Part-II Entrepreneurship

Chapter-6
Legal and Statutory/constitutional
Environment for Small Industry
Legal Steps in Setting Up A Small Size Industries
1. Did You Pick a Name? Make Sure You‟re Legally
Permitted to Use It.
Before you start printing out business cards, make sure the
great new name you thought of isn‘t infringing/disobeying
on the rights of an already existing business.
In most cases, you don't need an attorney for this task,
as you can perform a free search online that looks
at business names registered with the Secretary of
State — that will tell you if the name is available in
your state. Then, take your search to the next level
and conduct a no-conflict, free trademark search to
see if your name is available for use in all the
states.
 Cont’d
2. Register a Fictitious Business Name/DBA
• A DBA (Doing Business As) must be filed
whenever your company does business under a
different name. If you‘ve got a sole proprietorship or
general partnership, a DBA is needed if your
company name is different from your own name.
• For a LLC (Limited Liability Company) or
corporation, a DBA must be filed to conduct
business using a name that‘s different from the
official Corporation or LLC name you filed. These
are typically filed at the state and/or county level.
 Cont‟d
3. Incorporate Your Business or Form a LLC
• Forming a LLC or corporation is an essential step to
protect your personal assets (such as your personal
property or your child‘s college fund) from any
liabilities of the company.
• Each business structure (form of business) has its
own advantages and disadvantages, depending on
your specific circumstances.
4. Get a Federal Tax ID Number
• To distinguish your business as a separate legal
entity, you'll need to obtain a Federal Tax
Identification Number (FTIN), also referred to as an
Employer Identification Number (EIN).
 Cont‟d

5. Learn About Employee Laws

 Your legal obligations as an employer begin as
soon as you hire your first employee.
 You should spend time with an employment law
professional to fully understand your obligations for
these (and other) procedures:
– federal and state payroll and withholding taxes,
– self-employment taxes,
– anti-discrimination laws,
– unemployment insurance,
– workers' compensation rules, and
– wage and hour requirements.
 Cont‟d
6. Obtain the Necessary Business Permits and
Licenses
 Depending on your business type and physical
location, you may be required to have one or
more business licenses or permits from the
state, local or even federal level.
 Such licenses include:
– a general business operation license,
– zoning and land use permits,
– sales tax license,
– health department permits, and
– occupational or professional licenses.
 Cont‟d
7. File for Trademark Protection
 You're not actually required by law to register a
trademark. Using a name instantly gives you
common law rights as an owner, even without
formal registration.
 However, as expected, trademark law is complex
and simply registering a DBA in your state doesn‘t
automatically give you common-law rights. In order
to claim first use, the name has to be ‗trade
markable‘ and in use in commerce.
 Cont‟d

