Establishing a Strong Ethical Culture for a Firm
A. Lead by Example
Any entrepreneur, manager, or supervisor can do to build a strong ethical culture in their organization. In strong ethical cultures they should be able to:
- Communicate ethics as a priority
- Set a good example of ethical conduct
- Keep commitments
- Provide information about what is going on
- Support following organizational standards
Also, things that employees can do to support a strong ethical culture in an organization are to:
- Consider ethics in making decisions
- Talk about ethics in the work (they) do
- Set a good example of ethical conduct
- Support following organizational standards
B. Establish a Code of Conduct
A code of conduct (or code of ethics) is a formal statement of an organization’s values on certain ethical and social issues.
The advantage of having a code of conduct is that it provides specific guidance to entrepreneurs, managers, and employees regarding expectations of them in terms of ethical behavior.
C. Implement an Ethics Training Program
Ethics training programs teach business ethics to help employees deal with ethical dilemmas and improve their overall ethical conduct.
An ethical dilemma is a situation that involves doing something that is beneficial to oneself or the organization but may be unethical.
Dealing Effectively with Legal Issues
Leading entrepreneurial ventures can also expect to encounter a number of important legal issues.
A. Choosing an Attorney for a Firm
Here is a guide on how to select an attorney
- Contact the local bar association and ask for a list of attorneys who specialize in business start-ups in your area.
- Interview several attorneys. Check references. Ask your prospective attorney whom he or she has guided through the start-up process before and talk to the attorney’s clients. If an attorney is reluctant to give you the names of past or present clients, select another attorney.
- Select an attorney who is familiar with the start-up process. Make sure that the attorney is more than just a legal technician. Most entrepreneurs need an attorney who is patient and is willing to guide them through the start-up process.
- Select an attorney who can assist you in raising money for your venture. This is a challenging issue for most entrepreneurs, and help in this area can be invaluable.
- Make sure your attorney has a track record of completing his or her work on time. It can be very frustrating to be prepared to move forward with a business venture, only to be stymied by delays on the part of an attorney.
- Talk about fees. If your attorney won’t give you a good idea of what the start-up process will cost, keep looking.
- Trust your intuition. Select an attorney who you think understands your business and with whom you will be comfortable spending time and having open discussions about the dreams you have for your entrepreneurial venture.
- Learn as much about the process of starting a business yourself as possible. It will help you identify any problems that may exist or any aspect that may have been overlooked. Remember, it’s your business start-up, not your attorney’s. Stay in control.
B. Drafting a Founders’ Agreement
A founders’ agreement is a written document that deals with issues such as the relative split of the equity among the founders of the firm, how individual founders will be compensated for the cash they put into the firm, and how long the founders will have to remain with the firm for their shares to fully vest.
C. Avoiding Legal Disputes
Most legal disputes are the result of misunderstandings, sloppiness, or a simple lack of knowledge of the law. It is important early in the life of new businesses to establish practices and procedures to help avoid legal disputes. Legal snafus, particularly if they are coupled with management mistakes, can be extremely damaging to a new firm.
1. Meet All Contractual Obligations
Includes paying vendors, contractors, and employees as agreed and delivering goods or services as promised. If an obligation cannot be met on time, the problem should be communicated to the affected parties as soon as possible.
2. Avoid Undercapitalization
A new business should raise the money it needs to effectively conduct business or should stem its growth to conserve cash. Equity must often be shared with investors to obtain sufficient investment capital to support the firm’s growth.
3. Get Everything in Writing
here are also two important written agreements that the majority of firms ask their employees to sign. A nondisclosure agreement binds an employee or another party (such as a supplier) to not disclose a company’s trade secrets. A non-compete agreement prevents an individual from competing against a former employer for a specific period of time.
4. Set Standards
Entrepreneurial ventures should be vigilant when selecting their alliance partners. A firm falls short in terms of establishing high ethical standards if it is willing to partner with firms that behave in a contrary manner.
Obtaining Business Licenses and Permits
There are three ways for those leading businesses to determine the licenses and permits that are necessary.
The first is to ask someone who is running a similar business, and they will usually be able to point you in the right direction.
The second is to contact the secretary of state’s office in the state where the business will be launched.
The third is to use one of the search tools available online
A. Federal Licenses and Permits
Most businesses do not require a federal license to operate, although some do.
B. State Licenses and Permits
There are three categories of licenses and permits that you may need to operate a business. Most states have start-up guides that walk you through the steps of setting up a business in the state.
1. Business Registration Requirements
Some states require all new businesses to register with the state.
2. Sales Tax Permits
If you’re obligated to collect sales tax, you must get a permit from your state.
3. Professional and Occupational Licenses and Permits
There are laws that require people in certain professions to pass a state examination and maintain a professional license to conduct business.
There are also certain businesses that require a state occupational license or permit to operate.
C. Local Licenses and Permits
On the local level, there are two categories of licenses and permits that may be needed. The first is a permit to operate a certain type of business. The second category are permits for engaging in certain types of activities.
- Building permit: Typically required if you are constructing or modifying your place of business
- Health permit: Normally required if you are involved in preparing or selling food
- Signage permit: May be required to erect a sign
- Street vendor permit: May be required for anyone wanting to sell food products or merchandise on a city street
- Sidewalk café permit: May be required if tables and chairs are placed in a city right-of-way
- Alarm permit: Sometimes required if you have installed a burglar or fire alarm
- Fire permit: May be required if a business sells or stores highly flammable material or handles hazardous substance
Choosing a Form of Business Organization
Sole proprietorships, partnerships, corporations, and limited liability companies are the most common legal entities from which entrepreneurs make a choice. Choosing a legal entity is not a one-time event. As a business grows and matures, it is necessary to periodically review whether the current form of the business organization remains appropriate.
