Description
In such a detailed elucidation relating to the benefits of integrating entrepreneurship into business associations.
SAINT LOUIS UNIVERSITY SCHOOL OF LAW
711
THE BENEFITS OF INTEGRATING ENTREPRENEURSHIP INTO
BUSINESS ASSOCIATIONS
ANN M. SCARLETT*
Since 2009, the television show Shark Tank
®
has popularized
entrepreneurship and energized people to start their own businesses or to think
about starting a business.
1
On Shark Tank, entrepreneurs pitch their product or
service to a panel of “sharks” and seek to obtain an investment from one or
more of the sharks for their business.
2
The entrepreneurs’ businesses span a
variety of products and services such as jewelry, home repair products,
specialty food products, applications for smart phones, food trucks, and
babysitting services.
3
Although most of the entrepreneurs do not get the
investment they seek, the sharks ask the entrepreneurs a variety of questions
about their businesses and sometimes offer advice even though they are not
willing to make an investment.
4
When the sharks are interested in investing in
a business, an often lively exchange of offers and counteroffers occurs.
5
In addition to encouraging entrepreneurism, watching Shark Tank episodes
provides viewers with an introduction to a variety of business concepts such as
business valuation, marketing plans, profit margins, and product pricing. It also
* Professor of Law, Saint Louis University. I want to thank all my students in Business
Associations, as they are a constant source of inspiration for teaching improvements and their
feedback on my course innovations over the years has been invaluable. I also want to thank
Daniel Hunkins for providing excellent research assistance.
1. See Abha Bhattarai, Surviving the Sharks, WASH. POST, J an. 20, 2014, at A14
(discussing contestants’ experiences on the show). However, entrepreneurship is not a new
concept by any means, as the Kauffman Foundation has been promoting entrepreneurship in
various ways since the mid-1960s and the Coleman Foundation since 1951.
2. See Shark Tank: About, ABC.COM,http://abc.go.com/shows/shark-tank/about-the-show
(last visited Sept. 5, 2014) (explaining the plot of the show); see also Bhattarai, supra note 1.
3. See Shark Tank: Episode Guide, ABC.COM,http://abc.go.com/shows/shark-tank/epi
sode-guide (last visited Sept. 5, 2014) (providing examples of the various businesses that have
appeared on the show).
4. See Bhattarai, supra note 1; see also Kevin Brass, Secrets of Winning on ‘Shark Tank’:
Judges and Contestants on the Entrepreneurial Reality Show Lay Out What it Takes to Win,
WALL ST. J . (Aug. 25, 2014),http://www.wsj.com/articles/secrets-of-winning-on-shark-tank-140
8912047 (discussing keys to success on the show).
5. See, e.g., Shark Tank: Episode 107, ABC.COM (Sept. 28, 2009),http://abc.go.com/
shows/shark-tank/episode-guide/season-01/107-episode-107#recap (noting the pitch for Grill
Charms received three offers from the sharks).
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introduces issues involving legal principles such as patents, copyrights,
trademarks, product licensing, royalty rights, and investment and ownership
structures. Seeing the products of successful entrepreneurs from Shark Tank
for sale in major stores or on the internet shows viewers that entrepreneurs can
succeed. Many people associate these entrepreneurs with achieving the
“American Dream,” which might mean a number of things such as financial
security, greater flexibility for family life, or freedom to pursue your ideas.
Law students have taken notice of this focus on entrepreneurship and it is
an area of increasing interest among law students. Some law students aspire to
become entrepreneurs themselves, and other law students prefer to represent
entrepreneurs. Law students may seek to become entrepreneurs by starting
their own law firms or other types of businesses.
6
Given the lack of traditional
law firm jobs following the 2008 financial crisis, more recent law graduates
became solo practitioners or combined with several others to form small law
firms out of necessity.
7
The trend toward solo or small law practices, however,
is not new. Of attorneys in private practice in the United States, almost half are
solo practitioners and almost two-thirds work in law firms with one to five
attorneys.
8
Another segment of law students plan to use their legal training to
represent entrepreneurs, which includes self-employed individuals, individuals
launching start-up ventures, and owners of existing small businesses.
9
Legal
skills for representing small business clients are particularly necessary for new
attorneys who want to practice law in rural areas and small towns. But, even in
6. Although the precise number of attorneys who become entrepreneurs is not known, a
survey of JDs who passed the bar in 2000 revealed that 24% were not practicing law and that
27.7% were working in the business sector in 2012. Debra Cassens Weiss, 24 Percent of JDs
Who Passed the Bar in 2000 Aren’t Practicing Law, Survey Finds, A.B.A. J . (Feb. 9, 2014, 12:00
AM), available athttp://www.abajournal.com/news/article/twelve_years_after_the_jd_20_per
cent_arent_practicing_law/ (reporting results from the “After the J D” study conducted by the
American Bar Foundation).
7. See, e.g., J ennifer A. Rymell, The Chair’s Corner: The Growing World of Legal
Entrepreneurs, 31 GP SOLO, J an.–Feb. 2014, at 8 (“Since 2008 the number of new law graduates
going into solo practice has steadily increased, hitting an all-time high in 2011 of 6.1 percent.
Before 2008, only 3.5 percent or less of law school graduates were starting their own solo
practice right out of law school.”).
8. Lawyer Demographics, A.B.A. 1 (2013), available athttp://www.americanbar.org/con
tent/dam/aba/administrative/market_research/lawyer_demographics_2013.authcheckdam.pdf
(reporting that, as of 2005, 49% of attorneys in private practice were solo practitioners, 14%
worked in firms with two to five attorneys, 6% in firms with six to ten attorneys, 6% in firms with
eleven to twenty attorneys, 6% in firms with twenty-one to fifty attorneys, 4% in firms with fifty-
one to 100 attorneys, and 16% in firms with more than 100 attorneys.).
9. The terms entrepreneurs, self-employed, and small business owners are used
interchangeably in this Essay. Entrepreneurs also include people who start a franchise, buy or
inherit an existing business, or start a charitable or civic organization.
SAINT LOUIS UNIVERSITY SCHOOL OF LAW
2015] THE BENEFITS OF INTEGRATING ENTREPRENEURSHIP 713
urban and suburban law practices, attorneys are far more likely to work with
self-employed individuals and small business owners than with public
corporations.
10
The United States has more than twenty-eight million small businesses,
which comprise over 99% of all businesses.
11
Almost half of all employees
work for small businesses.
12
Approximately 90% of firms in the United States
have less than twenty employees and 98% have less than 100 employees.
13
Further, more than 60% of new jobs are created by start-up and small
businesses.
14
The importance of small businesses is also demonstrated by the
smallest businesses, those with less than twenty-five employees, producing the
greatest number of patents per employee.
15
Admittedly, some new businesses
cease operations within a few years for a variety of reasons,
16
but the statistics
show that small businesses are vitally important to creating new jobs and a key
to restarting substantial growth in our economy. Students’ interest in
entrepreneurship may reflect the reality that start-up and small businesses are a
driving force in the United States’ economy, and thus a fertile area for future
law practice.
I. ADVANTAGES OF INTEGRATING ENTREPRENEURSHIP INTO THE BUSINESS
ASSOCIATIONS COURSE
The primary advantage of incorporating entrepreneurship into Business
Associations is that it increases students’ engagement and interest in the
course. Many students enroll in Business Associations simply because it is a
bar course and these students often have no background or interest in business.
Yet, most students are likely already familiar with small businesses. Some
students, like me, come from a family that owns a small business or have
10. See infra notes 11–13.
11. Frequently Asked Questions, SBA OFFICE ADVOCACY 1 (Mar. 2014), available athttp://www.sba.gov/sites/default/files/FAQ_March_2014_0.pdf [hereinafter SBA FAQ] (defining
small business as less than 500 employees and including both full and part-time businesses).
12. Id. (stating 48.5% of private sector employers are small businesses); see also id. (noting
that more than three-quarters of small businesses are non-employers, meaning the businesses are
operated only by their owners without employees).
13. Statistics of U.S. Businesses Annual Data, U.S. CENSUS BUREAU (2011),http://www.cen
sus.gov/econ/susb/ (last visited Sep. 5, 2014).
14. SBA FAQ, supra note 11 (stating small businesses created 63% of net new jobs between
1993 and 2013 based on Bureau of Labor Statistics, BED).
15. Anthony Breitzman & Diana Hicks, An Analysis of Small Business Patents by Industry
and Firm Size, SBA OFFICE ADVOCACY i (Nov. 2008), available athttp://archive.sba.gov/advo/
research/rs335tot.pdf; see also SBA FAQ, supra note 11, at 3 (“Of high patenting firms (15 or
more patents in a four-year period), small businesses produced 16 times more patents per
employee than large patenting firms.”).
16. Half of new businesses are still operating after five years and more than a third after ten
years. SBA FAQ, supra note 11, at 1–2.