8. Open a Bank Account to Start Building

Business Credit
 When you rely on your personal credit to fund
your business, your personal mortgage, auto
loan and personal credit cards all affect your
ability to qualify for a business loan (and for how
much).
 Using business credit separates your personal
activities from that of the business.
 To begin building your business credit, you
should open a bank account in the name of your
company, and the account should show a cash
flow capable of taking on a business loan.
 Business Laws
 Law of Contract can be:
– Written or verbal contracts
– Elements of a contract
 The law of contract: deals with legally
enforceable agreements involving two or
more parties. Businesses enter into such
agreements many times each day, so it is
important for a small business owner to have
a basic knowledge of contract law and the
responsibilities it creates.
 Cont‟d
 A contract is a legally enforceable agreement
between two or more parties.
 A breach of contract occurs when one party does
not fulfill their part of the agreement.
What is Written or verbal contracts?
 Many people believe that a contract must always
be a written document, signed by both parties.
 This is not necessarily the case.
 Some contracts, such as those involving the sale of
a house or the sale of a car, have to be in a
particular written form, as specified by legislation.
 Cont‟d
 Buying a cup of coffee or lunch at a local café is a
verbal contract and does not require a written
document.
 If you eat the food and walk out without paying, you
breach the contract. If the café owner does not
provide the food ordered and you have paid in
advance, then the café owner has breached the
contract.
 Many business contracts are formalized in writing
so that both parties are clear as to their obligations;
this also makes disputes less likely.
 Cont‟d
• … Written or verbal contracts?
In the absence of any written documentation, it can
be difficult to prove a contract exists, unless wit-
nesses were present at the time of the agreement.
 In many other situations, source documents such
as order forms, invoices and receipts provide
written evidence of a contract.
 A business will send an order form to one of its
suppliers, and in return the goods are supplied with
an invoice, and the supplier keeps a copy of that
invoice.
 If there is any dispute, both parties have
documentary evidence that a legally binding
agreement existed between them, with details of the
goods to be supplied and the price.
 Cont‟d
 Elements of a contract
 There are three essential elements necessary to make a
contract legally binding:
– offer
– acceptance of the offer
– consideration.
 In addition, a contract cannot be legally enforceable
unless the following requirements are satisfied:
– no mistake, misrepresentation, duress/pressure
or undue influence
– capacity to enter a contract, in both age and
understanding
– the object of the contract must be legal.
 Cont‟d
 Offer
 An offer is made when one party is willing to give
something of value (for example, money) in
exchange for something of value to be provided by
the other party (for example, a cleaning service).
 An offer is a proposal that forms the basis of the
agreement.
 The offer must be clearly communicated to the other
party.
Cont‟d
 Acceptance:
 An acceptance occurs when one party agrees to
the proposal (offer) of the other.
 This requires an act that clearly communicates
acceptance of the offer, in the form of an oral or
written statement, a shake of the hand, or the
physical act of handing over the goods in exchange
for the money. A receipt or cash register printout
provides evidence that agreement has been
reached.
Cont‟d
 Consideration
 In essence consideration is the price paid to initiate
the contract.
 Both sides must give up something for the contract to
be binding.
 In most cases, one party gives up money in exchange
for goods or services provided by the other party.
Cont‟d
 Consideration involves passing something of value,
or the promise to do something, in return for what
has been promised by another.
 Mistake, misrepresentation, duress and undue
influence
 Both parties to a contract must have a clear
knowledge and understanding of the nature of their
agreement.
 For example, if a seller had two cars for sale and a
buyer made an offer for one of them, but the seller
thought he was making an offer for the other car,
and accepted the offer, the mistake may mean there
is no contract.
Cont‟d
 The two parties must also enter the relationship
willingly. If one party can prove that he or she was
pressured into the agreement, they may be able to
avoid the contract.
 Capacity
 If one party can prove that he or she was drunk, or of
unsound mind at the time of entering into a contract, it
may be possible for that person to avoid their contractual
obligations. A contract is not binding on a person who is
not yet an adult (that is, they under 18 years of age),
unless the contract is for goods that would be considered
a necessity, such as food, shelter or clothing. Some
contracts for the education or training of a minor, such as
apprenticeships, are also binding.
Cont‟d
 Legality
 If an agreement is made to carry out an illegal
activity, it will not be a legally enforceable contract.
 If a person hires a tradesman and agrees to pay
cash for the work done to avoid paying GST (Goods
and Services tax), the agreement may be illegal and
therefore not an enforceable contract.
 An agreement for one party not to give evidence in
court, or agreements to deprive either party of the
right to sue the other would not be enforceable
contracts.
Cont‟d
 Responsibilities to a contract
 Once a contract has been entered into, both parties
are obliged to carry out their part of the agreement
and do the things they agreed to do.
 If one party fails to carry out what was promised,
then there is a breach/violation of contract.
 The injured party has the right to sue for damages,
or to legally force the other party to perform their
part of the agreement.
 The injured party may also choose to terminate the
contract, in which case any consideration already
provided must be returned to the injured party.
 6.2 Governmental Setup in Promoting Small
Industries
 With most of the world‘s business being conducted
by small entrepreneurs, it makes good economic
sense for governments to implement policies that
encourage small-business growth.
 The five ways in which government can have the
most positive effect are :
– by making capital more accessible,
– facilitating business education,
– promoting entrepreneurship,
– reducing regulatory burdens, and
– protecting intellectual property.
Cont‟d
 What is the government structure or setup to
promote SMEs across the country, states, zones,
weredas, … in Ethiopia?
 Financial Institutions
 What financial institutions are available to promote
SMEs.
 How do they promote SMEs?
 6.3 Social Responsibility of Business

