LEGAL ASPECTS OF ENTREPREURSHIP
GM 520 – Keller Graduate School of Business
Submitted and Copyrighted by: Carla J. Miller, Summer 2009
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I.
Introduction Running a successful business can be very difficult without the right tools. As more
and more people start or consider starting their own business, it is important that they understand the core steps that are required to launch successful ventures. These steps include spotting, assessing, selecting and executing opportunities presented.1 Business entrepreneurs must also have a thorough knowledge of the laws and statutes that pertain to the ownership and operation of their business, in order to maintain business operations in the long-term. Without this knowledge they are subject to fines, litigation, lawsuits and a host of other problems concerning employees, clients, vendors and other associates that can destroy their daily operations very quickly. Are online jobs the next big thing? As the U.S. economy continues to free-fall, millions of Americans are finding themselves without jobs, sufficient retirement or paychecks coming in. In March 2009 alone, the number of unemployed people increased by 694,000 to 13.2 million in the United States. Throughout history those on the cutting edge have adapted and prospered by knowing how to adapt to current economic climates, and this trend may once again be taking place on the internet.2 However, with the lack of precedents in the courts concerning some aspects of “CyberBusiness”, today’s entrepreneur must have additional knowledge in this area to protect themselves from unnecessary litigation. This paper will, hopefully, be a useful tool to budding entrepreneurs and help them make the necessary decisions to have a prosperous and successful business operation. Of course, a formal education would be the greatest tool for any entrepreneur to have to assure profitability and future business success.
1. 2. http://www.growthink.com/businessplan/help-center/four-steps-entrepreneurship http://www.net-news-daily.com/
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A. What are business ethics and why should they matter to your new business? The purpose of having laws is to provide and identify remedies to maintain order in the society. Ethics consists of those unwritten rules we have developed for our interactions with each other. These unwritten rules govern us when we share resources or honor contracts. The Constitution of the United States, and the constitutions of countries around the world, define the laws and statutes that regulate businesses in the society. However, there are always loopholes and gaps in the laws that unscrupulous individuals will seek to use to their benefit or to harm others. Business ethics takes the customs and everyday practices of a society and leaves it up the morals, mores, principals of fairness and justices practiced by the owners and associates of business to act in a manner that is ethical or “right”. B. What is a Business Tort and can I get whipped cream with that? When businesses or individuals do not follow ethical practices, usually a Business Tort is created (and no, you cannot get whipped cream, but you might get whipped in court or slapped with a huge lawsuit.) A tort is a private wrong. When a tort is committed, the party who was injured in entitled to collect compensation for damages from the wrongdoer for the private wrong. The three types of tort liability include intentional torts, negligence, and strict liability. Intentional torts are those that involve deliberate actions. Careless conduct or actions committed without thinking about the consequences of your actions, is the tort of negligence. Product liability is a form of strict liability, where a company can be held liable for injuries when a customer (or other client) has misused its product or service, because even the failure to provide adequate warnings on a product’s usage can result in strict liability. Businesses have a duty to act in an ordinary and prudent manner in order to mitigate liability for negligence.
3. Business, Its Legal, Ethical, and Global Environment, 8 edition, by Marianne Moody Jennings, published by Rob Downing 2009, 2006 as part of College Learning Academic Resource Center (our text)
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There are other types of intentional torts including: Defamation and slander that may pertain to publishing concerns or to information disseminated to the public about a business or an individual in an advertisement and, product disparagement is a serious tort involving the defamation of a company’s product. Innocent criticisms may be allowed, however when the disparagement causes loss of profits or ruins a company’s reputation, the harmed company can recover damages when the criticism has been committed with malice aforethought. I will cover other forms of product torts and strict liability, when discussing how to pick a product form and what types of violations of statutory laws result from developing and performing business contracts in a later section of this paper. However, the easiest way to learn what laws and regulations pertain to your business, is to develop a business plan (See Appendix I) and through the execution of your business plan you will learn what Constitutional statutes, or local and state laws that can affect or do not affect, your particular kind of business or product. Be aware that the majority of issues concerning entrepreneurship will have to do with contract laws, business torts, employment discrimination, environmental or real estate issues, and issues dealing with local statutes and laws. However, once you have developed your product, picked your management team, and hired your employees you can then turn your attention to making and re-investing your anticipated profits. Capital creation and maintenance will be a huge concern for most new entrepreneurs, because they usually do not have access to large sums of money. Entrepreneurs must be very creative and at the same time, very cautious about how they raise capital and how they can retain capital for their future operations. Trade laws, tariffs and other policies must be followed when conducting business in or with foreign countries. The Geneva based General Agreement on Tariffs and Trade (GATT) establishes uniform trade policies between the U.S. and the European Union nations. Along with the North American Free Trade Agreement (NAFTA) which is a trade agreement among the United States, Canada and Mexico, entrepreneurs can establish relationships and conduct business with foreign countries while being protected from unscrupulous trade practices.
