Unit 3: Legal

Issues for the

Entrepreneurship
Development
Devilal Sharma (PhD)
Course Instructor
Unit 3: Legal Issues for the Entrepreneurship
Development 3 LHs
➢Legal structures: Entrepreneurship registration, Types of business
enterprises (sole proprietorship, partnership, company, trusts);
➢Intellectual property: patents, trademarks, industrial design,
copyright, trade secrets;
➢Other legal issues: licenses, trade practices, taxation, licensing,
Product safety and liability, Insurance and contracts.
 Choosing a Form of Business Ownership
When a business is launched, a form of legal entity must be chosen. The most
common legal entities are…

Sole Proprietorship Partnership

Limited Liability
Corporation
Company

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Issues to Consider in Choosing a Legal Form of Business
Ownership

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 Sole Proprietorship

Sole Proprietorship
◦ The simplest form of business entity is the sole proprietorship.
◦ A sole proprietorship is a form of business organization involving one
person, and the person and the business are essentially the same.
◦ A sole proprietorship is not a separate legal entity. The sole proprietor is
responsible for all the liabilities of the business, and this is a significant
drawback.

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Advantages and Disadvantages of a Sole Proprietorship
Advantages of a Sole Proprietorship
▪ Creating one is easy and inexpensive.
▪ The owner maintains complete control of the business and retains all of
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.

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Advantages and Disadvantages of a Sole Proprietorship
Disadvantages of a Sole Proprietorship
▪ 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.
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 Partnerships

Partnerships
◦If two or more people start a business, they must organize
as a partnership, corporation, or limited liability company.
◦Partnerships are organized as either general or limited
liability partnerships.

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Partnerships

A form of business organization

where two or more people pool
General Partnership their skills, abilities, and
resources to run a business. The
primary disadvantage is that all
partners are liable for all the
partnership’s debts and
obligations.

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Partnerships

• A modified form of general

partnership.
• The major difference between
the two is that a limited
Limited Partnership partnership includes two classes
of owners: general partners and
limited partners.
• The general partners are liable
for the debts and obligations of
the partnership, but the limited
partners are only liable up to
the amount of their investment.

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 Advantages and Disadvantages of a
General Partnership

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).
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 Advantages and Disadvantages of a
General Partnership
Disadvantages of a 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,
the owners 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 with the death or withdrawal of one partner unless otherwise
stated in the partnership agreement.
▪ The liquidity of each partner’s investment is low.

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 Corporations

Corporations
◦A corporation is a separate legal entity organized under the
authority of a state.
◦Corporations are organized as either C corporations or
subchapter S corporations.
◦C corporations are what most people think of when they hear
the word “corporation.” However, business startups are often
organized as subchapter S corporations.

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C Corporation
• Is a separate legal entity that, in the
eyes of the law, is separate from its
owners.
• In most cases a corporation shields
its owners, who are called shareholders,
C Corporation
from personal liability for the debts of
the corporation.
• A corporation is governed by a board
of directors, which is elected by the
shareholders.
• A corporation is formed by filing
articles of incorporation.

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C Corporation
• A corporation is taxed as a separate
legal entity.
• A disadvantage of a C corporation is
that it is subject to double taxation.
This means that a corporation is taxed
C Corporation
on its net income, and when the same
income is distributed to shareholders
in the form of dividends, the income is
taxed again on the shareholders’
personal tax returns.

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Advantages and Disadvantages of a C Corporation

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.
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Advantages and Disadvantages of a C Corporation

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 shareholder’s 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.
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Subchapter S Corporation
• Combines the advantages of a partnership
and a C corporation.
• Is similar to a partnership in that the
income of the business is not subject to
Subchapter S double taxation.
Corporation • Is similar to a corporation in that the
owners are not subject to personal liability
for the debts or behavior of the business.
• A Subchapter S Corporation does not pay
taxes. Profits and losses are passed
through to the tax returns of the owners.
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 Subchapter S Corporation
There are strict standards that a business must meet to qualify for status as a subchapter S
corporation. The standards are shown below:

▪ 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 only have 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.
▪ All shareholders must agree to have the corporation formed as a
subchapter S corporation.
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 Limited Liability Company
• Is a form of business ownership that
is rapidly gaining popularity in the
U.S.
• Along with the Subchapter S, it is a
popular choice for start-up firms.
Limited Liability • The limited liability company combines
Company the limited liability advantage of the
corporation with the tax advantages of
a partnership.
• A limited liability company does not
pay taxes. Profits and losses are passed
through to the tax returns of the owners.

