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Chapter 3 ORGANIZING AND FINANCING A NEW VENTURE FOCUS In this chapter, we focus on organizing the venture, obtaining and protecting intellectual property, and early stage financing. Although an entrepreneur can change the legal form of the venture in the future, the initial choice should carefully consider tax effects, liability implications, and the amount of financial capital needed to start and initially operate the firm. Entrepreneurs who possess and protect intellectual property will increase the chance that their ventures will survive and create value. 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 CHAPTER OUTLINE 3.1 PROGRESSING THROUGH THE VENTURE LIFE CYCLE 3.2 FORMS OF BUSINESS ORGANIZATION A. Proprietorships B. General and Limited Partnerships C. Corporations D. Limited Liability Companies (LLCs) 3.3 CHOOSING THE FORM OF ORGANIZATION: TAX AND OTHER CONSIDERATIONS 3.4 INTELLECTUAL PROPERTY A. Protecting Valuable Intangible Assets B. What Kinds of Intellectual Property can be Protected? C. Other Methods for Protecting Intellectual Property Rights 3.5 SEED, STARTUP, AND FIRST-ROUND FINANCING SOURCES A. Financial Bootstrapping B. Business Angel Funding C. First-Round Financing Opportunities SUMMARY DISCUSSION QUESTIONS AND ANSWERS 1. Describe the major differences between a proprietorship and a partnership. 35
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Chapter 3: Organizing and Financing A New Venture A proprietorship is individually owned while a partnership has two or more owners. Little time and low legal costs are involved with starting a proprietorship whereas a partnership requires moderate time and legal costs to start. 2. What is a limited partnership? A limited partnership consists of at least one general partner with unlimited investor liability and limits limited partner liabilities to the amount of their equity capital contribution to the partnership. 3. Briefly describe the corporate form of business organization. What is meant by limited liability? In a corporation the firm’s assets are separated from the owners’ personal assets. It provides for an unlimited life and it is usually easy to transfer ownership. Income taxes are paid at the corporate level and dividends are subject to personal tax rates. The limited investor liability of a corporation provides that the owners are only liable for the amount of their equity investments in the business and
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This note was uploaded on 12/05/2009 for the course FIN Fin 595 taught by Professor Shabbir during the Spring '09 term at CSU Dominguez Hills.

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