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relatives that own small businesses. For other students, they may frequent a
hair salon, a restaurant, a bar, or a dental office that is owned by local
individuals. Even many national brand restaurants and retailers are franchises
owned by local individuals. To expand students’ awareness of the variety
among entrepreneurs, a professor can play clips from Shark Tank or similar
shows.
17
Students are less intimidated by the legal and business concepts in the
course when based on familiar small businesses. Students enjoy Shark Tank
clips and actively participate in discussions about legal and business issues
when based on these clips. The students also seem to engage more fully in
hypotheticals based on the real entrepreneurs from Shark Tank clips. By
incorporating entrepreneurship into the Business Associations course, the legal
issues are more interesting to students. It is also easier for students to learn
how these legal principles apply to small businesses that they know or have
seen on Shark Tank clips, and to see how that knowledge can be used in their
future legal practices or in starting their own businesses.
Another advantage to incorporating entrepreneurship into Business
Associations is the ability to draw upon local resources and speakers. The St.
Louis metropolitan area, where my law school is located, has a particularly
vibrant entrepreneurship environment. A variety of incubators and accelerators
actively encourage and support entrepreneurs in St. Louis. Angel investors and
venture capital funds are also present. Some of these organizations specifically
encourage technology and biotechnology start-up businesses in St. Louis,
while other organizations encourage people to start small local service
businesses such as hair salons, lawn service companies, and restaurants. J ust as
immigrants account for much of the growth in new businesses in the United
States,
18
St. Louis’ large immigrant communities produce many entrepreneurs
that have started a variety of businesses such as restaurants and service
businesses. In addition, at least one local organization is encouraging residents
17. START UP has television episodes and webinars that focus on entrepreneurship. Start
Up, USA.COM,http://startup-usa.com/episodes (last visited Nov. 1, 2014). Additionally, Startups:
Made in Kansas City is a series of videos by the public television station in Kansas City that
focuses on entrepreneurship. Startups: Made in Kansas City, KCPT.ORG,http://www.kcpt.org/
programs/local-programs/startups/ (last visited Nov. 1, 2014).
18. See, e.g., The Jobs Machine, ECONOMIST (Apr. 13, 2013),http://www.economist.com/
news/business/21576101-start-ups-founded-immigrants-are-creating-jobs-all-over-america-jobs-
machine (“Some 40% of Fortune 500 firms were founded by immigrants or their children,
according to the Partnership for a New American Economy, a pressure group. . . . Although the
foreign-born are only an eighth of America’s population, a quarter of high-tech start-ups have an
immigrant founder.”).
SAINT LOUIS UNIVERSITY SCHOOL OF LAW
2015] THE BENEFITS OF INTEGRATING ENTREPRENEURSHIP 715
in economically distressed areas of the city to start their own businesses as way
of revitalizing their neighborhoods.
19
Many of these local organizations host workshops and networking events
to educate and support entrepreneurs, and these organizations can dramatically
improve a business’s chance of succeeding.
20
In addition, the Center for
Entrepreneurship at Saint Louis University has been inspiring and supporting
entrepreneurs for forty years, and other local universities also engage in similar
work. All these local resources provide a variety of local events that Business
Associations students can attend to learn more about entrepreneurship and to
interact with local entrepreneurs. These organizations also serve as an excellent
source of engaging entrepreneurs that can speak with a Business Associations
class about their experiences starting a business, the legal issues that they have
confronted, and their advice about how attorneys can communicate and build
relationships with entrepreneurs.
Integrating entrepreneurship into Business Associations also offers cross-
curricular advantages. Some law schools have already seized upon students’
interest in entrepreneurship by establishing centers, concentrations, or clinics
focused on the topic.
21
Other law schools collaborate with the business school
at their universities to educate law students on entrepreneurship.
22
For law
schools with a clinic or other emphasis on entrepreneurship law, integrating
entrepreneurship into the Business Associations course has the advantage of
increasing students’ interest in those curricular offerings. Even without
developing a specialized program, law schools can add entrepreneurship into
their curriculum by incorporating entrepreneurship law into the Business
Associations course. Further, because students typically enroll in Business
Associations in the fall semester of the 2L year, they can be introduced to other
classes important for representing entrepreneurs while they still have time to
enroll in them. These classes may include Intellectual Property Survey,
Employment Law, Securities Regulation, Transactional Drafting, and Taxation
19. Habitat for Business is a non-profit organization organized by the J ohn Cook School of
Business’s Center for Entrepreneurship at Saint Louis University. Habitat for Business, J OHN
COOK SCH. BUS.,http://business.slu.edu/centers-of-distinction/center-for-entrepreneurship/pro
grams-events/habitat-for-business/ (last visited Nov. 1, 2014).
20. J EROME A. KATZ & RICHARD P. GREEN II, ENTREPRENEURIAL SMALL BUSINESS 157
(4th ed. 2014).
21. For example, Duke University School of Law offers an LLM in Law and
Entrepreneurship, and Pepperdine University School of Law has the Geoffrey H. Palmer Center
for Entrepreneurship and the Law. Some law schools, such as those at Northwestern University
and University of Pennsylvania, operate clinics focused on entrepreneurship. Some law schools,
including University of Washington School of Law and Drexel University School of Law, offer
concentrations involving entrepreneurship.
22. See, e.g., Anthony J . Luppino, Minding More Than Our Own Business: Educating
Entrepreneurial Lawyers Through Law School-Business School Collaborations, 30 W. NEW ENG.
L. REV. 151, 154 (2007).
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for Individuals, Partnerships, and Corporations. With or without an
entrepreneurship center or clinic, introducing entrepreneurship into Business
Associations can help students understand the necessity of these other classes
to prepare for a law practice focused on self-employed and small business
clients.
In addition, focusing more attention on start-up and small businesses
provides many opportunities to address the professional and ethical issues of
transactional law practice. Unlike a public corporation client, these clients can
present ethical and professional challenges because the entrepreneurs are so
closely connected with their businesses that they often do not distinguish
between themselves and their businesses. For instance, an attorney counseling
clients about the choice of business entity must clearly identify who is the
client being represented. Is it one of the participants in the new venture, all of
the participants in the new venture, or the new venture itself? This raises not
only ethical issues about conflicts of interest, but also professional issues about
who is the best client from the attorney’s perspective. The professor can also
demonstrate professional skills in counseling a client beyond the merely legal
aspects. In helping a client choose a form of business entity, an attorney must
consider more than just the legal attributes of the various entity choices, but
also the client’s ability to comply with annual filing requirements for a
particular business entity and the burdens of that entity’s tax treatment.
Further, because entrepreneurs tend to be risk-takers and attorneys tend to be
risk averse, the professor may also include consideration of ways for an
attorney to communicate the legal risks of a transaction by a small business,
without being seen as a naysayer and damaging the future attorney-client
relationship.
A perhaps unexpected benefit of discussing entrepreneurial small
businesses within class hypotheticals is the ability to introduce basic business
and financial knowledge into the discussion. Although attorneys are not
business experts, they need to understand basic business terminology and
financial information to draft transactional agreements, such as those
documenting an investment in a small business or the sale of that business. By
presenting facts concerning a small business, students can learn business
concepts in a simpler context. For instance, students can more easily
understand the financial statements for a small beauty salon owned by a
husband and wife, than those for a public corporation. The professor can then
connect a potential buyer’s offer price for that beauty salon to different
business valuations based on its financial statements. Familiarity with the
business and financial information that entrepreneurs constantly consider
allows attorneys to assist clients in negotiating transactions and to provide
better legal advice. Finally, with enhanced business knowledge, students may
be inspired to become entrepreneurs.
SAINT LOUIS UNIVERSITY SCHOOL OF LAW
2015] THE BENEFITS OF INTEGRATING ENTREPRENEURSHIP 717
II. METHODS FOR INTEGRATING ENTREPRENEURSHIP INTO BUSINESS
ASSOCIATIONS
Entrepreneurship integrates easily into the existing topics covered in a
Business Associations or Business Organizations course. The credit hours
allocated to Business Associations vary among law schools, and some law
schools split the material into two separate courses (a Corporations course and
a separate Agency and Partnership course or Unincorporated Entities course).
Regardless of the exact credit hours or classes, entrepreneurship can be
incorporated into the course for the benefits mentioned in Part I.
23
A four-hour
Business Associations course typically covers the laws of agency, partnerships,
limited liability companies, corporations, securities laws, and mergers and
acquisitions.
24
Together these laws raise three primary issues: 1) choice of
business entity and the laws governing entities; 2) methods for raising capital
and related securities laws concerns; and 3) exit strategies. A traditional
Business Associations course tends to cover these three issues mostly through
a focus on large corporations, particularly public corporations. Indeed legal
principles directly related to unincorporated entities often account for only a
quarter of the course. However, these three issues are equally relevant to
unincorporated business entities and small private corporations as explained
below. Integrating entrepreneurship into the course means emphasizing small
businesses more than public corporations.