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A thorough (if not, familiar) knowledge of investment products and ways to prevent large losses of company capital, will protect the average entrepreneur from having to shut down operations prematurely. A good insurance provider, a good accountant, a good investment counselor, and an even better lawyer are four of the most essential people which most entrepreneurs must have in their corner; especially a lawyer who is experienced specifically in the field of Business Law. The laws of each state vary greatly and in the case of Internet businesses, international and interstate laws must be adhered to. One fatal lawsuit can be the death knell to the most profitable of businesses and should be avoided at all costs.
II.
Developing Your Business Plan
A. Picking Your Organization Type, Product Development, and Hiring Employees
1. Choosing a business form – Partnerships vs Sole Proprietorships vs Corporations “Being an entrepreneur basically means that you have a business idea that your are passionate about, and you will organize people, funding and the necessary wherewithal to implement this idea and bring it to fruition by taking all the risks and enjoying all the rewards during this journey”4 If you want to become successful then you must surround yourself with successful people. You must create a Board of Directors for yourself. You must make the decision to either have a team of good people around, whom you can trust, or decide whether or not you can do it alone. With partnerships, you must share your profits, but you can also share your losses. Partners may have additional capital or much needed credit resources. The structure of your business will depend upon local tax laws, local property statutes, licensing laws, and the types of contracts that are signed between the owners, the personal needs of investors, and the needs of the individual owners.
4. http://www.howtodothings.com/business/steps-towards-becoming-an-entrepreneur
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After your business starts to grow, you may consider selling stock, and/or becoming a publicly traded corporation. However, be aware that although corporations may enjoy limited liability for business torts or claims, they also are subject to many more laws and regulations set forth by complicated Sarbanes-Oxley (2002) reporting rules and regulations. A simple product or service may only need a simple business format like a sole proprietorship or a partnership, whereas, many new companies are choosing to become Limited Liability Corporations to mitigate the effects of claims placed against the owners in the case of litigation. 2. Choosing your product rights – Ownership, Trademarks and Copyrights
The Universal Commercial Code (UCC) - Article 2 of the UCC governs contracts for the sale of goods and has been adopted in all states except Louisiana. Under Article 2 contracts can be more easily formed, the standards for performance more readily defined, and the remedies more easily determined. 5
a. Deciding to sell or lease your products (Ownership vs Lease agreements) A lease is a right of use and possession of property for a fixed or open-ended period of time. The key difference between a lease of property and ownership is that a lease transfers possession, but not ownership. When the lease ends, possession returns back to the lessor. A Bill of Lading is a receipt for a shipment issued by the carrier to the seller. It is also a contract for the shipment of the goods and provides evidence of who has title of ownership to the goods. The bill of lading can also be used in conjunction with a line of credit because the two together offer the seller the assurance of payment and the buyer assurance of arrival of the goods. The letter of credit lists the terms and conditions under which the seller can draw on the letter of credit or be paid. All licensing agreements and ownership paperwork must be kept in a secure location and be readily available to all parties concerned in the event of questions or pending litigation. Records of all transactions should be maintained and updated regularly, and original documents backed up or copied for security purposes.
