CHAPTER 7 I PREPARING THE PROPER HHICAL AND LEGAL FOUNDATION
XploSafe is now moving forward on sound legal footing. lt routinely utilizes legal
documents in everyday business dealings including nondisclosure agreements, mutual
confidentiality agreements, and formal agreements with distributors. When needed,
the documents are run by an attorney for approval or advice. lt’s also progressing as a
business. lt’s generating sales, has been awarded a Small Business innovation
Research grant, and has secured sales from customers across the world including
NASA, the Department of Energy, and multiple pharmaceutical companies. It is also
hoping to play an ever expanding role in the fight against harmful explosivesl
his chapter begins by discussing the most important initial ethical and
legal issues facing a new firm, including establishing a strong ethical
organizational culture, choosing a lawyer, drafting a founders' agreement,
and avoiding litigation. Next, we discuss the different forms of business organi-
zation, including sole proprietorships, partnerships, corporations, and limited
liability companies.
Chapter 12 discusses the protection of intellectual property through patents,
tradema_rks, copyrights, and trade secrets. This topic, which is also a legal issue.
is becoming increasingly important as entrepreneurs rely more on intellectual
property rather than physical property as a source of a competitive advantage.
Chapter 15 discusses legal issues pertaining to franchising. The chapter next
discusses the licenses and permits that may be needed to launch a business,
along with the different forms of business organization, including sole propri-
etorships, partnerships, corporations, and limited liability companies.
INITIAL ETHICAL AND LEGAL ISSUES
FACING A NEW FIRM
As the opening case about XploSafe suggests, new ventures must deal with
important ethical and legal issues at the time of their launching. Ethical and
legal errors made early on can be extremely costly for a new venture down the
road. And there is a tendency for entrepreneurs to overestimate their know-
ledge of the law. In fact, in one study 254 small retailers and service company
owners were asked to judge the legality of several business practices? A sam-
ple of the practices included in the survey is shown next. Which practices do
you think are legal and which ones do you think aren`t legal?
l Avoiding Social Security payments for independent contractors
l Hiring only experienced help
l Preempting potential competition with prices below costs
l Agreeing to divide a market with rivals
The first two practices are legal, while the second two are illegal. How did
you do? For comparison purposes. you might want to know that the partici~
pants in the survey were wrong 35 percent of the time about these four prac-
tices. The study doesn’t imply that entrepreneurs break the law intentionally or
that they do not have ethical intentions. Vt/'hat the study does suggest is that
entrepreneurs tend to overestimate their knowledge of the legal complexities
involved with launching and running a business.
As a company grows, the legal environment becomes even more complex. A
reevaluation of a company's ownership structure usually takes place when
investors become involved. In addition, companies that go public are required to
comply with a host of Securities and Exchange Commission (SEC) regulations,