A. Teaching Methods
The key to teaching entrepreneurship in the Business Associations course
is through hypothetical problems or case studies whereby students are
presented with the legal issues confronting entrepreneurs. I utilize two different
methods for presenting such scenarios. The first is the running hypothetical in
which the basic facts of a scenario are changed and expanded as different legal
topics are encountered in the course. The running hypothetical is particularly
useful for initial class discussions of new legal principles. Because a variety of
businesses exist, the running hypotheticals should include at least one focused
on a service-oriented business (such as a dental practice, hair salon, or
23. See supra Part I.
24. A sampling of Business Associations casebooks illustrates these are the typical laws
covered. See, e.g., ERIC A. CHIAPPINELLI, CASES AND MATERIALS ON BUSINESS ENTITIES (3d
ed. 2014); DWIGHT DRAKE, BUSINESS ORGANIZATIONS IN A PLANNING CONTEXT: CASES,
MATERIALS AND STUDY PROBLEMS (2013); LEE HARRIS, CASES AND MATERIALS ON
CORPORATIONS AND OTHER BUSINESS ENTITIES: A PRACTICAL APPROACH (2011); WILLIAM A.
KLEIN ET AL., BUSINESS ASSOCIATIONS: AGENCY, PARTNERSHIPS, AND CORPORATIONS (8th ed.
2012); D. GORDON SMITH & CYNTHIA A. WILLIAMS, BUSINESS ORGANIZATIONS: CASES,
PROBLEMS, AND CASE STUDIES (2d ed. 2008).
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plumbing company) and another that is product-oriented (such as a consumer
product manufacturer or an internet retailer of specialty food items).
The running hypotheticals are supplemented by other hypothetical
problems that present different factual scenarios to expand and test the legal
principles being studied. Students find these problems most beneficial if
distributed several days before being discussed in class. If the professor
follows the traditional casebook format of progressing through agency,
partnerships, LLCs, and corporations, the most complex choice of law
problems will be presented only after the class has covered all the business
entities. The same hypotheticals would form the foundation of a course
implementing a problem-based approach to the legal issues. The goal of the
hypothetical problems is for students to understand the choices that could be
made on the three key legal issues (choice of business entity and laws
governing entities, methods for raising capital and related securities laws
concerns, and exit strategies), and the perceived advantages and disadvantages
of each choice.
B. Choice of Business Entity and Laws Governing Entities
By presenting problems focused on start-up businesses, students gain a
deeper understanding of each type of business entity. Depending on the chosen
state of formation, the choices for a small group of entrepreneurs starting a
business may include general partnership, limited liability partnership, limited
partnership, limited liability company, S corporation, or C corporation.
25
More
than one of these business entity forms may be appropriate for the new venture
depending on the goals and expectations of the participants as well as the
provisions of the governing laws. There is rarely only one answer when
deciding the form of business entity for a new venture. Rather, the attorney
must ask a series of questions to learn the clients’ goals, expectations, and
limitations, and then the attorney must outline the advantages and
disadvantages of the business entities that best fit the clients. Ultimately it is
the clients’ choice, but that choice should be informed by the attorney’s
thoughtful legal advice.
Using real or hypothetical scenarios based on start-up ventures, the
professor can easily lead students through discussions of the factors to consider
in choosing a business entity. Because businesses operate in a variety of areas,
the scenarios should include examples of all types of businesses including:
service-oriented, manufacturing, technology, traditional retailers, and internet-
based companies. By carefully varying the facts of these scenarios, the
professor can demonstrate the reasons that lead start-up businesses to choose
25. For a sole owner, the choices typically include sole proprietorship, limited liability
company, S corporation, and C corporation.
SAINT LOUIS UNIVERSITY SCHOOL OF LAW
2015] THE BENEFITS OF INTEGRATING ENTREPRENEURSHIP 719
different forms of business entities. The professor can also use the scenarios to
help students develop the skills to effectively interview a client for the purpose
of giving legal advice. To advise a client on the choice of business entity, the
attorney must learn, among other things, how the new business will operate,
the goals for the business both in the short term and the long term, the
expectations of the participants, and the relationships among the participants.
The attorney cannot simply focus on the near-term goal of filing any necessary
papers to initiate the business, but instead must consider issues that may arise
when the business is more mature or when the business is nearing its end.
Many factors combine to influence the choice of business entity, so only a
few examples can be mentioned here. For instance, an important consideration
in selecting the form of business entity is whether the participants’ goal is to
eventually sell or merge the business. Conversely, if the participants want to
receive a steady income from the business and, perhaps, to pass the business to
their children, that may suggest an alternative form of business entity. The tax
treatment of the chosen business entity is another important factor, but it is
more complex than typically addressed in Business Associations. For instance,
the participants may want to limit their individual tax liability on an annual
basis, to avoid any individual tax liability until they exit the business, or to
maximize tax-free fringe benefits. Alternatively, the participants may not be
that focused on taxes if they are simply looking for the business to replace their
current income while giving them the flexibility of running their own business.
Although tax issues are more fully taught through specific tax courses, it is
beneficial for students to identify the tax aspects that impact the choice of
business entity and to see the need to enroll in tax courses.
The incorporation of entrepreneurship principles allows for a more
multifaceted choice of entity discussion, and students’ understanding of the
business entities can be further developed by considering the internal
governance of those entities. The hypothetical scenarios can be varied to
include facts about internal governance issues so that students must carefully
compare the statutory provisions governing each form of business entity. In
considering the internal governance structure for each business entity, students
must focus on the statutory defaults and permissible ways to vary those
provisions through agreement. For example, the statutory defaults for exiting
the business vary among the business entities, as do the statutory defaults for
fiduciary duties and the permissibility of limiting or eliminating those duties.
Students’ understanding of these issues can be further developed by having
them not only analyze the best business entity forms for a particular scenario,
but also draft a letter to the client in which they explain the options or draft an
agreement to govern the internal relations among the owners (e.g., a LLC
operating agreement, a shareholder agreement).
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C. Methods for Raising Capital and Related Securities Laws Concerns
Integrating an entrepreneurship approach in Business Associations requires
an expanded discussion of methods by which a small business may raise
capital and concurrently requires an expanded discussion of the exemptions
from securities laws for any outside investments. Raising capital is a matter of
critical importance in start-up businesses. The methods by which a start-up
small business can acquire capital are vastly different from the opportunities
available to a public company. Whereas a public company might be able to
make an additional public issuance of shares, sell bonds to the public, or
borrow money from a commercial bank, the founders of start-up ventures
typically start with their own savings or borrowings and then turn to family and
friends.
26
If the start-up venture is technology based, it may be able to attract
an angel investor or venture capital investors. Crowdfunding is also a potential
method of raising money popularized by companies such as Kickstarter and
Indiegogo.
27
Or, if lucky, the entrepreneur may appear on Shark Tank and
attract an investment from one of the sharks.
28
These investors may receive a
variety of interests in exchange for investing in a start-up small business and
the class can consider the most common forms of investment interests as well
as the documents reflecting these investment interests (e.g., subscription
agreements, convertible promissory notes).
When the founders of a business seek outside investments whether from
family, friends, angel investors, venture capitalists, or crowdfunders,
29
issues
concerning securities laws arise. Unfortunately, many attorneys and lay people
are unaware of the broad applicability of the securities laws. Indeed, the
definition of a “security” is much broader than simply stock in a publicly-
26. It is difficult for start-up and small businesses to obtain loans from commercial lenders
without substantial collateral or personal guarantees, but they may be able to obtain non-bank
financing based on their inventory, purchase orders, or accounts receivables. The professor may
want to discuss these issues in considering financing options for start-up and small businesses.
27. See Ellen Huet, Making the Cut, S.F. CHRON. (J an. 5, 2014) (discussing the use of the
crowdfunding companies in the fashion industry); Sean M. O’Connor, Crowdfunding’s Impact on
Start-Up IP Strategy, CPIP (Feb. 24, 2014),http://cpip.gmu.edu/2014/02/24/crowdfundings-im
pact-on-start-up-ip-strategy-3/ (noting the popularity of crowdfunding through the companies).
28. See Shark Tank: Episode Guide, supra note 3.
29. Crowdfunding was originally permitted only for donations, rewards, or non-interest
loans, because offering equity interests would have violated the Securities Act of 1933. In 2012,
Title III of the J umpstart Our Business Startups Act (J OBS Act) authorized equity crowdfunding
through a new registration exemption. J umpstart Our Business Startups Act, Pub. L. No. 112–
106, 126 Stat. 306 (2012) (codified in various sections of 15 U.S.C. §§ 77a-aa, 78a-pp)
(amending Section 4 of the Securities Act of 1933 to create a new exemption for crowdfunded
securities). However, the Securities and Exchange Commission has not yet issued final
regulations to allow equity crowdfunding to begin.