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Advantages and Disadvantages of a Limited Liability Company

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.

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Advantages and Disadvantages of a Limited Liability Company

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 business.
▪ Some states levy a franchise tax on LLCs—which is essentially a fee the LLC
pays the state for the benefit of limited liability.

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The IP Chain of Activities
Creation
Innovation
Commercialization
Protection
Enforcement
Intellectual property
Copyright
Industrial Property
a. Trademarks
b. Patent
c. Industrial designs
d. Confidential information
E Geographical Indications
 IP as intangible property
Tangible property
Land, houses, estates, car
Intangible property
-intellectual property
Intangible wealth, easily appropriated and reproduced, once
created the marginal cost of reproduction is negligible
The role of IP as intangible property
1. economic rights of creators
2. commercial exploitation of owner of IP
3. capital expenditure
4. transfer of technology
5. cultural development
Why IP protection is given
Capital expenditure for new products
R and D
Marketing and advertisement
No free loaders
Maintaining loyal followers
profit
IP as a property
Can be sold
Can be bought
Can be lease or rent
Can pass under a will
Can be assigned
An Overview of Intellectual Property Law in Nepal
Intellectual property (IP) law in Nepal is primarily governed by two key
pieces of legislation – the Copyright Act 2002 and the Patent, Design and
Trademark Act 1965. These laws provide the legal framework for
protecting various forms of intellectual property rights in the country. The
Copyright Act covers literary, artistic and other creative works, while the
Patent, Design and Trademark Act deals with industrial property rights.

Nepal has made efforts to bring its IP laws in line with international
standards, especially after becoming a member of the World Trade
Organization (WTO) in 2004.
 What is Intellectual Property in Nepal?
Intellectual property in Nepal refers to creations of the mind that are given legal
protection against unauthorized use or copying. This includes literary and artistic works,
symbols, names, images, designs and inventions used in commerce. The main
categories of IP recognized in Nepal are:

•Copyright: Protects original literary, dramatic, musical and artistic works

•Patents: Protects new inventions that involve an inventive step and are capable of
industrial application

•Designs: Protects the visual design of objects that are not purely utilitarian

•Trademarks: Protects distinctive signs that identify goods or services of a particular

trader
 What are the International Conventions
governing IP Law?
Nepal is a member of several international IP conventions and treaties, which influence its domestic
IP laws and practices:

•World Trade Organization (WTO) Agreement on Trade-Related Aspects of Intellectual Property Rights
(TRIPS Agreement): As a WTO member since 2004, Nepal is obligated to comply with minimum
standards of IP protection set out in TRIPS.

•Paris Convention for the Protection of Industrial Property: Nepal joined in 2001, providing for national
treatment and priority rights for patents, trademarks and designs.

•Berne Convention for the Protection of Literary and Artistic Works: Nepal acceded in 2006, requiring
copyright protection for foreign works.

•World Intellectual Property Organization (WIPO): Nepal became a member in 1997, participating in
WIPO-administered treaties.
 International Convention for IP
Paris Convention for Protection of Industrial Property 1967 ( 1989)
Berne Convention for the Protection of Literary and Artistic Works 1971
( 1990)
Trade-related aspects of Intellectual Property Agreement 1994 ( 1995)
WCT ( digital agenda)
PCT 2004
 Scope of Coverage of Intellectual Property
in Nepal
1. Copyright : The Copyright Act 2002 provides protection for original
literary, artistic, musical and dramatic works. This includes books,
computer programs, paintings, photographs, sculptures, architectural
designs, musical compositions and more. Copyright arises
automatically upon creation of the work and registration is optional.
The Act grants both economic and moral rights to copyright owners.
2. Design : Industrial designs are protected under the Patent, Design
and Trademark Act 1965. A design refers to the aesthetic aspects of
a product’s appearance, such as its shape, patterns or colors. To be
eligible for protection, a design must be new or original. Registered
designs are protected for 5 years, renewable twice for a total of 15
years.
 Scope of Coverage of Intellectual
Property in Nepal
3. Trademark : The Patent, Design and Trademark Act covers
protection of trademarks, which are distinctive signs used to identify
goods or services in the marketplace. Words, logos, symbols, colors,
shapes and even sounds can potentially be registered as trademarks
in Nepal. Trademark registration is valid for 7 years and can be
renewed indefinitely.
4. Patent : Patents are granted for new inventions that involve an
inventive step and are capable of industrial application. The Patent,
Design and Trademark Act provides patent protection for 7 years,
renewable twice for a total of 21 years. Both product and process
patents are recognized. However, Nepal’s patent system is still
underdeveloped compared to other forms of IP.
 Definitions of Intellectual Property
Copyright: The exclusive legal right given to the creator of an original work to
reproduce, publish, sell, or distribute the work.

