their products and services through the use of unique “marks”

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Marks allow consumers to easily identify the source and quality of products/services

Most trademarks take the form of names, words, or graphic designs and can be on the shape of packages, colors, odors, and sounds

Trademarks are the most valuable form of intellectual property for many firms

A trademark should be suggestive of (but not describe) a product or product line

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How do You Obtain or Disclose a Trademark™?– no formal government procedure exists for establishing a trademark– ownership is established by being first to use the mark on products– a trademark can be lost if the mark becomes a generic term or label

(e.g., “aspirin” or “cellophane”)

How do You Register a Trademark? – a trademark can be registered in individual states or with the U.S.

Patent and Trademark Office– a federal registration should be used if a product is sold in more than

one state– products with federally registered trademarks show the trademark

accompanied by ®

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Copyrights are intellectual property rights to “writings” in written and electronically-stored forms, protects the “form of expression of an idea” and not just words themselves

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Other Methods for Protecting Intellectual Property Rights

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 Employment Contracts agreements between an employer and employee whereby the employer employs the employee in exchange for the employee agreeing to keep confidential information secret and to assign ideas and inventions to the employer

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