SAINT LOUIS UNIVERSITY SCHOOL OF LAW
2015] THE BENEFITS OF INTEGRATING ENTREPRENEURSHIP 721
traded corporation as many people think,
30
and includes many of the
investments made in unincorporated entities and private corporations.
31
Thus,
individuals receiving an interest in a LLC or a S corporation owned by a friend
or family member are likely receiving a security, which either must be
registered under the Securities Act of 1933 or fit an exemption to registration
under that Act.
32
Because most small businesses will rely on exemptions when
seeking outside investments, a professor integrating entrepreneurship into
Business Associations should expand the coverage of exemptions from the
securities registration requirements of the Securities Act of 1933. If the class
studies agreements documenting outside investments, the professor can ask
students to find the provisions of each agreement addressing the qualifications
for a registration exemption and to identify the applicable exemptions.
Similarly, the definition of a “security” is equally broad for purposes of
securities fraud liability under the Securities Exchange Act of 1934,
33
particularly Rule 10b-5 liability.
34
Thus, securities fraud liability can extend to
investments in unincorporated entities and private corporations. When an
investment in a small business does not go well, a disgruntled investor may be
able to plead a Rule 10b-5 securities fraud claim fairly easily.
35
The professor
can address the broad applicability of the securities fraud laws by including
more cases in which unincorporated entities or private corporations are
accused of securities fraud.
36
30. Securities Act of 1933 § 2(1), 15 U.S.C. § 77b(1)) (2012); Securities Exchange Act of
1934 § 3(a)(10), 15 U.S.C. § 78c(a)(10) (2012).
31. See, e.g., SEC v. W.J. Howey Co., 328 U.S. 293, 298–300 (1946) (holding that the
interests in a citrus grove sold by the Howey Company were “investment contracts,” and thus
securities under the Securities Act of 1933); Robinson v. Glynn, 349 F.3d 166, 169, 174–75 (4th
Cir. 2003) (holding that the interest sold in a LLC was a security).
32. 15 U.S.C. § 77d.
33. See, e.g., Marine Bank v. Weaver, 455 U.S. 551, 555 (1982) (stating the definition of a
security is “quite broad” under the Securities Exchange Act of 1934 and essentially the same as
the definition of a security under the Securities Act of 1933).
34. 17 C.F.R. § 240.10b-5 (2013).
35. See DWIGHT DRAKE, BUSINESS PLANNING: CLOSELY HELD ENTERPRISES 202 (4th ed.
2013) (“The seller has an affirmative duty to accurately state material facts and to not mislead;
the buyer has a solid cause of action if the seller blows it. Rule 10b-5 and its state counterparts
keep our courts packed with countless disgruntled investors who believe they were unfairly
deceived when things didn’t go as planned.”); id. at 204(“The dumb, poor investors may lack the
capacity to evaluate what is being promised; but after things go bad, it doesn’t take much to find
an aggressive lawyer who is willing to spec the case against a contingent fee because, given the
undisputed limitations of the plaintiffs, it’s a slam dunk.”).
36. This expanded coverage can be facilitated by more quickly covering securities fraud
liability within public corporations under the Securities Exchange Act of 1934, forms of securities
liability under the Securities Act of 1933, and short swing profits liability under Securities
Exchange Act of 1934.
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D. Exit Strategies
A professor incorporating entrepreneurship into Business Associations will
have discussed exit strategies to a limited extent within the choice of business
entity and internal governance contexts. If time permits, the professor may also
want to directly address the possible exit strategies for small business owners.
Although going public is the exit strategy for a few start-up companies, the
more likely exit strategies involve sales or mergers with competitors. The
entrepreneurial focus in this context is achieved by focusing on sales and
mergers involving small private corporations, LLCs, and partnerships, rather
than mergers and sales among public companies. Doing so makes the financial
terms and the conditions for the transactions easier for students to understand.
It also allows students to review asset purchase agreements and merger
agreements that are generally shorter and simpler to comprehend than those
involving public corporations.
III. FOCUSING ON ENTREPRENEURSHIP TO FACILITATE TEACHING PRACTICAL
SKILLS
Practical skills are an important focus of law schools as they aim to
produce practice-ready attorneys.
37
A key skill for all attorneys is legal
drafting. For drafting transactional documents, an attorney must also know
related skills such as how to find and use form documents, how to review
documents drafted by other parties involved in a deal with your client, and how
to negotiate in your client’s best interest. Therefore, a professor teaching
drafting in Business Associations may also want to include discussion and
exercises on these issues.
Drafting can be more easily incorporated into the Business Associations
course with scenarios involving a few entrepreneurs. Focusing on scenarios of
a small business founded by a few individuals has the advantages of simpler
facts for students to understand and typically simpler agreements to document
the transactions. Such scenarios allow opportunities for drafting the required
document to formally create the business entity chosen (e.g., articles of
incorporation, articles of formation) and the internal governance document for
the business (e.g., shareholder agreement, LLC operating agreement). These
drafting exercises can be combined with the related skills of finding and using
form documents. The same scenarios can be expanded to include methods for
financing the business, the terms of such investments, and drafting the
37. See, e.g., William E. Foster & Emily Grant, Memorializing the Meal: An Analogical
Exercise for Transactional Drafting, 36 U. HAW. L. REV. 403, 403 (2014) (“The legal academy is
increasingly focused on producing practice-ready lawyers.”); Kamille Wolff Dean, Teaching
Business Law in the New Economy: Strategies for Success, 8 J . BUS. & TECH. L. 223, 236–37
(2013) (noting the forces influencing law schools to teach practical skills).
SAINT LOUIS UNIVERSITY SCHOOL OF LAW
2015] THE BENEFITS OF INTEGRATING ENTREPRENEURSHIP 723
agreements. Finally, the same scenarios can be further developed to include an
exit from the business through the drafting of a merger agreement, a stock
purchase agreement, or an asset purchase agreement.
In a Business Associations class with a large number of students, it can be
difficult to successfully complete even one full drafting exercise. One way to
minimize the drafting burden on students and the grading burden on the
professor is to develop a drafting exercise based on a simple agreement for a
small entity, such as a subscription agreement. Another way to minimize the
burden is to limit a drafting exercise to only one or two provisions of an
agreement for a small entity.
Alternatively, without requiring students to actually draft a document, a
professor can teach some drafting lessons through the review of documents.
For example, the professor can give students a draft LLC operating agreement
and tell them that they are each a potential LLC member, and then ask them to
review the document for any items that they find objectionable, items that they
want to negotiate, and items that they think are missing. This exercise can
reveal examples of poor drafting and illustrate the potential for one-sidedness
within an agreement. The professor can enhance the exercise by posing various
“what if” scenarios that will expose any ambiguous or missing provisions of
the agreement. For instance, asking students to assume that a member has died
a year after the business began may highlight the absence of any provisions in
the operating agreement addressing that event. Alternatively, asking students to
assume that a member wants to transfer half of her interest as part of a divorce
settlement may reveal ambiguity with the existing provisions of the operating
agreement. Both variations can then lead to a discussion of the different ways
to address the issue in the agreement. As with drafting assignments, a
document review exercise can be simplified by focusing on only a few
provisions within an agreement.
In advance of reviewing or drafting an agreement, a professor can also
have students (in small groups) participate in a mock negotiation of the key
terms of that agreement. For instance, the professor can tell students that each
small group has formed a LLC and now needs to negotiate its operating
agreement. The students can develop their own list of the key terms and
negotiate those terms, or the professor can simplify the exercise by giving the
students a list of the key terms and having them negotiate those terms. In an
ideal setting with unlimited time, the professor would have each student draft
the operating agreement according to the negotiated terms. The professor could
also have students exchange their draft documents with the other “LLC
members” in their small groups to show the variations that can be produced by
different drafters (and which may necessitate further negotiations). If such a
drafting exercise is not realistic, the negotiation exercise can be followed by
the professor distributing an agreement intended to reflect the negotiated deal
and having the students review it for items that they find objectionable, items
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that vary from the negotiated terms, and items that are ambiguous or missing.
Similarly, a professor could have students negotiate the terms for an
investment in a small business or the terms for a merger or sale of the business.
CONCLUSION
Integrating entrepreneurship into Business Associations through an
emphasis on start-up and small businesses is worth sacrificing some coverage
of public corporations. Attorneys are much more likely to work with clients
who are self-employed or own small businesses, and thus the legal principles
covered in a Business Associations course have more relevance to students
when focused on these likely clients. Students are also able to more easily
understand the legal concepts presented when focused on start-up and small
businesses. Incorporating entrepreneurship also has the advantage of
introducing law students to the cross-curricular nature of this practice area and
at a time when they can still enroll in other relevant courses. It is also an
engaging way for students to understand the legal and business issues
presented in transactional legal practice. Some students may even be motivated
to become entrepreneurs themselves. For someone who has taught Business
Associations for many years, it is energizing to see students so engaged and
actively participating in class, and it inspires me to continue developing
creative classes and exercises with an entrepreneurship focus.
doc_294115220.pdf
In such a detailed elucidation relating to the benefits of integrating entrepreneurship into business associations.
