BUS 8303 Entrepreneurship and Innovative Business Development: UNIT VIII STUDY GUIDE: Legal Considerations – Assignment Solution

UNIT VIII STUDY GUIDE: Legal Considerations

Course Learning Outcomes for Unit VIII

Upon completion of this unit, students should be able to:

 

1. Compare the types of

 

2. Analyze the role of an entrepreneurial mindset in opportunity

 

3. Appraise the use of design thinking toward innovative

 

4. Examine business
   • Synthesize the connections between social entrepreneurship business models and selection of legal

 

5. Differentiate innovative business

 

7. Describe legal aspects of business
   • Identify unique benefits related to legal structures in forming a new
   • Describe legal determinations of employee

 

Course/Unit Learning Outcomes	Learning Activity
1	Chapter 16 Unit VIII Case Study
2, 3, 5	Unit VIII Case Study
4.1, 7.1	Unit Lesson Chapter 14 Student Resource: Common Legal Structures Unit VIII Case Study
7.2	Unit Lesson Chapter 14 Unit VIII Case Study

 

Required Unit Resources

Chapter 14: Navigating Legal and IP Issues Chapter 16: Supporting Social Entrepreneurship

In order to access the following resource, click the link below.

 

Navigate to the Video and Multimedia area in Student Resources for Chapter 14 of the eTextbook to view the item listed below.

 

• Common Legal Structures

 

Unit Lesson

 

Legal Structures

There are important decisions needed in selecting the form of ownership for your new venture. The legal structure impacts tax rates, ownership stakes, non-profit and for-profit status, legal liabilities, and even conditions of sale when the new venture is sold, which is most often the primary means by which significant profits are realized.

 

A common mantra in creating a new venture is to begin with the end in mind. What is the ultimate goal of your new venture? Knowing this end goal will help you understand what form of ownership you want to select for your new venture.

 

As an example, let’s look at YouTube. A key success requirement for YouTube was technology related to video searches. Just as this technology was being created, the four PayPal employees who started YouTube recognized this technology as an opportunity to create a video library or video content collection. The startup team also knew that their goal was to sell the company to Google, or at least that was their hope (TechSavvy, 2019). Having this end vision in mind, selling to Google should have helped in the decision for the form of ownership YouTube founders selected.

 

Other influencing factors would have been acquiring funding for the venture and potential liabilities around their business idea. Each of these considerations should be a part of the decision in the selection of the form of ownership. There is also the option that you might start with one form of ownership, such as a sole proprietor or limited liability corporation (LLC) status, and select another form of ownership as the venture grows.

 

The easiest form of ownership is a sole proprietor; although LLCs are also easy to acquire and have the added benefit of providing some liability protection. This is a frequent choice for licensed professionals. Liability for wrongdoing and debts are the responsibility of the owners, even with LLCs. A C corporation is a type of corporation created by the state government and owned by an unlimited number of shareholders. It is frequently selected when seeking external equity funding. In the YouTube example, YouTube started as a sole proprietor and evolved into a C corporation.

 

Another example is someone who wants to start a lifestyle venture or a venture that solves a social problem. A lifestyle venture is a business that supports the owner’s lifestyle with sufficient income to pay the venture’s

 

expenses as well as the owner’s debts and enough money to provide for a reasonable quality of life. Social entrepreneurship has a focus on solving a societal problem such as supporting children’s health and education. Knowing the legal risks and benefits in selecting the best legal structure can position the venture for future success. These examples point out the value in knowing what you want from the new venture, and how that outcome impacts the legal structure to support your vision for the venture’s future.

 

There are a variety of business structures to choose from including, sole proprietorship, general partnerships, corporations, limited liability, and benefit corporations, to name a few choices. In the eTextbook, Table 14.2 explains types of ownership including a short definition, liability, and taxation differences between these choices. Learning these differences is a start in considering the legal structure that best fits your idea.

Because selecting the structure of the venture is an important and essential choice, consulting an attorney is well worth your time and effort.

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Various websites provide information related to legal questions and concerns about your business venture and are located in Table 14.1 of the eTextbook. Just as due diligence is needed in making all decisions, you should also take the time to explore the legal implications of your decisions, including your business structure. Conducting this background research before deciding positions you for improved and informed actions. Even with taking the time to become informed about legal topics, you should seek out legal advice before making these decisions. In some situations, such as the following topic area, you might even need formal letters from state officials clarifying your decisions.

 

Employee Legal Classification

 

One significant area of legal consideration relates to employees. Legal requirements related to the classification of employees, benefits, and compensation are derived from federal, state, and local regulations impacting these tightly regulated areas. Knowing your state and local employment laws and other regulations related to your specific business is essential to avoid potential penalties and fines. There are three primary categories of employees: contract labor, non-exempt employees, and exempt employees.

 

Table 14.7 of the eTextbook identifies the differences between an employee and a contract laborer.

(Neck et.al, 2021, p. 375)

In some industries, getting a formal letter from the state where you operate is wise for providing a statement supporting workers as contract laborers rather than employees. Contract laborers provide their tools and pay their taxes, benefits, and expenses. If we start a business categorizing workers as contract laborers, we

 

would not withhold taxes or pay taxes on the worker’s behalf, but, if, at a later date, the state decides that the workers are not contracted workers and are, instead, employees, the business owner would be responsible for back taxes and possibly wages and other benefits. This determination could be the downfall of the business.