Design: The appearance of the whole or part of a product resulting from its
features, particularly the lines, contours, colors, shape, texture or materials.

Trademark: A sign capable of distinguishing the goods or services of one

enterprise from those of other enterprises.

Patent: An exclusive right granted for an invention, which is a product or a

process that provides a new way of doing something or offers a new technical
solution to a problem.
Intellectual Property & Data Protection in Nepal
While Nepal has laws covering major IP rights, it lacks comprehensive data
protection legislation. The Electronic Transactions Act 2006 provides some
provisions related to data privacy and cybersecurity, but these are limited in
scope.

Nepal is working on drafting a dedicated data protection law to regulate

collection and use of personal data. This is expected to complement existing IP
laws by providing protection for databases and other data-related innovations.

Currently, protection of trade secrets and confidential business information

relies mainly on contractual obligations rather than specific legislation.
Strengthening data protection laws will be crucial as Nepal develops its digital
economy and knowledge-based industries.
 Definition of Intellectual Property
“Intellectual Property shall include the rights relating to
◦ literary, artistic and scientific works,
◦ performances of performing artists, phonograms, and broadcasts,
◦ inventions in all fields of human endeavour
◦ scientific discoveries
◦ Industrial designs
◦ trademarks, service marks and commercial names and designations
◦ protection against unfair competition
and all other rights resulting from intellectual activity in the industrial, scientific, literary
or artistic fields.”
(WIPO Convention)

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 Major Intellectual Properties
Copyright and Related Rights
Industrial Property
➢Patents
➢Industrial Designs
➢Trade Marks
➢Geographical Indications
➢Layout Designs/Topographies Integrated Circuits
➢Trade Secrets
➢Protection of New Plant Varieties

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 Ownership of Rights
Literary – author
Drama – Dramatist
Music – Composer
Artistic work – Artist e.g. Painter, sculptor, architect
Photograph – Photographer
Author of Computer Programme – Person who causes the work to be created
Cinematograph film – producer
Sound Recording - producer

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Author as Owner of Rights: Exceptions
In the course of employment – employer
Employment by newspaper, magazine – employer has
publishing right; other rights with author
Photograph, painting, cinema for valuable
consideration – person who pays money

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 Author as Owner of Rights: Exceptions

Lecture delivered in public – Person delivering

Government Work – Government
Public Undertaking Work – public undertaking
Work of International Organization – International
Organization

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Author as Owner of Rights: Exceptions

Work of apprentice – to Teacher

If teacher writes a book then teacher because he is
employed to teach and not write
Question Papers – Paper setter
Encyclopedia, dictionary – editor for collection
Music under contract by film producer – film producer
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 Duration of Copyright
Literary, dramatic, Musical and Artistic Works published during life
time of author: Life + 60 years
All Other Works: 60 years from date of publication
◦ Posthumous, Anonymous Works
◦ Works of Government and Organizations
◦ Cinema and Sound Recording
◦ Photograph

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 What is a PATENT?

•A patent is an exclusive right granted for an invention, which is a

product or a process that provides a new way of doing something, or
offers a new technical solution to a problem
•The limited monopoly right granted by the state enables an
inventor to prohibit another person from manufacturing, using or
selling the patented product or from using the patented process,
without permission.
•Period of Patents - 20 Years

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 WHAT CAN BE PATENTED?
Inventions in all fields of technology, whether products or processes, if they meet the
criteria of

Novelty;

Non-obviousness (inventive step);

Industrial application (utility).

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 Conditions of Patentability
Novelty: Invention not known to public prior to claim by inventor
Inventive Step: Invention would not be obvious to a person with
ordinary skill in the art

Industrial Application: Invention can be made or used in any useful,

practical activity as distinct from purely intellectual or aesthetic one

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 What is an Industrial Design?
Design’ means only the features of shape, configuration,
‘
pattern, ornament or composition of lines or colours
applied to any article whether in two dimensional or three
dimensional or in both forms, by any industrial process or
means, whether manual,mechanical or chemical, separate
or combined, which in the finished article appeal to and
are judged solely by the eye.

