Professional Documents
Culture Documents
The terms Micro-enterprise and small-enterprise refer in the first place to the
size of the business. For a long time, the concept of ‘informality’ has also used
informal nature of the employment process (no contract of employment and low
wages) and to the fact that most of such business are not registered. However
for a meaningful classification of firms into categories, the size of firm or the
characteristics of enterprises and of the entrepreneurs who set up and run them
The nature and definition of small business varies from country to country. There is no
one universal unifying definition of Small business. Worldwide, countries apply their
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this section to cite some of the definitions given to such categories of enterprise
The following table indicates the various definitions of small business in selected
countries:
Small business:
Size Criteria
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Though the criteria used to measure the size of business may vary, the following criteria
are commonly used to measure the size of businesses.
Economic/Control Criteria
i. Market share- the market share of a small firm is not large enough to enable
to influence the prices of national goods sold to any significant extent.
ii. Independence-The owner of a small business is independent in that he/she
has full control over the business.
iii. Personalized management- It is the owner who actively participates in all
aspects of the firms’ management and in all major decision making processes.
Thus, there is little or no devolution of delegation of authority.
In most Advanced nations SMEs has significant share in employment creation, and
overall economic development
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SMEs in South Africa contribute 56% of private sector employment , and 36%
of GDP
SMEs contribution is decisive for value generation (51 % of USA’s GDP was
produced by MSEs,35% of south Africa’s GDP as produced by SMEs
Remark:
Creation and growth of SMEs is an important item on the policy agenda (in all
economies )
i. Micro and small enterprises are considered to be greatest value in building up a local
production structure and in promoting economic growth.
ii. Micro and small enterprise are also considered as a means of creating employment
opportunity and achieving a fair distribution of national resource income, knowledge
and power.
iii. Small scale enterprises are also seen as a seedbed for the development of local
entrepreneurship.
iv. Small enterprises are also important in that can help to promote rural industrialization.
v. Small scale enterprises are also termed or seen as forms enterprises in which more
appropriate technology is applied. They require less capital and more labor. They have
the capacity to generate a much higher degree of employment with less capital as
compared to the large-scale sector. Thus, they are less capital intensive and more
employment oriented.
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vi. Small-scale enterprises are also important in that can serve as suppliers of parts and
accessories to bigger industries. This ancillary function involves specialization in
specific areas and results in greater profitability.
vii. Small-scale enterprises or industries can also play a prominent role in promoting the
export market.
Reflection Exercise:
Employment creation
Pave industrialization
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MSE support strategy is visualized through government development
agencies.
Workforce in Ethiopia is flexible.
Retail and manufacturing sector provide most paid employment.
Internationally (supported) organizations are active in entrepreneurship
education.
Privatization process will increase and enable competition.
Incompetency
Unbalanced experience
Lack of experience
Inadequate records
Personalized management
Lack of innovation
Border conflict may trouble activities in the poor North and some unstability in
some regions.
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Employee protection is rather low.
Bureaucracy
Corruption
.
UNCTAD’s (United Nations Conference on Trade and Development) (2011)
assessments of Ethiopia's MSE promotion
UNCTAD recommends:
Assessing firms needs and matching them with the appropriate service providers
The Government should provide incentives through relevant policy tools (for
example, tax incentives and direct subsidies) to encourage enterprises to train
their workforce with advanced skills
What are the opportunities challenges and for start ups in Ethiopia?
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Small businesses often face a variety of problems related to their size. When results that
show micro and small enterprises come to Ethiopia research have been facing some pressing
problems. According to the survey results of Abebe etal, 2009, MSEs in Ethiopia shows a
depressing picture, which is characterized by:
Introduction
Not all businesses that survive grow to be large businesses. This is due either to
the nature of their industry or simply the personal desires or ambitions of the
owner/manager. And external factors such as (entry of competitors, change in
technology) among others.
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Illustrative to different stages of Small business
iii. How can I ensure that my best customers will be my best customers in 3 to 5
years?
iv. How can I develop new customers and market for my products and services as
quickly as possible?
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v. How can I attract and retain qualified employees?
Key imperatives
Develop basic system to manage cash and control receivables, inventory and
payables.
The marketing strategy at this stage will be educate the customer and securing
distribution
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II. Survival stage
Working capital
Key imperatives
Upgrade and formalize systems for control and planning for the future (proactive
planning replaces reactive planning )
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Develop some new product and look for new source of finance
The marketing strategy here customer loyalty must be cultivated, band must be
built
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Here marketing Efficiency is important,
Cash the cow if not kill the dog (exit) strategy is important
I. SOLE PROPRIETORSHIP
A form of business organization in which an individual introduces his/her own capital, skill
and intelligence in the management of its affairs and is solely responsible for the results of
its operation known as Sole proprietorship. This form is also known as individual or single
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proprietorship, sole ownership or individual enterprise.
This business is a very common form of ownership carried out in different areas where the
capital required is small and the risk is not heavy. In such form of ownership, speed of
decision is very important and special regard has to be shown to the needs, tastes and
fashions of customers. Examples can be photo studios, bookshops, bakeries, small
restaurants, grocery and retail stores, and other elementary business where a personal
service is important.
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Social desirability
From the social point of view, the sole proprietorship is desirable as it ensures
that too much wealth does not concentrate in the hands of few. It may be one of
the ways in which equitable distribution of wealth is ensured. In addition, the
unlimited liability of the proprietor ensures members of the society involving in
these forms of business organization to put forth their maximum effort, which
indirectly helps the society to prosper.