SAINT LOUIS UNIVERSITY SCHOOL OF LAW
711
THE BENEFITS OF INTEGRATING ENTREPRENEURSHIP INTO
BUSINESS ASSOCIATIONS
ANN M. SCARLETT*
Since 2009, the television show Shark Tank
®
has popularized
entrepreneurship and energized people to start their own businesses or to think
about starting a business.
1
On Shark Tank, entrepreneurs pitch their product or
service to a panel of “sharks” and seek to obtain an investment from one or
more of the sharks for their business.
2
The entrepreneurs’ businesses span a
variety of products and services such as jewelry, home repair products,
specialty food products, applications for smart phones, food trucks, and
babysitting services.
3
Although most of the entrepreneurs do not get the
investment they seek, the sharks ask the entrepreneurs a variety of questions
about their businesses and sometimes offer advice even though they are not
willing to make an investment.
4
When the sharks are interested in investing in
a business, an often lively exchange of offers and counteroffers occurs.
5
In addition to encouraging entrepreneurism, watching Shark Tank episodes
provides viewers with an introduction to a variety of business concepts such as
business valuation, marketing plans, profit margins, and product pricing. It also
* Professor of Law, Saint Louis University. I want to thank all my students in Business
Associations, as they are a constant source of inspiration for teaching improvements and their
feedback on my course innovations over the years has been invaluable. I also want to thank
Daniel Hunkins for providing excellent research assistance.
1. See Abha Bhattarai, Surviving the Sharks, WASH. POST, J an. 20, 2014, at A14
(discussing contestants’ experiences on the show). However, entrepreneurship is not a new
concept by any means, as the Kauffman Foundation has been promoting entrepreneurship in
various ways since the mid-1960s and the Coleman Foundation since 1951.
2. See Shark Tank: About, ABC.COM,http://abc.go.com/shows/shark-tank/about-the-show
(last visited Sept. 5, 2014) (explaining the plot of the show); see also Bhattarai, supra note 1.
3. See Shark Tank: Episode Guide, ABC.COM,http://abc.go.com/shows/shark-tank/epi
sode-guide (last visited Sept. 5, 2014) (providing examples of the various businesses that have
appeared on the show).
4. See Bhattarai, supra note 1; see also Kevin Brass, Secrets of Winning on ‘Shark Tank’:
Judges and Contestants on the Entrepreneurial Reality Show Lay Out What it Takes to Win,
WALL ST. J . (Aug. 25, 2014),http://www.wsj.com/articles/secrets-of-winning-on-shark-tank-140
8912047 (discussing keys to success on the show).
5. See, e.g., Shark Tank: Episode 107, ABC.COM (Sept. 28, 2009),http://abc.go.com/
shows/shark-tank/episode-guide/season-01/107-episode-107#recap (noting the pitch for Grill
Charms received three offers from the sharks).
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introduces issues involving legal principles such as patents, copyrights,
trademarks, product licensing, royalty rights, and investment and ownership
structures. Seeing the products of successful entrepreneurs from Shark Tank
for sale in major stores or on the internet shows viewers that entrepreneurs can
succeed. Many people associate these entrepreneurs with achieving the
“American Dream,” which might mean a number of things such as financial
security, greater flexibility for family life, or freedom to pursue your ideas.
Law students have taken notice of this focus on entrepreneurship and it is
an area of increasing interest among law students. Some law students aspire to
become entrepreneurs themselves, and other law students prefer to represent
entrepreneurs. Law students may seek to become entrepreneurs by starting
their own law firms or other types of businesses.
6
Given the lack of traditional
law firm jobs following the 2008 financial crisis, more recent law graduates
became solo practitioners or combined with several others to form small law
firms out of necessity.
7
The trend toward solo or small law practices, however,
is not new. Of attorneys in private practice in the United States, almost half are
solo practitioners and almost two-thirds work in law firms with one to five
attorneys.
8
Another segment of law students plan to use their legal training to
represent entrepreneurs, which includes self-employed individuals, individuals
launching start-up ventures, and owners of existing small businesses.
9
Legal
skills for representing small business clients are particularly necessary for new
attorneys who want to practice law in rural areas and small towns. But, even in
6. Although the precise number of attorneys who become entrepreneurs is not known, a
survey of JDs who passed the bar in 2000 revealed that 24% were not practicing law and that
27.7% were working in the business sector in 2012. Debra Cassens Weiss, 24 Percent of JDs
Who Passed the Bar in 2000 Aren’t Practicing Law, Survey Finds, A.B.A. J . (Feb. 9, 2014, 12:00
AM), available athttp://www.abajournal.com/news/article/twelve_years_after_the_jd_20_per
cent_arent_practicing_law/ (reporting results from the “After the J D” study conducted by the
American Bar Foundation).
7. See, e.g., J ennifer A. Rymell, The Chair’s Corner: The Growing World of Legal
Entrepreneurs, 31 GP SOLO, J an.–Feb. 2014, at 8 (“Since 2008 the number of new law graduates
going into solo practice has steadily increased, hitting an all-time high in 2011 of 6.1 percent.
Before 2008, only 3.5 percent or less of law school graduates were starting their own solo
practice right out of law school.”).
8. Lawyer Demographics, A.B.A. 1 (2013), available athttp://www.americanbar.org/con
tent/dam/aba/administrative/market_research/lawyer_demographics_2013.authcheckdam.pdf
(reporting that, as of 2005, 49% of attorneys in private practice were solo practitioners, 14%
worked in firms with two to five attorneys, 6% in firms with six to ten attorneys, 6% in firms with
eleven to twenty attorneys, 6% in firms with twenty-one to fifty attorneys, 4% in firms with fifty-
one to 100 attorneys, and 16% in firms with more than 100 attorneys.).
9. The terms entrepreneurs, self-employed, and small business owners are used
interchangeably in this Essay. Entrepreneurs also include people who start a franchise, buy or
inherit an existing business, or start a charitable or civic organization.
SAINT LOUIS UNIVERSITY SCHOOL OF LAW
2015] THE BENEFITS OF INTEGRATING ENTREPRENEURSHIP 713
urban and suburban law practices, attorneys are far more likely to work with
self-employed individuals and small business owners than with public
corporations.
10
The United States has more than twenty-eight million small businesses,
which comprise over 99% of all businesses.
11
Almost half of all employees
work for small businesses.
12
Approximately 90% of firms in the United States
have less than twenty employees and 98% have less than 100 employees.
13
Further, more than 60% of new jobs are created by start-up and small
businesses.
14
The importance of small businesses is also demonstrated by the
smallest businesses, those with less than twenty-five employees, producing the
greatest number of patents per employee.
15
Admittedly, some new businesses
cease operations within a few years for a variety of reasons,
16
but the statistics
show that small businesses are vitally important to creating new jobs and a key
to restarting substantial growth in our economy. Students’ interest in
entrepreneurship may reflect the reality that start-up and small businesses are a
driving force in the United States’ economy, and thus a fertile area for future
law practice.
I. ADVANTAGES OF INTEGRATING ENTREPRENEURSHIP INTO THE BUSINESS
ASSOCIATIONS COURSE
The primary advantage of incorporating entrepreneurship into Business
Associations is that it increases students’ engagement and interest in the
course. Many students enroll in Business Associations simply because it is a
bar course and these students often have no background or interest in business.
Yet, most students are likely already familiar with small businesses. Some
students, like me, come from a family that owns a small business or have
10. See infra notes 11–13.
11. Frequently Asked Questions, SBA OFFICE ADVOCACY 1 (Mar. 2014), available athttp://www.sba.gov/sites/default/files/FAQ_March_2014_0.pdf [hereinafter SBA FAQ] (defining
small business as less than 500 employees and including both full and part-time businesses).
12. Id. (stating 48.5% of private sector employers are small businesses); see also id. (noting
that more than three-quarters of small businesses are non-employers, meaning the businesses are
operated only by their owners without employees).
13. Statistics of U.S. Businesses Annual Data, U.S. CENSUS BUREAU (2011),http://www.cen
sus.gov/econ/susb/ (last visited Sep. 5, 2014).
14. SBA FAQ, supra note 11 (stating small businesses created 63% of net new jobs between
1993 and 2013 based on Bureau of Labor Statistics, BED).
15. Anthony Breitzman & Diana Hicks, An Analysis of Small Business Patents by Industry
and Firm Size, SBA OFFICE ADVOCACY i (Nov. 2008), available athttp://archive.sba.gov/advo/
research/rs335tot.pdf; see also SBA FAQ, supra note 11, at 3 (“Of high patenting firms (15 or
more patents in a four-year period), small businesses produced 16 times more patents per
employee than large patenting firms.”).
16. Half of new businesses are still operating after five years and more than a third after ten
years. SBA FAQ, supra note 11, at 1–2.
