Tutorial 8 (topic 7) Preparing A Proper Ethical And Legal Foundation Q1. In general, do entrepreneurs tend to overestimate or underestimate their knowledge of the laws that pertain to starting a new firm? What does answer to this question suggest that entrepreneurs do before they start a firm? In general, entrepreneurs tend to overestimate their knowledge of the laws that pertain to starting a new firm. Before entrepreneurs start a firm, they should seek for lawyer to get some legal advice, get sources and information about the business, refer to book, or search the information thru the internet about the legal issue that they face.Q2. Describe what is meant by the terms code of conduct and ethics training programs. What is their purpose? The term code of conduct is a formal statement of an organization’s values on certain ethical and social issues. Which means it is a set of formal statement for a firm or company to concern and emphasis on the values on ethical and social issues.
For example, value that an organization expect employee to carry out some task, the method on how employee serve customer, social responsibility for an organization, privacy, and others.Then, ethics training programs is teaching business ethnics to help employee deal with ethical dilemmas and improve their overall ethnical conduct. It means, ethics training program is a set of system or some courses that use to lead employee deal with ethical dilemmas, which is a situation that employee involve some activities that is beneficial to oneself or the organization, but may be unethical. For example, an employee using company’s computer to carry out new program, thus this may raise an issue whether the new program is the property for an organization or the particular employee.Also, improve overall ethical conduct can be done by implementing an ethics training program because it can help employee to deal or response to ethical dilemma. The purpose for code of conduct and ethics training programs is to promote a healthy climate of business ethics and avoid lawsuit in a firm.
Also, the purpose is to establish a strong ethical culture and avoid litigation. Q3. Describe what a founders’ agreement is and why it’s important for a team of entrepreneurs to have one in place when launching a venture. A founder agreement is a written that deals with issues such as the relative split of he equity among the founders of the firm, how individual founders will be compensated for the cash or the “sweat equity” they put into the firm, and how long the founders will have to remain with the firm for their shares to fully vest. It means founder agreement is a formal document that mention about the profit sharing between the founders by following the amount of initial investment between the founders. Items that include in a founders’ agreement are nature of the prospective business, a brief business plan, legal form of business ownership, buyback clause, description of the initial operating capital and others.
It is important for a team of entrepreneurs to have one in place when launching a venture because it can avoid the conflict such the problem between the founders regarding the profit sharing and distribution of stock at the end of the business, avoid litigation, and to know the expectation of their own role in the organization. Therefore, founders’ agreement is important to act as a set of rules or guideline while founders are conducting their business and it can reduce most of the issues that can harm the performance of a business. Q4. Describe the purpose of a non-disclosure agreement and the purpose of a non-compete agreement.Non-disclosure agreement is a legal document or contract sign between two parties, which is restrict the access or by third party.
The purpose of a non-disclosure agreement is a promise made by an employee or supplier who does not disclose the trade secret between the firm to the third party or outsider. Also, a non-disclosure agreement is a contract through which the parties agree not to disclose information covered by the agreement. On the other hand, non-compete agreement is a contract between one party such as employee agrees not to pursue a similar profession or trade in competition against another party such as employer.The purpose of a non-compete agreement is to avoid the possibility that upon the termination or resignation for an employee might begin working for a competitor firm or starting a new business which is related or similar with the employer’s business in a specific geographical area and time frame.
Q5. What are the advantages and disadvantages of organizing a new firm as a sole proprietorship? Is sole proprietorship an appropriate form of ownership for an aggressive entrepreneurial firm? Why or why not? The advantages of organizing as a sole proprietorship are being the simplest form of business tructure. Then, creating a sole proprietorship form is easy and inexpensive so a starting cost can be reduced, and then an owner maintains complete control of the business without any intervention in decision making, and profit is own retain by the owner, business losses can be deducted against the sole proprietor’s other sources of income, and the business is not subject to double taxation because the income earned by a sole proprietorship passes directly to the personal income tax return of the owner, and then business is easy to dissolve due to without any partners and complex agreement.Whereas, the disadvantages of a sole proprietorship are liability on the owner’s part is unlimited so if a business is facing deficit, owner is responsible for all the losses.
Then, the business relies on the skills and abilities of a single owner in order to manage the business wisely. Furthermore, raising capital can be difficult because of only owner is running the business without any help from partners. Moreover, the business ends at the owner’s death or loss of interest in the business, the liquidity of the owner’s investment is low due to low capital and cash flow can be used in generating more profit.A sole proprietorship is not an appropriate form of ownership for an aggressive entrepreneurial firm.
An aggressive firm will probably need to raise capital early in its life because it is important for an aggressive firm to have a huge amount of capital in competing the earlier stage in the market, thus it is not possible under the sole proprietorship form of ownership. Also, in an aggressive entrepreneurial firm will be taking more risk in the investment, hence a limited liability form of company is more suitable in an aggressive entrepreneurial firm, which owner can limit their personal losses.