 

Let’s say you want to open a cottage industry business that creates custom-made clothing. Your workers provide their equipment like sewing machines and scissors. You provide the workers with orders from customers. You pay these workers based on what they produce. Would these workers be contract laborers, or would these workers be employees?

 

Interestingly enough, some states determine that these are contract laborers and other states decided that these are employees. This is an example of a situation where it would be best to get a final and specific classification from the state labor department.

 

Across the United States, some states use common law in classifying workers as contract laborers or employees, while other states use an ABC method. Common law considers if the employer has any behavioral control of the worker, financial control over the worker in terms of reimbursement of expenses, whether the worker provides the same services in the open market, and the relationship between the employer and worker. The relationship is further clarified through any written contracts describing the relationship and provided benefits such as vacation, sick days, profit-sharing, and the terms of employment such as length of the relationship and conditions for ending the relationship (Wrapbook, 2019).

 

The ABC method considers the extent of control over the worker or absence of control, as in free from control in how the work is performed, the business of the worker such as if the work performed is unusual and/or off the premises of the entity’s premises, and whether the worker is customarily engaged as a contractor, a perspective related to whether worker is commonly accepted as engaged for profit in the open market (Wrapbook, 2019).

 

Let’s go back to the example of the cottage industry with people creating the products. In applying both the common law and ABC methods for determining if an employee is a contract worker or an employee, how would you classify these workers? As you can see, these nuances and interpretations make these decisions difficult. This example fits well into that area where taking the time to receive a formal determination from the state labor department and keeping that document on file, is well worth your time.

 

Non-Exempt and Exempt Employees

 

Two subdivisions of employee categories are non-exempt and exempt employees. Non-exempt employees are entitled to overtime pay by the Fair Labor Standards Act (FLSA) while exempt employees are not entitled to overtime pay. Exempt employees must earn a minimum of $55.00 per week or $23,660 per year in the form of salary. Executives and professionals are considered exempt. Non-exempt employees must be paid overtime at one-and-a-half times their hourly rate for any hours over 40 hours per week. This exempt employee earning amount is updated occasionally.

 

Even if an employee is titled as a manager, if that employee does not earn this minimum amount of wages, the employee is non-exempt and would need to be paid overtime wages. The FLSA covers a variety of labor requirements and is another legal area that impacts your business.

 

Due to the complexities related to regulations, taxes, compensation, and benefits, outsourcing these activities might be a wise decision. Many payroll companies manage the entire compensation process from storing employee information through processing payroll through year-end tax statements such as employee W-2s.

 

Interactive Activity

 

In order to check your understanding of concepts from this unit, complete the Unit VIII Knowledge Check activity.   Unit VIII Knowledge Check   PDF version of the Unit VIII Knowledge Check   Note: Be sure to maximize your Internet browser so that you can view each individual lesson on a full screen, ensuring that all content is made visible.   Remember, this is a nongraded activity.

 

Summary

 

In considering legal decisions, asking other business owners about their choices and experiences is part of your due diligence process. Asking questions provides background information, although due diligence includes digging deeper to find out if the answers apply to your business venture’s best interests. Other legal considerations include intellectual property areas and the privacy protection of employee and customer information.

 

Even for social entrepreneurs, legal structure must be carefully considered and must align with the business model and success of the venture. Selecting a non-profit status still requires that the venture has cash inflow to sustain the venture. Some unique business models for social entrepreneurs include grant funding, crowd funding, as well as traditional and innovative business models covered in a previous unit. Just as cash is necessary for the venture’s growth and success, mitigating risks through the best legal structure is also essential.

 

All of these topics should be addressed by your team in a founder’s agreement. A founder’s agreement is a formal document that clearly defines details about who makes decisions, especially in situations of disagreement; what percent each person in the startup team owns of the venture; and how this percent reflects payment of losses and receipt of profits. Making these decisions early in the new venture planning stage prevents significant future problems.

 

In looking at the decision for percent ownership in the venture and how losses and profits are managed, consider what happens if one owner thinks payments are in cash and another owner thinking payments are made in greater equity in the venture.

 

Another important area is the way owners exit the venture. Discussing and deciding on these topics early in the venture’s planning process is much easier than making these decisions in real time when owners have their interpretation of these actions.

References

 

Neck, H. M., Neck, C. P., & Murray, E. L. (2021). Entrepreneurship: The practice and mindset. SAGE.

 

TechSavvy. (2019, August 9). What was YouTube before Google? – The story of YouTube before it was sold to Google for $1.6 billion [Video]. YouTube. https://www.youtube.com/watch?v=0vU0wVp_45E

 

Wrapbook. (2019). Employee or contractor? The complete list of worker classification tests by state. https://www.wrapbook.com/worker-classification-tests-by-state/#ABC%20Test

 

 

Suggested Unit Resources

Supplement B: The Pitch Deck

 

 

Learning Activities (Nongraded)

Nongraded Learning Activities are provided to aid students in their course of study. You do not have to submit them. If you have questions, contact your instructor for further guidance and information.

 

In order to access the following resources, click the links below.

 

Utilize the following Chapter 14 Flashcards and Chapter 16 Flashcards to review terminology from the eTextbook.