 An enterprise, irrespective of its size, is socially

responsible when it gives equal importance to the
economic, social and environmental concerns within
its core business.
 This is to say that in order to ensure its
sustainability a business should satisfy its clients,
generate profit to ensure financial health and
respect the expectations of people that it affects or
is affected by, such as its employees, suppliers, or
the community in which it operates.
It thus builds shared value and effectively manages
the impact of its activities.
Cont‟d
 More so, operating in a socially responsible
manner (i.e. responsible entrepreneurship) can
add direct benefits to business and ensure long-
term strategic competitiveness through proactive
and innovative problem solving and the
generation of a supportive team that maximizes
opportunities.
 Global trends in the evolution of Corporate
Social Responsibility (SR).
 Social responsibility has been traditionally
associated with the private sector, particularly
with multinational enterprises. For this reason,
the term ―corporate social responsibility‖ (CSR) is
more widely applied than ―social responsibility‖
(SR).
Cont‟d

 The view according to which social

responsibility is relevant for all types of
organizations is a relatively recent one, and
came about as other social actors recognized
they equally had a responsibility towards society.
 The terms ―social responsibility‖ (SR) and
―corporate social responsibility‖ (CSR) have been
used by many people in different ways over the
past 20 years. So as to help to clarify this
evolution we insert here a schematic adapted
from the UNIDO (United Nations Industrial
Development Organization) - Figure 1.
Figure 1. The global evolution of Corporate Social Responsibility
to its current position as a core sustainable business enabler
Cont‟d

 In October 2011 the EU Commission redefined

corporate social responsibility as “the responsibility
of enterprises for their impacts on society‖, and
encouraged enterprises to have a process in place
to integrate social, environmental, ethical, human
rights and consumer concerns into their business
operations and core strategy in close cooperation
with their stakeholders.
 Stakeholders include:
– communities,
– investors and lenders,
– governments,
Cont‟d
– staff and their trade unions,
– NGOs (non-governmental organizations),
– students,
– teachers,
– donor organizations,
– insurers,
– industry peers,
– the buyers of the industry‟s end products,
– environmental authorities,
– local mayors, etc.
• At large: any individual or group who can impact or be
impacted by an organization's decisions or activities.
Cont‟d
 ISO (the International Organization for
Standardization) in its 2010 Standard for Social
Responsibility (ISO26000) articulated the purpose
of social responsibility to be:
 ―… to contribute to sustainable development,
 to take into account the expectations of
stakeholders,
 to be in compliance with applicable law and
consistent with international norms of behavior, and
 to integrate all of this throughout the organization
and practice it in all its relationships…‖.
Cont‟d
 According to the World Business Council for
Sustainable Development (WBCSD), ―corporate
social responsibility (CSR) is the continuing
commitment by business to contribute to economic
development while improving the quality of life of
the workforce and their families as well as of the
community and society at large‖.
 The term ―social responsibility‖ (SR) will be
preferred to ―corporate social responsibility‖ (CSR)
when the concept is used in the context of SMEs.
 Defining social responsibility for small and
medium enterprises
 “Social responsibility is the responsibility of
companies for their impact on society.”
EU Commission in 2011
 This definition emphasizes:
- Responsible entrepreneurship
 Four core areas of SR were condensed from
international standards (based on ISO 26000, the
EU 2011 Communication on CSR and the UN
Global Compact, and informed by the OECD
principles of Corporate Governance, the AA1000
series and the GRI reporting system)
Cont‟d
…. and from previous research and reports on
SMEs‘ social responsibility behavior:
1. Workplace
2. Marketplace
3. Environment
4. Community
 SR core Description Issues of most significant
areas concern
Workplace • Workplace issues are key to • Employment and
the success of any business. employment relations –
• Human resources are the equal opportunities, HR
most valuable assets for any management,
SME, through their expertise, communication with
productivity, and employees,
involvement. • Conditions of work and
• The workplace chapter deals social protection – pay and
with company policies and benefits, workplace
practices towards their main climate,
internal stakeholder – • Health and safety at work –
employees – and largely refers policies and trainings, etc.,
to improvement of working • Human development and
conditions, pay and benefits training in the workplace,
or job creation. • Work-life balance
 Examples of key actions to improve
workplace performance
 Eliminate discrimination in employment practices
and offer equal opportunities to women, workers
with disabilities and other vulnerable groups, such
as young or older workers;
 Ensuring a grievance procedure and system in
response to situations involving discrimination and
harassment allegations;
 Prepare a simple employee handbook on
employment terms, benefits, performance
appraisal, staff suggestions and complaints
procedures;
 Provide a reasonable and reliable living wage and
fair remuneration for employees;
Cont‟d
 Assess potential health and safety risks and
implement the necessary measures to mitigate the
identified risks;
 Ensure adequate health and safety arrangements,
incorporating physical and mental well-being;
 Use health promotion and education to support a
high standard of health;
 Facilitate employees‘ access to training,
development, lifelong learning, knowledge and
enriching experience;
 Introduce flexible working arrangements (e.g. work
from home, flexible working hours, part-time work).
Benefits to business
 Staff retention
 Motivated staff
 Employer of choice
 Reduced accidents and risks
 Better productivity
 Responsible profit
 SR core Description Issues of most significant
areas concern
Marketplac • The most crucial factor of each • Anti-corruption policies
enterprise’s economic effectiveness is • Fair competition in acquisition
e
the business environment in which it process
operates – including • Quality of product/service
shareholders/investors, suppliers and • Fair pricing
business partners, and customers. We • Promoting social responsibility in
generically called it here Marketplace. the value chain
• Among the areas of SR, this is • Respect for property rights
probably the closest to an enterprise’s • Fair marketing
core business. Nonetheless, the way it • Protecting consumers’ health and
operates on the marketplace is above safety
all an indicator of how it performs in • Sustainable consumption
all other areas: workplace, • Consumer service, support, and
environment, and community. complaint and dispute resolution
• Aspects such as marketing, • Consumer data protection and
advertising, labeling, supply chain privacy
management, pricing, etc. should • Access to essential services
reflect an enterprise’s commitment to • Consumer education and
responsible entrepreneurship. awareness
Examples of key actions to improve marketplace
performance