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relatives that own small businesses. For other students, they may frequent a
hair salon, a restaurant, a bar, or a dental office that is owned by local
individuals. Even many national brand restaurants and retailers are franchises
owned by local individuals. To expand students’ awareness of the variety
among entrepreneurs, a professor can play clips from Shark Tank or similar
shows.
17
Students are less intimidated by the legal and business concepts in the
course when based on familiar small businesses. Students enjoy Shark Tank
clips and actively participate in discussions about legal and business issues
when based on these clips. The students also seem to engage more fully in
hypotheticals based on the real entrepreneurs from Shark Tank clips. By
incorporating entrepreneurship into the Business Associations course, the legal
issues are more interesting to students. It is also easier for students to learn
how these legal principles apply to small businesses that they know or have
seen on Shark Tank clips, and to see how that knowledge can be used in their
future legal practices or in starting their own businesses.
Another advantage to incorporating entrepreneurship into Business
Associations is the ability to draw upon local resources and speakers. The St.
Louis metropolitan area, where my law school is located, has a particularly
vibrant entrepreneurship environment. A variety of incubators and accelerators
actively encourage and support entrepreneurs in St. Louis. Angel investors and
venture capital funds are also present. Some of these organizations specifically
encourage technology and biotechnology start-up businesses in St. Louis,
while other organizations encourage people to start small local service
businesses such as hair salons, lawn service companies, and restaurants. J ust as
immigrants account for much of the growth in new businesses in the United
States,
18
St. Louis’ large immigrant communities produce many entrepreneurs
that have started a variety of businesses such as restaurants and service
businesses. In addition, at least one local organization is encouraging residents
17. START UP has television episodes and webinars that focus on entrepreneurship. Start
Up, USA.COM,http://startup-usa.com/episodes (last visited Nov. 1, 2014). Additionally, Startups:
Made in Kansas City is a series of videos by the public television station in Kansas City that
focuses on entrepreneurship. Startups: Made in Kansas City, KCPT.ORG,http://www.kcpt.org/
programs/local-programs/startups/ (last visited Nov. 1, 2014).
18. See, e.g., The Jobs Machine, ECONOMIST (Apr. 13, 2013),http://www.economist.com/
news/business/21576101-start-ups-founded-immigrants-are-creating-jobs-all-over-america-jobs-
machine (“Some 40% of Fortune 500 firms were founded by immigrants or their children,
according to the Partnership for a New American Economy, a pressure group. . . . Although the
foreign-born are only an eighth of America’s population, a quarter of high-tech start-ups have an
immigrant founder.”).
SAINT LOUIS UNIVERSITY SCHOOL OF LAW
2015] THE BENEFITS OF INTEGRATING ENTREPRENEURSHIP 715
in economically distressed areas of the city to start their own businesses as way
of revitalizing their neighborhoods.
19
Many of these local organizations host workshops and networking events
to educate and support entrepreneurs, and these organizations can dramatically
improve a business’s chance of succeeding.
20
In addition, the Center for
Entrepreneurship at Saint Louis University has been inspiring and supporting
entrepreneurs for forty years, and other local universities also engage in similar
work. All these local resources provide a variety of local events that Business
Associations students can attend to learn more about entrepreneurship and to
interact with local entrepreneurs. These organizations also serve as an excellent
source of engaging entrepreneurs that can speak with a Business Associations
class about their experiences starting a business, the legal issues that they have
confronted, and their advice about how attorneys can communicate and build
relationships with entrepreneurs.
Integrating entrepreneurship into Business Associations also offers cross-
curricular advantages. Some law schools have already seized upon students’
interest in entrepreneurship by establishing centers, concentrations, or clinics
focused on the topic.
21
Other law schools collaborate with the business school
at their universities to educate law students on entrepreneurship.
22
For law
schools with a clinic or other emphasis on entrepreneurship law, integrating
entrepreneurship into the Business Associations course has the advantage of
increasing students’ interest in those curricular offerings. Even without
developing a specialized program, law schools can add entrepreneurship into
their curriculum by incorporating entrepreneurship law into the Business
Associations course. Further, because students typically enroll in Business
Associations in the fall semester of the 2L year, they can be introduced to other
classes important for representing entrepreneurs while they still have time to
enroll in them. These classes may include Intellectual Property Survey,
Employment Law, Securities Regulation, Transactional Drafting, and Taxation
19. Habitat for Business is a non-profit organization organized by the J ohn Cook School of
Business’s Center for Entrepreneurship at Saint Louis University. Habitat for Business, J OHN
COOK SCH. BUS.,http://business.slu.edu/centers-of-distinction/center-for-entrepreneurship/pro
grams-events/habitat-for-business/ (last visited Nov. 1, 2014).
20. J EROME A. KATZ & RICHARD P. GREEN II, ENTREPRENEURIAL SMALL BUSINESS 157
(4th ed. 2014).
21. For example, Duke University School of Law offers an LLM in Law and
Entrepreneurship, and Pepperdine University School of Law has the Geoffrey H. Palmer Center
for Entrepreneurship and the Law. Some law schools, such as those at Northwestern University
and University of Pennsylvania, operate clinics focused on entrepreneurship. Some law schools,
including University of Washington School of Law and Drexel University School of Law, offer
concentrations involving entrepreneurship.
22. See, e.g., Anthony J . Luppino, Minding More Than Our Own Business: Educating
Entrepreneurial Lawyers Through Law School-Business School Collaborations, 30 W. NEW ENG.
L. REV. 151, 154 (2007).
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for Individuals, Partnerships, and Corporations. With or without an
entrepreneurship center or clinic, introducing entrepreneurship into Business
Associations can help students understand the necessity of these other classes
to prepare for a law practice focused on self-employed and small business
clients.
In addition, focusing more attention on start-up and small businesses
provides many opportunities to address the professional and ethical issues of
transactional law practice. Unlike a public corporation client, these clients can
present ethical and professional challenges because the entrepreneurs are so
closely connected with their businesses that they often do not distinguish
between themselves and their businesses. For instance, an attorney counseling
clients about the choice of business entity must clearly identify who is the
client being represented. Is it one of the participants in the new venture, all of
the participants in the new venture, or the new venture itself? This raises not
only ethical issues about conflicts of interest, but also professional issues about
who is the best client from the attorney’s perspective. The professor can also
demonstrate professional skills in counseling a client beyond the merely legal
aspects. In helping a client choose a form of business entity, an attorney must
consider more than just the legal attributes of the various entity choices, but
also the client’s ability to comply with annual filing requirements for a
particular business entity and the burdens of that entity’s tax treatment.
Further, because entrepreneurs tend to be risk-takers and attorneys tend to be
risk averse, the professor may also include consideration of ways for an
attorney to communicate the legal risks of a transaction by a small business,
without being seen as a naysayer and damaging the future attorney-client
relationship.
A perhaps unexpected benefit of discussing entrepreneurial small
businesses within class hypotheticals is the ability to introduce basic business
and financial knowledge into the discussion. Although attorneys are not
business experts, they need to understand basic business terminology and
financial information to draft transactional agreements, such as those
documenting an investment in a small business or the sale of that business. By
presenting facts concerning a small business, students can learn business
concepts in a simpler context. For instance, students can more easily
understand the financial statements for a small beauty salon owned by a
husband and wife, than those for a public corporation. The professor can then
connect a potential buyer’s offer price for that beauty salon to different
business valuations based on its financial statements. Familiarity with the
business and financial information that entrepreneurs constantly consider
allows attorneys to assist clients in negotiating transactions and to provide
better legal advice. Finally, with enhanced business knowledge, students may
be inspired to become entrepreneurs.
SAINT LOUIS UNIVERSITY SCHOOL OF LAW
2015] THE BENEFITS OF INTEGRATING ENTREPRENEURSHIP 717
II. METHODS FOR INTEGRATING ENTREPRENEURSHIP INTO BUSINESS
ASSOCIATIONS
Entrepreneurship integrates easily into the existing topics covered in a
Business Associations or Business Organizations course. The credit hours
allocated to Business Associations vary among law schools, and some law
schools split the material into two separate courses (a Corporations course and
a separate Agency and Partnership course or Unincorporated Entities course).
Regardless of the exact credit hours or classes, entrepreneurship can be
incorporated into the course for the benefits mentioned in Part I.
23
A four-hour
Business Associations course typically covers the laws of agency, partnerships,
limited liability companies, corporations, securities laws, and mergers and
acquisitions.
24
Together these laws raise three primary issues: 1) choice of
business entity and the laws governing entities; 2) methods for raising capital
and related securities laws concerns; and 3) exit strategies. A traditional
Business Associations course tends to cover these three issues mostly through
a focus on large corporations, particularly public corporations. Indeed legal
principles directly related to unincorporated entities often account for only a
quarter of the course. However, these three issues are equally relevant to
unincorporated business entities and small private corporations as explained
below. Integrating entrepreneurship into the course means emphasizing small
businesses more than public corporations.