5. Business, Its Legal, Ethical, and Global Environment, 8 edition, by Marianne Moody Jennings, published by Rob Downing 2009, 2006 as part of College Learning Academic Resource Center (our text)
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There are certainly many benefits for both the lessor and the lessee to consider when deciding whether or not to purchase property or goods. These considerations are beyond the scope of this paper. However, suffice it to say, that some rights of ownership supersede the rights of lessees, and there are several tax benefits for lessees that owners do not enjoy. The Uniform Commercial Codes regulates the rights and agreements of leases and owners including: collateral requirements, liens, mortgages, bailments, security interests and what happens when owners or lessees default on their obligations. 3. Picking a product form--- Developing Effective Marketing and Advertising Copyrights and Trademarks protect the owners and creators of the expression of ideas such as: books, articles, songs, dances, recordings, photographs, etc. A copyright gives the holder the exclusive right to sell, control or license the copyrighted works. Trademarks are words, pictures, designs or symbols that businesses place on goods to identify those goods as being “owned” by that business. The Lanham Act of 1946 is a federal law passed to give businesses protection from trademark infringement which is the illegal use of a trademark without permission. Trademarks and copyrights must be registered and the holder must self-enforce the unique nature of the property being protected. Patents and Trade Secrets are also protected and damages may be awarded to businesses that can prove violations of the Lanham Act, where their future profits have been or might have been impacted by the use or sale of the unauthorized materials or products. Entrepreneurs must be vigilant in developing their product mixes and be aware of other similar products on the market by researching trade journals and registering their original ideas. Ignorance of the market or unintentional violations can still be penalized or punished. Products must be unique and original. Some forms of imitation are allowed in the “gray market” of “knock-off” goods, however, license infringement is a very serious charge and the awarded damages can be considerable. First Amendment Rights of free speech in product advertising can be limited, but product disparagement must be strictly avoided, and advertising or celebrity endorsements must be free from deception, lies, or undue influential claims.
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Businesses, like each one of us, have the duty to act in an ordinary and reasonably prudent manner in all circumstances. Breaches of this duty can assign liability for claims against the business and the establishment of damages to be paid in the case of litigation for negligence or the assumption of risk by guilty parties. Warrantees and Guarantees must be either expressed or implied for merchantability or fitness for use, products and their packages must be free of defects, and warnings and instructions must be clearly posted. The Federal Trade Commission is authorized to prevent unfair and deceptive trade practices. The Consumer Product Safety Commission regulates safety standards for consumer products and can impose civil penalties and criminal fines; including imprisonment for willful or intentional violations of the regulations and laws. Remember always: Caveat emptor! (Let the buyer beware) 4. Choosing your Employees and Partners ---Hiring and Firing and Employer Responsibility a. Civil Rights and Contract Law
“A contract is a promise or a set of promises for breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty.” This definition comes from the Restatement (Second) of Contracts, a statement of contract law by the America Law Institute (ALI) which recognizes a contract as a set of voluntary promises that the law will enforce for private parties. 6
Entrepreneurs must follow all hiring and firing practices set forth by the Civil Rights Act of 1964, The Fair Labor and Standards Act (FLSA) (which governs minimum wage laws), and the Equal Employment Opportunity Act, for all employees without discrimination based on sex, color, religion, race or national origin. The FLSA makes it a violation for any employer to fire an employee for filing an FLSA complaint for participating in any FLSA proceeding. Employers must follow all Social Security Act regulations, and are required to contribute under the Federal Insurance Contributions Act (FICA), and the Employee Retirement Income Security Act which was amended by the Pension Protection Act of 2006. All taxes and contributions must be paid according to State and Federal regulations, and upon viable termination or injury, unemployment or worker’s compensation must also be paid.
6. Business, Its Legal, Ethical, and Global Environment, 8 edition, by Marianne Moody Jennings, published by Rob Downing 2009, 2006 as part of College Learning Academic Resource Center (our text)
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Employers must also be aware of strikes, labor relations contracts, union negotiations and other labor concerns such as collective bargaining, however, these are issues beyond the scope of this paper for most entrepreneurs. On the other hand, immigration concerns are very important and employers must be aware of their employees’ legal work status at all times. It is important to realize that a contractual relationship exists between the agent (employee) and the principal (employer). A bilateral contract is created between the employer and employee in which a promise to perform certain actions is made. An offer must be made and communicated by the offeror, and the offeree must accept the terms for the offer to be valid. An enforceable contract must be created in writing in order to comply with the statutes of frauds. Any rejection or changes made to the contract, and all stipulations must be divulged and understood by all parties or be subject to arbitration or litigation. All parties must be legally able to enter into the contract or else it may become voidable due to misrepresentation or fraud, and be subject to compensatory damages.
