New Ventures & the Law
New ventures are a vital source of employment and growth for the economy. Entrepreneurs who engage in new ventures, whether as part of a large corporation or as an individual working out of a studio apartment, should be aware of the requirements imposed by the law. State business formation law and federal intellectual property law offer entrepreneurs powerful tools to protect their assets and ideas. Other laws impose duties on business, for example, federal and state tax, tort law, employment law, and securities law, among other legal issues. Entrepreneurs should be diligent in understanding which laws apply to their chosen activity to ensure the maximum chances for success. Accordingly, the entrepreneur should educate themselves to the greatest extent possible and engage the most experienced attorney that their budget will allow.
Keywords Business Formation; Business Tax; Employee; Entrepreneur; Independent Contractor; Intellectual Property Rights; New Ventures
Entrepreneurship: New Ventures
A new venture or an entrepreneurial undertaking involves the coordination of a number of people and resources. New businesses form the foundation upon which market economies are built, because they capitalize on a recognized need in the marketplace. Entrepreneurs are often creative and energetic and can be one person working alone or teams of people working within multinational corporations forming a partnership to take advantage of a new market in light of their respective expertise. While new ventures can and often do form from within an organization, the common notion seems to be that of a visionary starting with little more than limitless determination to see a vision become reality. However, businesses start without a new or revolutionary idea, and open to fill an existing need that is perhaps being underexploited. For example, when a lawyer leaves a law firm to open a new firm or a private solo practice, it may be entrepreneurial or could be considered self-employment. The distinction between entrepreneurship and self-employment rests on the premise that entrepreneurship is the act of creating something new as opposed to offering something substantially similar.
In light of this distinction, it is appropriate to endorse a clear definition of the meaning of new venture for discussion here. A new venture is any enterprise that generates profit based on a business model that did not previously exist. Whether a new venture is entrepreneurial in the sense of novelty may be of great importance to marketing and potential profit concerns. However, the law is largely unconcerned with whether a business has a good or bad idea, a new approach or tried-and-true system, because the law tends to apply uniformly to a given class of businesses.
The law as applied to new ventures can be regarded as separate from business concerns, but it is always included, to some degree or another, in all business activity. Business activities address such matters as the identification of products suited to certain markets, pricing, sales, distribution channels, advertising methods, and human resources. Legal questions may address whether to operate as a corporation or limited liability company. In a general sense, a business question is the subjective assessment of whether a business should take some action and a legal question is an objective determination of how or whether a business may lawfully take that action.
Recognizing the dual requirements of business and legal considerations and that due diligence is required in each area leads to an important preliminary step in the formation of a new venture, seeking legal advice and expertise. Good legal advice and planning often goes unnoticed because nothing happens; operations carry on smoothly and efficiently and entrepreneurs are free to focus on their business activities. On the other hand, a failure to adequately address legal concerns can cause a business to fail. A business may be packed with customers and generating profit but may nevertheless be forced to close due to lack of compliance with the law or from liability that could have been avoided. The complexity and nature of the business and the resources of its organizers will determine the type of legal counsel is required. A joint venture between two large oil companies would clearly require a highly specialized team of legal professionals, while a person opening a pet grooming service would need far less expertise but would nevertheless require some legal consultation from time to time.
Selecting an attorney is likely to be one of the more important decisions in the business start-up process. While legal issues are best handled by lawyers and business decisions are best handled by business people, each professional can benefit significantly from knowledge of the other. The attorney that has experience and particular expertise in the target industry and start-ups is preferable to one that does not. Initially, an entrepreneur may be inclined to use their existing legal counsel or an attorney recommended by a friend or family. However, because effective legal counsel is so important, considerations of skill and expertise should take priority over considerations based on expediency and convenience. Additionally, it is always wise to retain the services of the best professional that a budget will allow. An effective team is critical to the success of a new venture and legal counsel is an important part of that team during all phases of the business life cycle.
The form of business refers to the legal category to which a business belongs. Generally, the options are sole proprietorship, corporation, limited liability company (LLC), joint venture, or some form of partnership. Each has certain advantages and disadvantages. Generally, the two major criteria that are used to decide between forms are the potential for limited liability and exposure to taxes. Typically, the goal is to minimize the potential for legal liability for the owners and to minimize taxes. Because potential personal liability for business liability is a major concern, sole proprietorships are generally not recommended because they afford no limited liability. Legally, a sole proprietorship is an extension of an individual, that is to say, there is no legal difference between the owner and the business that they own. Therefore, should the business incur some debt or obligation, the individual owner would be personally liable for that debt. For example, a person sets up a shop that operates as a sole proprietorship. A customer trips and suffers severe injury and sues. A court rules that the shop was negligent and returns a judgment in favor of the customer. The judgment will be satisfied by the business's assets, including any insurance. If those assets are insufficient, the sole proprietor's personal assets (house, car, personal savings etc.) may also be taken to satisfy the judgment. The owner of a sole proprietorship is said to have unlimited liability for business liabilities including debts that arise from contracts, business operations, taxes, and torts.
Typically, companies raise capital by selling equity, which is an ownership stake in the company, or by incurring debt. A sole proprietor may wish to entice an investor by offering ownership in the business. If the investor agrees and contributes money in exchange for ownership, the two have formed a partnership. Partnerships (a general partnership in this example) can typically arise without any filing; they are said to arise as a matter of law so long as two or more people carry on business for profit. General partnerships and sole proprietorships both have unlimited liability for the owners. In the case of a general partnership, each partner is usually liable for all partnership debts, even if the other partner entered in the contract or made the deal. Imagine investing in a sole proprietorship, legally converting it to a partnership, and then after the company defaulted on payment, having creditors knock on your door demanding your house and savings to satisfy business debts. That is the nature of unlimited liability, which creates grave risks for anyone who owns a business without any protection from liability. Investors would typically require that a sole proprietor or general partnership structure be converted into some entity that had limited liability.
Fortunately, unlimited liability can be converted to limited liability with the use of state laws that allow the formation of such entities. The major alternatives are limited liability companies (LLCs), corporations, and limited liability partnerships (LLPs) or limited partnerships (LPs). These business forms provide limited liability to the owners and generally consider the business to be a separate legal entity from its owners. That means that, barring...
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