A. Teaching Methods
The key to teaching entrepreneurship in the Business Associations course
is through hypothetical problems or case studies whereby students are
presented with the legal issues confronting entrepreneurs. I utilize two different
methods for presenting such scenarios. The first is the running hypothetical in
which the basic facts of a scenario are changed and expanded as different legal
topics are encountered in the course. The running hypothetical is particularly
useful for initial class discussions of new legal principles. Because a variety of
businesses exist, the running hypotheticals should include at least one focused
on a service-oriented business (such as a dental practice, hair salon, or
23. See supra Part I.
24. A sampling of Business Associations casebooks illustrates these are the typical laws
covered. See, e.g., ERIC A. CHIAPPINELLI, CASES AND MATERIALS ON BUSINESS ENTITIES (3d
ed. 2014); DWIGHT DRAKE, BUSINESS ORGANIZATIONS IN A PLANNING CONTEXT: CASES,
MATERIALS AND STUDY PROBLEMS (2013); LEE HARRIS, CASES AND MATERIALS ON
CORPORATIONS AND OTHER BUSINESS ENTITIES: A PRACTICAL APPROACH (2011); WILLIAM A.
KLEIN ET AL., BUSINESS ASSOCIATIONS: AGENCY, PARTNERSHIPS, AND CORPORATIONS (8th ed.
2012); D. GORDON SMITH & CYNTHIA A. WILLIAMS, BUSINESS ORGANIZATIONS: CASES,
PROBLEMS, AND CASE STUDIES (2d ed. 2008).
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plumbing company) and another that is product-oriented (such as a consumer
product manufacturer or an internet retailer of specialty food items).
The running hypotheticals are supplemented by other hypothetical
problems that present different factual scenarios to expand and test the legal
principles being studied. Students find these problems most beneficial if
distributed several days before being discussed in class. If the professor
follows the traditional casebook format of progressing through agency,
partnerships, LLCs, and corporations, the most complex choice of law
problems will be presented only after the class has covered all the business
entities. The same hypotheticals would form the foundation of a course
implementing a problem-based approach to the legal issues. The goal of the
hypothetical problems is for students to understand the choices that could be
made on the three key legal issues (choice of business entity and laws
governing entities, methods for raising capital and related securities laws
concerns, and exit strategies), and the perceived advantages and disadvantages
of each choice.
B. Choice of Business Entity and Laws Governing Entities
By presenting problems focused on start-up businesses, students gain a
deeper understanding of each type of business entity. Depending on the chosen
state of formation, the choices for a small group of entrepreneurs starting a
business may include general partnership, limited liability partnership, limited
partnership, limited liability company, S corporation, or C corporation.
25
More
than one of these business entity forms may be appropriate for the new venture
depending on the goals and expectations of the participants as well as the
provisions of the governing laws. There is rarely only one answer when
deciding the form of business entity for a new venture. Rather, the attorney
must ask a series of questions to learn the clients’ goals, expectations, and
limitations, and then the attorney must outline the advantages and
disadvantages of the business entities that best fit the clients. Ultimately it is
the clients’ choice, but that choice should be informed by the attorney’s
thoughtful legal advice.
Using real or hypothetical scenarios based on start-up ventures, the
professor can easily lead students through discussions of the factors to consider
in choosing a business entity. Because businesses operate in a variety of areas,
the scenarios should include examples of all types of businesses including:
service-oriented, manufacturing, technology, traditional retailers, and internet-
based companies. By carefully varying the facts of these scenarios, the
professor can demonstrate the reasons that lead start-up businesses to choose
25. For a sole owner, the choices typically include sole proprietorship, limited liability
company, S corporation, and C corporation.
SAINT LOUIS UNIVERSITY SCHOOL OF LAW
2015] THE BENEFITS OF INTEGRATING ENTREPRENEURSHIP 719
different forms of business entities. The professor can also use the scenarios to
help students develop the skills to effectively interview a client for the purpose
of giving legal advice. To advise a client on the choice of business entity, the
attorney must learn, among other things, how the new business will operate,
the goals for the business both in the short term and the long term, the
expectations of the participants, and the relationships among the participants.
The attorney cannot simply focus on the near-term goal of filing any necessary
papers to initiate the business, but instead must consider issues that may arise
when the business is more mature or when the business is nearing its end.
Many factors combine to influence the choice of business entity, so only a
few examples can be mentioned here. For instance, an important consideration
in selecting the form of business entity is whether the participants’ goal is to
eventually sell or merge the business. Conversely, if the participants want to
receive a steady income from the business and, perhaps, to pass the business to
their children, that may suggest an alternative form of business entity. The tax
treatment of the chosen business entity is another important factor, but it is
more complex than typically addressed in Business Associations. For instance,
the participants may want to limit their individual tax liability on an annual
basis, to avoid any individual tax liability until they exit the business, or to
maximize tax-free fringe benefits. Alternatively, the participants may not be
that focused on taxes if they are simply looking for the business to replace their
current income while giving them the flexibility of running their own business.
Although tax issues are more fully taught through specific tax courses, it is
beneficial for students to identify the tax aspects that impact the choice of
business entity and to see the need to enroll in tax courses.
The incorporation of entrepreneurship principles allows for a more
multifaceted choice of entity discussion, and students’ understanding of the
business entities can be further developed by considering the internal
governance of those entities. The hypothetical scenarios can be varied to
include facts about internal governance issues so that students must carefully
compare the statutory provisions governing each form of business entity. In
considering the internal governance structure for each business entity, students
must focus on the statutory defaults and permissible ways to vary those
provisions through agreement. For example, the statutory defaults for exiting
the business vary among the business entities, as do the statutory defaults for
fiduciary duties and the permissibility of limiting or eliminating those duties.
Students’ understanding of these issues can be further developed by having
them not only analyze the best business entity forms for a particular scenario,
but also draft a letter to the client in which they explain the options or draft an
agreement to govern the internal relations among the owners (e.g., a LLC
operating agreement, a shareholder agreement).
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C. Methods for Raising Capital and Related Securities Laws Concerns
Integrating an entrepreneurship approach in Business Associations requires
an expanded discussion of methods by which a small business may raise
capital and concurrently requires an expanded discussion of the exemptions
from securities laws for any outside investments. Raising capital is a matter of
critical importance in start-up businesses. The methods by which a start-up
small business can acquire capital are vastly different from the opportunities
available to a public company. Whereas a public company might be able to
make an additional public issuance of shares, sell bonds to the public, or
borrow money from a commercial bank, the founders of start-up ventures
typically start with their own savings or borrowings and then turn to family and
friends.
26
If the start-up venture is technology based, it may be able to attract
an angel investor or venture capital investors. Crowdfunding is also a potential
method of raising money popularized by companies such as Kickstarter and
Indiegogo.
27
Or, if lucky, the entrepreneur may appear on Shark Tank and
attract an investment from one of the sharks.
28
These investors may receive a
variety of interests in exchange for investing in a start-up small business and
the class can consider the most common forms of investment interests as well
as the documents reflecting these investment interests (e.g., subscription
agreements, convertible promissory notes).
When the founders of a business seek outside investments whether from
family, friends, angel investors, venture capitalists, or crowdfunders,
29
issues
concerning securities laws arise. Unfortunately, many attorneys and lay people
are unaware of the broad applicability of the securities laws. Indeed, the
definition of a “security” is much broader than simply stock in a publicly-
26. It is difficult for start-up and small businesses to obtain loans from commercial lenders
without substantial collateral or personal guarantees, but they may be able to obtain non-bank
financing based on their inventory, purchase orders, or accounts receivables. The professor may
want to discuss these issues in considering financing options for start-up and small businesses.
27. See Ellen Huet, Making the Cut, S.F. CHRON. (J an. 5, 2014) (discussing the use of the
crowdfunding companies in the fashion industry); Sean M. O’Connor, Crowdfunding’s Impact on
Start-Up IP Strategy, CPIP (Feb. 24, 2014),http://cpip.gmu.edu/2014/02/24/crowdfundings-im
pact-on-start-up-ip-strategy-3/ (noting the popularity of crowdfunding through the companies).
28. See Shark Tank: Episode Guide, supra note 3.
29. Crowdfunding was originally permitted only for donations, rewards, or non-interest
loans, because offering equity interests would have violated the Securities Act of 1933. In 2012,
Title III of the J umpstart Our Business Startups Act (J OBS Act) authorized equity crowdfunding
through a new registration exemption. J umpstart Our Business Startups Act, Pub. L. No. 112–
106, 126 Stat. 306 (2012) (codified in various sections of 15 U.S.C. §§ 77a-aa, 78a-pp)
(amending Section 4 of the Securities Act of 1933 to create a new exemption for crowdfunded
securities). However, the Securities and Exchange Commission has not yet issued final
regulations to allow equity crowdfunding to begin.