b. Managing employee conduct and employee welfare Many companies have employees sign contracts that include covenants to not compete against the business, “moonlight, ” or disclose information about former employees should they leave their positions or be terminated. The underlying reason for the non-compete agreements must be evident, such as the employee having had access to the company’s proprietary information. An agent has the duty to obey reasonable instructions from the principal, to not commit criminal or intentional torts, and is required to perform according to the principal’s standards and instructions. Failure to do so would mean that the agent has acted outside their authority and may be personally liable for their conduct. Agents have a duty to use care and act prudently as they would as if managing their own affairs. An agent who does not use reasonable care is liable to the principal for any damages resulting from this lack of care. A principal has the right to expect an agent’s performance within the standards just described. In exchange, the principal has an obligation to provide compensation for services performed, in whatever form that has been agreed upon (by previous arrangement, only.)
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Principals also have the obligation to provide a reasonably safe and secure environment in which to work according to the Occupational Safety and Health Administration (OSHA) rules and regulations and Civil Rights Laws. Most employees do not have written contracts that specify the start and duration of their employment. Therefore, most employees work at the discretion of their employers and are employed “at will.” Termination of these relationships and the proper procedures or conditions under which termination may take place, should be divulged in the company employee personnel manual. Because this manual represents a potential contract for the employer, its nature and contents should be considered very carefully by the employee. Improper discharge by an employer is a serious matter, and the employer should seek to mitigate any damages for these actions by conducting regular performance reviews, giving clear and concise written reasons for dismissals, and following the written guidelines for terminations. They should also be prepared to show in court why they are not binding in any particular instance. Employers should perform all requisite background checks and review all references provided on resumes and employment applications to protect themselves and their other employees from fraud or discrimination claims. An employee’s work status must be completely understood based on whether or not they are independent contractors or regular employees. Taxes, compensation and other employee benefits such as healthcare may be limited for independent contractors and extensive for other employees such as pregnant women. Entrepreneurs may be prohibited from using workers that have special considerations, such as handicapped workers or workers who have other extensive health needs. 7. Location, location, location --- Demographics and Market Focus a. Real Estate Laws and Environmental Issues Once an entrepreneur has completed studies of their potential markets, they will probably want to choose a good site from which to work or sell their products. Choosing the proper location is a critical business decision, and subject to many local and state laws and regulations. Ownership interests in real property take various forms. The highest form of land ownership is called a fee simple interest. It gives full ownership rights to the property and the owner has the freedom to mortgage the property, sell the property, and, transfer it by will.
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Another real property interest is the easement, which is a right to use another’s property. A final form of real property interest is the lease (which was previously discussed earlier.) Most states have full statutory provisions on residential leases and many have requirements on commercial leases. Transferring real property is more complicated than transferring personal property and is effective through the use of a deed. A warrantee deed or a general warrantee deed provides the highest degree of title protection from the grantor. A special warrantee deed or the bargain and sale deed are similar to the warrantee deed, but is only valid for the time during which title is held for the property. Buyers should purchase title insurance that provides reimbursement in the event a title defect arises after purchase such as tax liens and easements. The quit claim deed is often used when someone is trying to clear title to property and gets the quit claim deeds from individuals who might or might not have claim on a title. Purchasing property is a major investment for most entrepreneurs who will probably choose to work from their own homes, or rent or lease work space in the early years of operation. Financing real property will usually be established via a mortgage, or a creditor security called a deed of trust which places title to property in the hands of a trustee until a debtor repays the creditor the full amount of the debt. Land owners and leaseholders must comply with Federal and local environmental regulations that protect the surrounding areas. The Noise Control Act of 1972 regulates the amount of noise emissions coming from a business location, the Federal Environmental Pesticide Control Act regulates the use of pesticides and herbicides on company property, and the Occupational Safety and Health Administration is responsible for regulating the worker’s environments. Businesses are also responsible for the release of any toxins, emissions, garbage, or any other pollutants that may enter the water, land or air surrounding the business and may be liable for interrupting the habitats of local animal species through the Endangered Species Act. Most of the federal statues previously discussed carry criminal sanctions for
violations and should be avoided at all costs. The EPA may require businesses to maintain records or to install costly equipment necessary to monitor the amounts of pollutants being released into the air or water around the business. It may be more cost effective to comply with environmental regulations than to ignore them and be subject to exorbitant fines or imprisonment for serious violations.