 Train and raise the awareness of employees and

agents about corruption and how to counter it;
 Conduct your activities in a manner consistent with
competition legislation and co-operate with
competition authorities;
 Incorporate ethical, social, environmental, and
gender equality criteria, including health and safety, in
our purchasing, distribution and contracting policies;
 Pay bills on time and at prices that enable suppliers
to fulfill their own responsibilities;
 Influence your clients, whenever possible, to
purchase more sustainable products if you can
produce them
Cont‟d
 Provide access to non-hazardous products;
 Ensure that products and services are
economically, socially and environmentally
sustainable
 Don‘t engage in activities that violate property
rights, including counterfeit/fake and piracy, or
infringe stakeholder interests
 Provide complete, accurate and understandable
information on all relevant aspects of our
operations, including total costs, taxes, terms and
conditions of significant investments;
 Protect consumers from hazards to their health and
safety during production processes, products and
services;
Cont‟d
 Provide clear instructions for safe use, including
assembly and maintenance;
 Provide proper installation, warranties and
guarantees and technical support regarding use,
return, repair and maintenance;
 Protect consumers against dishonest or misleading
advertising or labeling;
 Ensure the information is collected with the informed
and voluntary consent of the stakeholder;
 Educate consumers on environmental, social and
economic impact;
 Help consumers to know their rights and
responsibilities (such as providing clear wording on
contracts for services).
Benefits to business
• Build relationships
• Seen as credible and reputable business
• Customer retention
• Become preferred supplier – brand loyalty
• Better understanding of customers views
• Access new markets
• Attain new customers
• Avoid risks and legal issues
SR core Description Issues of most
areas significant concern
Community • The role of business in society has evolved • Community
during the last decades to incorporate not involvement
only economic, but also social and • Employment creation
environmental aspects. Therefore, today and skills
no company can afford to ignore the development,
issues concerning its stranding in the • Technology
community in which it operates – more so development and
SMEs, which have even stronger access – infrastructure
connections to communities due, in most to benefit both
cases, to their exclusively local operations. business and the
In the end, communities offer an community,
enterprise’s “social operating license”. • Wealth and income
• As a core area of SR, Community refers to creation – economic
engagement activities pursued by an impact,
enterprise with community members – • Education and culture,
activities that add value to both business • Health – protecting the
and locals. health of locals.
Examples of key actions to improve community
involvement
 Participate in local associations with the objective of
contributing to the public good and the development
objectives of communities;
 Maintain transparent relationships with government
officials free from bribery or improper influence;
 Take into account the promotion of community
development in planning investment projects. All
actions should broaden the opportunities for citizens,
for example increasing local procurements and
outsourcing to support local development;
 Consider the impact of investment decisions on
employment creation;
 Give preference, on a level competitive playing field,
to local suppliers of goods and services and
contribute to local supplier development;
Cont‟d
• Fulfill your tax responsibilities as described in law and
related regulations;
• Where economically feasible, adopt practices that allow
technology transfer and diffusion to contribute to long-
term local development;
• Obtain prior informed consent of the local community for
the use of local natural resources and respect the
traditional use of natural resources by local populations;
• Help conserve and protect cultural heritage, especially
where your operations may have an impact on it;
• Promote and/or support education at all levels and engage
in actions to improve the quality of education, to promote
local knowledge and to eradicate illiteracy;
• Seek to minimize or eliminate the negative health impacts
of any of our decisions / activities and help promote a
healthy life-style.
 Benefits to business
 Focus on key partners and build long-term
relationships (2-way benefits)
 Local government recognition
 Local ―social operating license‖
 Proactive feedback from local stakeholders to
enable more informed decision making.
 Support with planning applications and new
developments.
 Risk management – avoid delayed permitting,
protests (and the financial losses usually implied)
 New skills for employees
 Recruitment (awareness)
 Reputation as good employer
 Good public relations
SR core Description Issues of most significant
areas concern
Environm • Recent decades have seen a • Prevention of pollution
ent considerable increase in • Sustainable resource use
awareness and public concern • Climate change
about the impact of business mitigation and
on the natural environment. adaptation
The acceleration of climate • Protection of the
change, the scarcity of natural environment,
resources and the increasing biodiversity and
price of energy are important restoration of natural
factors that explain the habitat
necessity for an enterprise – • Communication to staff,
regardless of its size – to environmental
integrate environmentally awareness, transparency
responsible practices into its and responsibility
business operations.
 E.gs of key actions to improve environmental performance
• Identify the sources, or potential sources, of pollution and waste
associated with our activities,
• Ensure that specific production activities are done as effectively as
possible with minimum energy, waste and environmental damage;
• Substitute naturally scarce materials with those that are more
abundant;
• Protect biodiversity and eco-system functions;
• Ensure that all resources are used efficiently within cyclic systems and
systematically reduce dependence on fossil fuels - use renewable
resources from well-managed and restorative eco-systems whenever
possible;
• Promote energy efficiency in your organization: sometimes it is as
simple as lowering air-conditioning by one degree Celsius, switching
off electrical appliances, or using LEDs instead of incandescent light
bulbs;
• Minimize waste, re-use/recycle where possible;
• Rely on soft copy formats wherever possible and set the default printer
setting to „double-sided printing‟;
• Raise staff awareness and motivation through providing internal
 Benefits to business
 Reduced landfill costs, compliance for customers
 Reduced costs & impact on environment thanks to a
more efficient deployment of resources
 Competitive advantage for attracting business
partners
 Competitive advantage in relation with competition as
environmental concerns become more and more an
important buying criteria for customers
 Compliance
 Access to new markets, if SR results in new ways of
production concerned with ―green‖ products or
technology
 Reduced accidents in workplace
Figure 2. Strategically managing SR core areas using corporate
governance and stakeholder engagement - source: astoneco
management adapted from ISO26000
 Steps to integrate social responsibility into
your core business