SAINT LOUIS UNIVERSITY SCHOOL OF LAW
2015] THE BENEFITS OF INTEGRATING ENTREPRENEURSHIP 721
traded corporation as many people think,
30
and includes many of the
investments made in unincorporated entities and private corporations.
31
Thus,
individuals receiving an interest in a LLC or a S corporation owned by a friend
or family member are likely receiving a security, which either must be
registered under the Securities Act of 1933 or fit an exemption to registration
under that Act.
32
Because most small businesses will rely on exemptions when
seeking outside investments, a professor integrating entrepreneurship into
Business Associations should expand the coverage of exemptions from the
securities registration requirements of the Securities Act of 1933. If the class
studies agreements documenting outside investments, the professor can ask
students to find the provisions of each agreement addressing the qualifications
for a registration exemption and to identify the applicable exemptions.
Similarly, the definition of a “security” is equally broad for purposes of
securities fraud liability under the Securities Exchange Act of 1934,
33
particularly Rule 10b-5 liability.
34
Thus, securities fraud liability can extend to
investments in unincorporated entities and private corporations. When an
investment in a small business does not go well, a disgruntled investor may be
able to plead a Rule 10b-5 securities fraud claim fairly easily.
35
The professor
can address the broad applicability of the securities fraud laws by including
more cases in which unincorporated entities or private corporations are
accused of securities fraud.
36
30. Securities Act of 1933 § 2(1), 15 U.S.C. § 77b(1)) (2012); Securities Exchange Act of
1934 § 3(a)(10), 15 U.S.C. § 78c(a)(10) (2012).
31. See, e.g., SEC v. W.J. Howey Co., 328 U.S. 293, 298–300 (1946) (holding that the
interests in a citrus grove sold by the Howey Company were “investment contracts,” and thus
securities under the Securities Act of 1933); Robinson v. Glynn, 349 F.3d 166, 169, 174–75 (4th
Cir. 2003) (holding that the interest sold in a LLC was a security).
32. 15 U.S.C. § 77d.
33. See, e.g., Marine Bank v. Weaver, 455 U.S. 551, 555 (1982) (stating the definition of a
security is “quite broad” under the Securities Exchange Act of 1934 and essentially the same as
the definition of a security under the Securities Act of 1933).
34. 17 C.F.R. § 240.10b-5 (2013).
35. See DWIGHT DRAKE, BUSINESS PLANNING: CLOSELY HELD ENTERPRISES 202 (4th ed.
2013) (“The seller has an affirmative duty to accurately state material facts and to not mislead;
the buyer has a solid cause of action if the seller blows it. Rule 10b-5 and its state counterparts
keep our courts packed with countless disgruntled investors who believe they were unfairly
deceived when things didn’t go as planned.”); id. at 204(“The dumb, poor investors may lack the
capacity to evaluate what is being promised; but after things go bad, it doesn’t take much to find
an aggressive lawyer who is willing to spec the case against a contingent fee because, given the
undisputed limitations of the plaintiffs, it’s a slam dunk.”).
36. This expanded coverage can be facilitated by more quickly covering securities fraud
liability within public corporations under the Securities Exchange Act of 1934, forms of securities
liability under the Securities Act of 1933, and short swing profits liability under Securities
Exchange Act of 1934.
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D. Exit Strategies
A professor incorporating entrepreneurship into Business Associations will
have discussed exit strategies to a limited extent within the choice of business
entity and internal governance contexts. If time permits, the professor may also
want to directly address the possible exit strategies for small business owners.
Although going public is the exit strategy for a few start-up companies, the
more likely exit strategies involve sales or mergers with competitors. The
entrepreneurial focus in this context is achieved by focusing on sales and
mergers involving small private corporations, LLCs, and partnerships, rather
than mergers and sales among public companies. Doing so makes the financial
terms and the conditions for the transactions easier for students to understand.
It also allows students to review asset purchase agreements and merger
agreements that are generally shorter and simpler to comprehend than those
involving public corporations.
III. FOCUSING ON ENTREPRENEURSHIP TO FACILITATE TEACHING PRACTICAL
SKILLS
Practical skills are an important focus of law schools as they aim to
produce practice-ready attorneys.
37
A key skill for all attorneys is legal
drafting. For drafting transactional documents, an attorney must also know
related skills such as how to find and use form documents, how to review
documents drafted by other parties involved in a deal with your client, and how
to negotiate in your client’s best interest. Therefore, a professor teaching
drafting in Business Associations may also want to include discussion and
exercises on these issues.
Drafting can be more easily incorporated into the Business Associations
course with scenarios involving a few entrepreneurs. Focusing on scenarios of
a small business founded by a few individuals has the advantages of simpler
facts for students to understand and typically simpler agreements to document
the transactions. Such scenarios allow opportunities for drafting the required
document to formally create the business entity chosen (e.g., articles of
incorporation, articles of formation) and the internal governance document for
the business (e.g., shareholder agreement, LLC operating agreement). These
drafting exercises can be combined with the related skills of finding and using
form documents. The same scenarios can be expanded to include methods for
financing the business, the terms of such investments, and drafting the
37. See, e.g., William E. Foster & Emily Grant, Memorializing the Meal: An Analogical
Exercise for Transactional Drafting, 36 U. HAW. L. REV. 403, 403 (2014) (“The legal academy is
increasingly focused on producing practice-ready lawyers.”); Kamille Wolff Dean, Teaching
Business Law in the New Economy: Strategies for Success, 8 J . BUS. & TECH. L. 223, 236–37
(2013) (noting the forces influencing law schools to teach practical skills).
SAINT LOUIS UNIVERSITY SCHOOL OF LAW
2015] THE BENEFITS OF INTEGRATING ENTREPRENEURSHIP 723
agreements. Finally, the same scenarios can be further developed to include an
exit from the business through the drafting of a merger agreement, a stock
purchase agreement, or an asset purchase agreement.
In a Business Associations class with a large number of students, it can be
difficult to successfully complete even one full drafting exercise. One way to
minimize the drafting burden on students and the grading burden on the
professor is to develop a drafting exercise based on a simple agreement for a
small entity, such as a subscription agreement. Another way to minimize the
burden is to limit a drafting exercise to only one or two provisions of an
agreement for a small entity.
Alternatively, without requiring students to actually draft a document, a
professor can teach some drafting lessons through the review of documents.
For example, the professor can give students a draft LLC operating agreement
and tell them that they are each a potential LLC member, and then ask them to
review the document for any items that they find objectionable, items that they
want to negotiate, and items that they think are missing. This exercise can
reveal examples of poor drafting and illustrate the potential for one-sidedness
within an agreement. The professor can enhance the exercise by posing various
“what if” scenarios that will expose any ambiguous or missing provisions of
the agreement. For instance, asking students to assume that a member has died
a year after the business began may highlight the absence of any provisions in
the operating agreement addressing that event. Alternatively, asking students to
assume that a member wants to transfer half of her interest as part of a divorce
settlement may reveal ambiguity with the existing provisions of the operating
agreement. Both variations can then lead to a discussion of the different ways
to address the issue in the agreement. As with drafting assignments, a
document review exercise can be simplified by focusing on only a few
provisions within an agreement.
In advance of reviewing or drafting an agreement, a professor can also
have students (in small groups) participate in a mock negotiation of the key
terms of that agreement. For instance, the professor can tell students that each
small group has formed a LLC and now needs to negotiate its operating
agreement. The students can develop their own list of the key terms and
negotiate those terms, or the professor can simplify the exercise by giving the
students a list of the key terms and having them negotiate those terms. In an
ideal setting with unlimited time, the professor would have each student draft
the operating agreement according to the negotiated terms. The professor could
also have students exchange their draft documents with the other “LLC
members” in their small groups to show the variations that can be produced by
different drafters (and which may necessitate further negotiations). If such a
drafting exercise is not realistic, the negotiation exercise can be followed by
the professor distributing an agreement intended to reflect the negotiated deal
and having the students review it for items that they find objectionable, items
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that vary from the negotiated terms, and items that are ambiguous or missing.
Similarly, a professor could have students negotiate the terms for an
investment in a small business or the terms for a merger or sale of the business.
CONCLUSION
Integrating entrepreneurship into Business Associations through an
emphasis on start-up and small businesses is worth sacrificing some coverage
of public corporations. Attorneys are much more likely to work with clients
who are self-employed or own small businesses, and thus the legal principles
covered in a Business Associations course have more relevance to students
when focused on these likely clients. Students are also able to more easily
understand the legal concepts presented when focused on start-up and small
businesses. Incorporating entrepreneurship also has the advantage of
introducing law students to the cross-curricular nature of this practice area and
at a time when they can still enroll in other relevant courses. It is also an
engaging way for students to understand the legal and business issues
presented in transactional legal practice. Some students may even be motivated
to become entrepreneurs themselves. For someone who has taught Business
Associations for many years, it is energizing to see students so engaged and
actively participating in class, and it inspires me to continue developing
creative classes and exercises with an entrepreneurship focus.
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