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III.
Investing in Yourself
A. Obtaining capital --- Securities Laws and Regulations
Applying for the funding after you’ve drawn up the plan will inject the necessary impetus into the business, and you can start recruiting those staff you’ve been talking to etc. Simultaneously, while applying for funds develop a marketing plan and sales strategy. How does one need to promote this business and which marketing tools do you use? 7
Most entrepreneurs must use and rely upon their personal ability to obtain credit or other forms of capital. Loans may be obtained from banks, credit unions, or other private investors, however they must be repaid in a timely manner. Thus, the entrepreneur must insure their investors of a steady stream of income to cover their obligations. Securities such as stocks, bonds, and other investment products that are traded on the New York and International Stock Markets, do not pertain to sole proprietorships or most partnerships, however, the Securities Exchange Commission is the regulatory agency that controls the sale and distribution of all such investment products. More information on these products should be obtained before they are sold or purchased, as there are many rules and regulations that must be followed should a business choose to obtain capital through these means.
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The following facts must be kept in mind when applying for credit and for extending credit to customers and clients. The Truth in Lending Act (TILA) as part of the Consumer Credit Protection Act passed in 1968 by Congress was created to make sure debtors are treated fairly through the adequate disclosures of credit terms. The Federal Reserve Board delegates the responsibility for enforcing the TILA, and has created various regulations to carry out the details of the act. The Equal Credit Opportunity Act (ECOA) was passed to ensure that credit was denied or awarded on the applicant’s merits (the ability to pay) and not on other factors such as race, sex, color, religion, national origin or age. Creditors may only ask for answers to those criteria for record-keeping purposes, but the final decision to extend or deny credit must be based on other factors such as: marital status, receipt of public assistance income, alimony or child support, and the applicant’s plans for having children. Violations of the ECOA statutes can carry stiff penalties, or prohibitive punitive damages.
7. http://www.howtodothings.com/business/steps-towards-becoming-an-entrepreneur 8. http://www.invest-money-stocks.com
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The Fair Credit Billing Act gives debtors and customers the opportunity to challenge figures on their open-end transaction monthly statements and gives them the rights to cancel or dispute charges. Creditors have 30 days from the time of receipt of the written protest to acknowledge to the debtor’s receipt of the protest. The creditor has 90 days from receipt of the protest to take final action by either giving the debtor’s account credit or reaffirm the valid charges. The Consumer Leasing Act is an amendment to the TILA the gives disclosure protection for consumers who lease goods. B. Protecting Your Credit and Credentials --- Identity Theft and Capital Protections Employees found guilty of taking employer’s property are guilty of theft or embezzlement. Three elements called the “actus reus” must be present: 1) intent to take the property, 2) actually taking the property for permanent use, and 3) lacking the authorization to take the property. For embezzlement, the elements are the same, with the addition of being in the position of trust for the company. The “mens reus” which makes it a crime, means being in the state of mind to actually and intentionally commit the act. Unintentional acts should be thoroughly investigated, and true responsibility and intent be established before more serious consequences are meted out. All sensitive and private information and property should be tagged with unique identification and guarded from theft or misuse with the proper security measures. Identity theft is a common practice, and businesses must constantly seek to protect themselves and their clients or customers from unscrupulous employee behavior. Computers and computer information must be protected by trusted employees who understand the seriousness of violations of client privacy and agent responsibilities. These acts are illegal and subject to criminal law statutes. An entrepreneur should not hesitate to press charges against any employee found guilty of these crimes to protect their business from further loss of profits or any future litigation. Owners who do not wish to be found guilty of any of these crimes must think twice before committing any act that can immediately be traced back to themselves. Irresponsible behavior will lead to devastating losses of capital and reputation for the business and should be avoided at all costs.