A. Sole Proprietorship
A sole proprietorship is a form of business organization involving one person, and the person and the business are essentially the same. The two most important advantages of a sole proprietorship are that the owner maintains complete control over the business and that business losses can be deducted against the owner’s personal tax return.
1. Advantages of a Sole Proprietorship
- Creating one is easy and inexpensive.
- The owner maintains complete control of the business and retains all the profits.
- Business losses can be deducted against the sole proprietor’s other sources of income.
- It is not subject to double taxation (explained later).
- The business is easy to dissolve.
2. Disadvantages of a Sole Proprietorship
- The liability on the owner’s part is unlimited.
- The business relies on the skills and abilities of a single owner to be successful. Of course, the owner can hire employees who have additional skills and abilities.
- Raising capital can be difficult.
- The business ends at the owner’s death or loss of interest in the business.
- The liquidity of the owner’s investment is low.
B. Partnerships
Partnerships are organized as either general or limited partnerships.
1. General Partnerships
A general partnership is a form of business organization where two or more people pool their skills, abilities, and resources to run a business. The primary advantage of a general partnership over a sole proprietorship is that the business isn’t dependent on a single person for its survival and success. The primary disadvantage of a general partnership is that the individual partners are liable for all the partnership’s debts and obligations.
2. Advantages of a General Partnership
- Creating one is relatively easy and inexpensive compared to a corporation or limited liability company.
- The skills and abilities of more than one individual are available to the firm.
- Having more than one owner may make it easier to raise funds.
- Business losses can be deducted against the partners’ other sources of income.
- It is not subject to double taxation (explained later).
3. Disadvantages of a General Partnership
- Liability on the part of each general partner is unlimited.
- The business relies on the skills and abilities of a fixed number of partners. Of course, similar to a sole proprietorship, the partners can hire employees who have additional skills and abilities.
- Raising capital can be difficult.
- Because decision making among the partners is shared, disagreements can occur.
- The business ends at the death or withdrawal of one partner unless otherwise stated in the partnership agreement.
- The liquidity of each partner’s investment is low.
4. Limited Partnerships
A limited partnership is a modified form of a general partnership. The major difference between the two is that a limited partnership includes two classes of owners: general partners and limited partners. Similar to a general partnership, the general partners are liable for the debts and obligations of the partnership, but the limited partners are liable only up to the amount of their investment. The limited partners may not exercise any significant control over the organization without jeopardizing their limited liability status.
C. Corporations
A corporation is a separate legal entity organized under the authority of a state.
1. C Corporations
C corporation is a separate legal entity that, in the eyes of the law, is separate from its owners.
Most C corporations have two classes of stock: common and preferred.
Preferred stock is typically issued to conservative investors who have preferential rights over common stockholders in regard to dividends and to the assets of the corporation in the event of a liquidation.
Common stock is issued more broadly than preferred stock. The common stockholders have voting rights and elect the board of directors of the firm. The common stockholders are typically the last to get paid in the event of the liquidation of the corporation
2. Advantages of a C Corporation
- Owners are liable only for the debts and obligations of the corporation up to the amount of their investment.
- The mechanics of raising capital is easier.
- No restrictions exist on the number of shareholders, which differs from subchapter S corporations.
- Stock is liquid if traded on a major stock exchange.
- The ability to share stock with employees through stock options or other incentive plans can be a powerful form of employee motivation.
3. Disadvantages of a C Corporation
- Setting up and maintaining one is more difficult than for a sole proprietorship or a partnership.
- Business losses cannot be deducted against the shareholders’ other sources of income.
- Income is subject to double taxation, meaning that it is taxed at the corporate and the shareholder levels.
- Small shareholders typically have little voice in the management of the firm.
4. Subchapter S Corporation
A subchapter S corporation combines the advantages of a partnership and a C corporation. It is similar to a partnership in that the profits and losses of the business are not subject to double taxation.
The S corporation must file an information tax return. An S corporation is similar to a C corporation in that the owners are not subject to personal liability for the behavior of the business.
There are strict standards that a business must meet to qualify for status as a subchapter S corporation:
- The business cannot be a subsidiary of another corporation.
- The shareholders must be U.S. citizens. Partnerships and C corporations may not own shares in a subchapter S corporation. Certain types of trusts and estates are eligible to own shares in a subchapter S corporation.
- It can have only one class of stock issued and outstanding (either preferred stock or common stock).
- It can have no more than 100 members. Husbands and wives count as one member, even if they own separate shares of stock. In some instances, family members count as one member.
- All shareholders must agree to have the corporation formed as a subchapter S corporation.
The primary disadvantages of a subchapter S corporation are restrictions in qualifying, expenses involved with setting up and maintaining the sub-chapter S status, and the fact that a subchapter S corporation is limited to 100 shareholders.
D. Limited Liability Company
As with partnerships and corporations, the profits of an LLC flow through to the tax returns of the owners and are not subject to double taxation. The main advantage of the LLC is that all partners enjoy limited liability.
1. Advantages of a Limited Liability Company
- Members are liable for the debts and obligations of the business only up to the amount of their investment.
- The number of shareholders is unlimited.
- An LLC can elect to be taxed as a sole proprietor, partnership, S corporation, or corporation, providing much flexibility.
- Because profits are taxed only at the shareholder level, there is no double taxation.
2. Disadvantages of a Limited Liability Company
- Setting up and maintaining one is more difficult and expensive.
- Tax accounting can be complicated.
- Some of the regulations governing LLCs vary by state.
- Because LLCs are a relatively new type of business entity, there is not as much legal precedent available for owners to anticipate how legal disputes might affect their businesses.
- Some states levy a franchise tax on LLCs—which is essentially a fee the LLC pays the state for the benefit of limited liability.