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Consumer Products

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Pharmaceutical Product

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Textile & Jewellery

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 Rights of the Registered Proprietor

The proprietor of the registered design has the exclusive right to

apply the design to any article in the class in which the design is
registered
Period of protection is ten years extendable by 5 years.

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 TRADE MARK

A name of an enterprise or a Mark capable of being represented

graphically, distinguishing the goods or services of one person
from those of others e. g., LUX, Godrej, TVS ,Telco, 555, APPLE

Trade Mark can be -

o sign , words, letters, numbers,
o drawings, pictures, emblem,
o colours or combination of colours,
o shape of goods,
o graphic representation or packaging or
o any combination of the above

as applied to an article or a product.

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 Registration of Trade Mark
Trade Marks are registered by national trade mark
registries and are valid in that country
Registration is made after examination and
publication
Period of registration is for 10 years but can be
renewed indefinitely
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Kinds of Trademarks
Marks on goods
Service Marks
Certification trademark
Collective Marks
Well known marks
Trade Names

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 TRADE MARK

Service Marks include banking, education, finance, insurance, real estate

,entertainment,repairs, transport, conveying news and information, advertising etc

Certification Trade marks: Certified by the Proprietor as having

characteristics like geographical origin, ingredients, quality e.g.AGMARK,WOOLMARK
Certification mark cannot be used as a trade mark.

◦ Certifies that the goods on which it is applied are made of 100% wool. It is
registered in 140 countries and licensed to the companies which assure
that they will comply with the strict standards set out by the Woolmark
company , the owner of the mark.
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 COLLECTIVE MARK
COLLECTIVE MARK is a Mark that distinguishes the goods -or
services of members of association from marks of other undertakings
Who owns collective Mark ?
Association of persons
It could be manufacturers, producers, suppliers, traders or other
profession bodies like institute of chartered accountants, test cricketers
association etc.

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WELLKNOWN MARKS
•Coca Cola for soft drink
th_toblerone.jpg (6323 Byte)

•Toblerone (Triangular- shaped chocolates)

Trade Names
•Godrej- Furniture, Refrigerators, Storewell, Compactor etc

•GE- Bulbs

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 What is a Geographical Indication?
Geographical Indication is an indication which
identifies goods as agricultural goods, natural goods or
manufactured goods as originating, or manufactured in
the territory of country, or a region or locality in that
territory, where a given quality, reputation or other
characteristic of such goods is essentially attributable to
its geographical origin.

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Explanation clarifies that GI need not be a geographical name
➢E.g. Alphonso, Basmati

Goods include goods of handicraft or of industry and also foodstuff .

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Registration
In India, geographical indications have to be registered.
Geographical Indications Registry examines and publishes the
application before registration
Registration is valid for 10 years but can be renewed indefinitely

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 Protectable Layout Designs?
Original and novel Layout-Designs of semiconductor
integrated circuits can get protection through registration
Registration is done after examination and publication of
the application
Registration is valid for 10 years

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 Non-registrable Layout-Designs

Not original
Has been commercially exploited anywhere in India or in a
convention country
Not inherently distinctive
Not inherently capable of being distinguishable from any
other registered layout-design

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 Trade Secrets
Some inventions, data, information cannot be
protected by any of the available means of IPRs.
Such information is held confidential as a trade
secret.
Trade secret can be an invention, idea, survey
method, manufacturing process, experiment results,
chemical formula, recipe, financial strategy, client
database etc.

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When Trade Secrets are preferred?
When invention is not patentable;
Patent protection is limited to 20 years, when secret
can be kept beyond that period;
When cost of patent protection are prohibitive;
When it is difficult to reverse engineer

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 How to guard Trade Secret?
Restricting number of people having access to secret information
Signing confidentiality agreements with business partners and
employees
Using protective techniques like digital data security tools and
restricting entry into area where trade secret is worked or held
National legislations provide protection in form of injunction and
damages if secret information is illegally acquired or used.