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C. Protection from claims 1. Insurance --- the ultimate in protection Employers can show financial responsibility by 1) maintaining proper insurance policies, 2) acquiring the policies from state regulated agencies, or 3) offering evidence of sufficient assets and resources to cover potential claims and benefits. There are foreseeable and unforeseeable events that occur in every business’ lifespan however, insurance is the coverage that can extend the life of a business in the event that legal proceedings are filed against the owner. It is a necessary and valuable resource and should never be overlooked by the successful entrepreneur. 2. Dispute Resolution, Litigation and Dissolution --- but only, if you must. Alternative dispute resolution (ADR) offers parties an alternative means of resolving conflicts outside of a courtroom and saves money for the litigants in the long run. Arbitration can be binding or nonbinding. Binding arbitration means that the decision of the arbitrators is final. Appeals of the decisions are limited. Nonbinding arbitration is a preliminary step to litigation. If one of the parties is not satisfied with the result in the arbitration the case may still be litigated. Your attorney can give you much needed information and assistance in these matters. If the parties cannot reach an agreement through a consent decree, the question of violations and penalties will go before an administrative hearing. The plaintiff or prosecutor would be the administrative agency, represented by one of its staff attorneys. The defendant would be the person or company accused of violating an administrative regulation. The judge is called an administrative law judge (ALJ) and in some agencies is called a hearing examiner or officer. The defendants may be represented by their private counsel or attorney. The AJL has the responsibility of making the decisions in the case. That decision is cast in the form of a written opinion that is made of the findings of facts, conclusions of law and an order specifying the remedies and sanctions. However, once the ALJ has issued a decision, it can be appealed to the next higher level in the agency. Those appealing an ALJ’s decisions must go through all required lines of authority in the agency before they can go to court, through a process of exhaustive administrative remedies.
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The entire process may take years to complete and the company may still be able to function on a daily basis, however, pending litigations should be disclosed in the company financial records to maintain transparency according to Sarbanes-Oxley rules and regulations. The company that is subject to litigation may face impending dissolution, if they cannot prove lack of liability or culpability. Huge fines and or damages may need to be paid and can wipe out the financial stability of the company to be an on-going concern, thus it may have to curtail or cease operations. This is where viable insurance and positive media damage control can protect the company from further claims or from additional penalties.
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Conclusions In conclusion I must state that there are many, many more laws, rules, statutes and
regulations that concern entrepreneurs that are beyond the scope of this paper. Again, I must refer the reader the Appendix I which is an outline of a typical Business Plan. The successful entrepreneur will gather as much knowledge and information they can about current legislation, standing laws, and statutes that pertain to their particular business operations and plans. The more they know, the better they can avoid expensive claims and litigation against their business or escape incarceration. It goes without saying, that the average entrepreneur will follow laws and regulations, or treat their clients, customers, vendors and creditors with honesty and respect. Then again, there will always be those who do not. Most small business fail within the first two years of operation, and many more succeed when they are vigilant in their honest business practices. Our Federal government has assured the public that businesses must comply with rules and regulations that not only protect the public but also the employees and owners alike.
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Appendix I Many small companies, for the first time ever are finding that they need to write a business plan. A few decades ago, this was unnecessary for "mom and pop" types of stores, but now even owners who have no other employees have the need for a business plan, and many people don't realize this until it's way too late. Without a business plan, you can lose sight of your goals and even fail to receive funding. A good business plan is very important, if not absolutely crucial if you want to start a successful business. A good business plan shows investors and employees that you are dead serious about starting your own business and that you are willing to put the effort into making it work. If they lend you money and your business fails within the first couple of years, as many new businesses do, they run the risk of losing money as well. You could declare bankruptcy, or otherwise evade paying back your loan. Simply put, without a business plan you will seem very unprofessional. A business plan also answers the questions of potential moneylenders and investors before they have the chance to ask to them. The most important part of your business plan to them will of course be the financial part, but they will also be interested in seeing your short term and long term goals. Are you planning to expand your business? If so, this could mean more income for you which means, that you will payback your loans more quickly as well as be able to continue growing your business. Employees who are interested in working for your company will have questions as well that can be answered by your business plan. For example, how will the management team work? Employees will look for opportunities to advance within your company as well as be interested that you have your finances in order. No one likes to work for a company that ultimately will fail after all. A good business plan is absolutely necessary, if you wish to start a new business. If you already own a business and have not developed the plan, now might be the time to do so. By having a working business plan available for anyone involved in your company, you can set clear goals for the future and be sure to please your audience [The following information is taken from the "Business Plan Development Guide", written by Alex F. DeNoble and Audrey B. Voyles.]