The 4 key steps of the model are:

1. Understand the strategic context, area of impact
and relevance of your organization's social
responsibility.
2. Clarify the strategic objectives of your organization,
integrating SR principles.
3. Identify obstacles and opportunities to achieve
your organization's strategic objectives.
4. Integrate SR throughout the organization (plans,
procedures, systems, organizational culture,
external initiatives, etc.) and its sphere of influence.
1. Understand the strategic context, area of impact and
relevance of your organization's social responsibility

 Analyze the strategic context of your operations – if

and where it could affect the social responsibility of
your organization.
 List the full range of your activities and operations,
and consider where they may impinge/impose on
the social responsibility of your organization
(workplace, market, community, environment).
 Determine the relevance of core SR areas and
issues. Establish concrete priorities (e.g. are of
immediate concern to stakeholders, are in
compliance with the law, etc.)
2. Clarify the strategic objectives of your
organization, integrating SR principles.

 Formally setting the direction - review the mission,

vision, values, goals and strategy of your
organization, with SR in mind.
3. Identify obstacles and opportunities to achieve
your organization's strategic objectives

 Identify the risks / obstacles that could prevent you

from reaching your objectives.
 Identify the opportunities that could help you reach
your objectives.
4. Integrate SR throughout the organization
(plans, procedures, systems, organizational
culture, external initiatives, etc. etc.) and its
sphere of influence
 Raise awareness and, where necessary, build
competency for SR throughout the organization
and its sphere of influence.
 Build SR into the organization's systems and
procedures (e.g. performance indicators to
include SR).
Figure 4. Model for SR integration