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Other Legal Issues
L ice nse s
T ra de pr ac tice s
T axat ion
L ice nsin g
P r o d uct saf et y an d lia bil it y
I nsu ra nce
C ont r act s
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Licenses
License is an official documents that provides legal
permission to register and start business
E.g. Doctor, Lawyer, CA

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 Licensing
License is an official documents that provides legal permission to register and
start business
Licensing is contractual agreement giving rights to others to use intellectual
property in return for a royalty of fee.
It is powerful marketing tool to start a new business venture
It is important strategy to enter global market.
It is also popular in sports events.

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Types of License
Patent license
Trademark license
Copyright license

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 Trade Practices
All existing and proposed businesses need to be aware that most
countries have laws governing what is ‘acceptable’ business conduct
Fair trade practices
◦ Protects right and interest of consumer
◦ Regulates the supply system
◦ Controls the price and quality of goods

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Taxation
Entrepreneurs must have knowledge regarding taxation.
It includes income tax, sales tax, vat, capital gain tax
In Nepal, income tax act 2002
Individual Taxpayer
Entity

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 Product safety and liability
It refers to responsibility to meet any legal specifications regarding a
new product.
Such specifications are prescribed by consumer protection act of a
country
It prescribes safety standards of products
It prohibits marketing of unsafe products with defects
Injury or death resulting from product defects create product liability
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Product safety and liability
Claims for product liability can be for:
◦Negligence
◦Warranty
◦Strict liability
◦Misrepresentation

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 Insurance
It is a legal contract between the insurer and the insured
It transfers risk from insured to insurer for a premium
It protects life and property from risks
Insurance involves cost
Entrepreneurs have limited resources.
They should carefully select the type of insurance for covering risk
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Insurance
Legally required insurance can not be avoided
Types of insurance available to entrepreneurs
◦ Property insurance
◦ Casualty
◦ Life
◦ Workers’ compensation
◦ Health
◦ Fire etc.
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 Insurance
It provides a means of managing risk in the new business.
Some insurances are required by law and cannot be avoided
while others are may be necessary to protect the financial net
worth of the venture.
Skyrocketing medical costs can have a significant impact on
insurance premiums.
Entrepreneurs also have to consider health care coverage.
Types of Insurance and Possible Coverage
 Contracts
It is a legally binding agreement between two parties
New entrepreneurial ventures require a number of contracts
with suppliers, landlords, employees and clients
Every contract contains conditions which need to be met
Breach of contract may occur

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Contracts
A legally binding agreement between two parties.
Often business deals are concluded with a
handshake.
The rule is to not to rely on a handshake if a deal
cannot be completed within one year.
Courts insist on a written contract for all
transactions over $500.
Contract Conditions and Results of a Breach
of Contract
 Contracts (cont.)

Four essential items in an agreement to provide the

best legal protection:
◦Understand the terms and conditions in the contract.
◦Cross out anything that you do not agree to.
◦Do not sign if there are blank spaces (these can be
crossed out).
◦Make a copy for your files after signing.
Macro Environmental Factors

Economic environment
Natural environment
Political legal environment
Socio-cultural environment
Technological environment
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 Eco-efficiency
It is production of goods and services by using fewer resources
an creating less waste
It jointly promotes environment and economic performance
The term eco-efficiency is coined by The World Business
Council for Sustainable Development (WBCSD)

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Eco-efficiency
Eco-efficiency is the delivery of competitively priced
goods and services that satisfy human needs and bring
quality of life, while progressively reducing ecological
impacts and resource intensively throughout the product
life cycle, to a level at least in line with the earth’s
estimated carrying capacity
◦ WBCSD
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 Factors Affecting Site Selection
Power Government policy
Quality of life Community and labor attitude
Local tax and restrictions Finance
Research facility Expansion possibility
Construction cost

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 Factors Affecting Site Selection
Proximity to customers Location of customers
Site-specific factors Availability of raw materials
Location of market Labor supply
Transportation facility Climate
Tax

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Business Description
Background of the business
Purpose and objectives
Marketing components
Financial components

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Background of the business
Name of the business
History of the business
Types and nature of the business
Current situation of the business
Types of products

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Purpose and objectives

Profit
Sales
Market share
Survival
Quality leadership
Cost/ loss minimization
Utilization of resources
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Marketing Components
Overall market
Specific market
Competitive factors

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Macro Environmental Factors

Economic environment
Natural environment
Political legal environment
Socio-cultural environment
Technological environment

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Thank You !!!!