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MAJOR PARTS IN A BUSINESS PLAN
What is a Business Plan? --- The Business Plan is perhaps the most important document an entrepreneur can create. The business plan helps guide the direction of the start-up company's first several years, as well as giving potential investors an idea of the company structure, goals and future plans. What are the parts of a Business Plan? Section 1 - The Executive Summary - The purpose of the executive summary is to capture the interest of the investors/lenders so they will want to find out more about the venture. These investors are likely to spend no more than 3 to 5 minutes before making a preliminary decision about your proposal. Therefore, this section is first, and in some ways is most important. This section should emphasize key issues and be no longer than 2 to 3 pages. The following information should be addressed in the executive summary:
Company profile Nature of the product/service being offered Size and growth trend of the market Make-up and background of the management team Financing requirements Key projections (sales, gross profits, net income) Proposed use of funds Proposed exit strategy including projected ROI
The executive summary is written last, after the rest of the plan is completed.
Section 2 - Business Description - -- This section of the business plan should provide the reader with a more detailed overview of the company and the nature of the product/service offering. It should include the following:
Mission Statement History behind the idea or current business Company's current or proposed legal form Proposed entry strategy and time line of events Description of the initial product/service (including any anticipated competitive advantage) Product research and development
Section 3 - Market Analyses --- The main objective of this section is to convince the reader that an explosive market opportunity exists, and that the entrepreneur understands it well enough to capture a share large enough to support the new venture. The entrepreneur can do this by addressing the following areas:
Description of the industry Targeted markets Marketing research Competition Barriers to entry 17
Section 4 - The Management Team --- The strength of the management team plays a key role in investors' and lenders' decision to fund a venture. The objective of this section is to convince the reader that the entrepreneur has a management team that can effectively manage the product/service into the market place and make the venture a success. The key areas to cover are:
Background and primary responsibilities of the management team Organizational structure Board of directors/advisors Ownership
Section 5 - Operations --- This section should provide an overview of the strategy for implementing the business plan. The objective here is for the entrepreneur to demonstrate that he/she has an understanding of how the plan will be implemented. Also, this section will help the entrepreneur focus on relevant costs associated with implementing the plan. The entrepreneur must remember to incorporate the assumptions made in this section into the assumptions in the financial section of the business plan. Depending on the type of business, the entrepreneur should address the following key areas:
Marketing Strategy Production Plan Personnel Customer Support Future research and development plans
Section 6 - Critical Risks --- In this section the entrepreneur should identify potential problems that could have a significant adverse affect on the new company. By disclosing such possibilities, the entrepreneur is letting the reader know up-front that there are risks associated with the venture. Such an approach will contribute to a heightened respect on the part of the reader for the entrepreneur. The following areas should be covered:
External Risks Internal Risks Insurance Provisions Contingency Plan
Section 7 - The Financial Projections --- The purposes of the financial section of the plan is to convince the reader that the venture makes sense from a financial standpoint. The entrepreneur must be able to translate the idea into a plausible set of financial projections which address procurement, allocation, return on investment, and cash management. The financial section should include actual performance data for at least the preceding 3 to 5 years. If the company has no operating history, then this section will deal only with financial projections. For existing and new companies, this section will include the following:
First year financial projections by month First year financial projections by quarter Five year forecast 18
Breakeven analysis Ratio analysis Exit strategy Historical financial data
Section 8 – Appendix --- The purpose of the appendix is to provide additional documentation that supports the business plan. This section gives potential investors the option of looking at more detailed information if they so desire. At a minimum you should make sure that you include in the appendix all information referenced in the plan. The following is a list of items that should be included:
Details explaining the tax advantages associated with the proposed structure of the new venture Copies of patents, trademarks or copyrights that have been completed Reviews by independent firms, publications, or outside agencies Letters expressing an interest to buy the product or service Questionnaires used to collect data as part of your marketing assumptions Non-compete agreements signed by the management team and key contributors, particularly if they play a key role in the invention of the new product Resumes of the key management team and key technical advisors Price list of competitors Promotional brochures or advertisements that describe the product or service
http://www3.uakron.edu/cba/fitzgerald/competition/businessplan.htm
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