Uncertain future
This kind of business suffers from instability or lack of continuity. This business
may come to end if the owner cannot continue to run the business due to death,
insanity, imprisonment or bankruptcy.
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II. PARTNERSHIP
When it will be difficult to find a single person possessing adequate capital, technical skill,
knowledge, and managerial experience; there arises a need for a formation of business
where two or more persons join together, contribute their capital and skills. This form of
association of two or more persons to carry on a business as co-owners for profit whereby
the relationship is based on agreement is known as partnership. The following are general
characteristics of a partnership:
a. Formation
This form of business requires the existence of two or more persons entering into a
contract.
b. Capital contribution
In this form of business, every partner shall make a contribution which may be in
money, debts, other property or skill.
c. Management
Every partner has the right to take an active part in the management of the firm's affair.
But the partnership agreement may provide the pattern of managing by indicating how
the management activity is shared among the different partners according to their
experience and knowledge.
d. Duration
The partnership firm legally comes to an end if any of the partners withdraws or is no
longer able to be a partner under the law or declared bankrupt. However, if the
remaining partners agree to work together under the original firm name and style, the
firm will not be dissolved and will continue its business after settling the claims of the
outgoing partner. Under some conditions, the business organization can be dissolved if
the purpose has been achieved or cannot be achieved and where the partners agree to
dissolution prior to the expiry of the term for which the business was formed.
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the firm's assets are insufficient.
Implied agency: The partner will be liable for the faults and wrongful acts of a
co-partner while acting for the business. Since every partner has the right to
take part in the management activity, when acting on his/her given a specified
area, every partner has an authority to act on behalf of his/her fellow partners
and the firm in the ordinary course of business. Thus, he/she is an agent of the
firm and that of the other partners. This indicates that the firm is responsible
for every mistake or fraud committed by the partner in the course of business
and the partner's knowledge will be treated as knowledge of the firm because
he/ she is an agent of the firm and that of other partners. Outside parties which
enter into a contract with a partner are entitled to believe that the firm also
agrees to the contact.
Utmost good faith: there must be the highest standard of honest among
partners. Partnership agreement is based on mutual confidence and trust of
partners.
No separate legal entity: the partnership firm has no independent legal
existence apart from the persons who constitute it. In the eyes of the law, there
is no distinction between the partners and the firm.
Restriction on transfer of interest: A partner cannot transfer his/her share
or give his/her ownership to outsiders without the consent of other partners.
Unanimity of consent: No change may be made in the nature of business and
no partner can act out of the specified way or make major and special decision
without the consent of all the partners.
Types of Partnership
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will be liable for the wrongful acts of a co-partner in the course of the firm's
business. More importantly, the general partners have the right to actively
participate in the management affair of the business. Therefore, the ongoing
discussion about partnership basically refers to this type of partnership.
Limited Partnership: This type of partnership is a firm that necessarily consists
of two classes of partners: the general partners who are liable jointly, severally
and who retain all the rights and obligations and limited partners who are only
liable to the extent of their contribution in the business. In other words, a limited
partnership has at least one general partner and at least one limited partner. The
limited partners are basically required to increase the capital of the business.
Since their liability is limited, their rights are also restricted and they cannot
take part in the management of the business and their act does not bind the firm.
The limited partners have the right to inspect the books of the firm for their
information and may advise the general partners. Again, the retirement, death,
insanity or bankruptcy of these special partners does not dissolve the
partnership. The limited partner cannot assign her share to an outsider without
the consent of the general partners. A limited partner should be registered under
the law. It is necessary to provide information to the public about the capital
contribution of the limited partners and the extent of their liability. The firm
should make public who are the limited partners and general partners so that
outsiders could specifically know whose personal assets they can claim at times
when business assets are not sufficient to cover debts and other obligations.
Non-registration or no publicity makes the limited partners to be treated as
general partners and the liability will be unlimited.
Advantages of Partnership
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resources of two or more persons will be available and this will make the business
to enjoy high credit standing and get more credit. Moreover, because the talents
and management of two or more persons are combined, the venture will be better
managed.
Personal supervision: partners look after the business personally and guard
against wastage and other inefficiencies because they are initially interested in the
success of the business
Reduced risk: The loss incurred by the firm will be shared by all partners and
hence the share of lose each partner will be less than the one in the case of sole
proprietorship.
Disadvantage of partnership
Unlimited liability: if the assets of the partnership are not sufficient to meet
the obligation creditors may choose to sue any or all to satisfy the debts.
Risk of implied authority: a dishonest or incompetent partner, by his/her
acts, misjudgment or fault, may put the firm in difficulties because his/her acts
would bind the firm and the remaining partners.
Lack of harmony: As every partner has equal voice in the management,
everyone would try to promote his/her personal interest, which may lead to
internal frictions and misunderstandings.
Lack of continuity: partnerships may come to an end, even though not in all
cases, due to death, retirement, or withdrawal of a partner for any reasons like
dissatisfaction, bankruptcy, or any serious disagreement among partners or by
court order.
Features of corporation
a. Separate legal entity: The rights and privileges are given to the corporation by its
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charter (charter is an instrument granting the corporation the right to operate and
defines the restrictions and procedures under which it may do so), which is granted by the
state in which it is incorporated. Thus, the corporation becomes a legal entity and is
granted the right to manage its own affairs, the right to sue and be sued, and the right to
own and dispose property.
b. Limited liability: Since the company is a separate legal entity, its debts are its own.
Shareholders of the corporation cannot be held liable to pay more than the face value of
the share standing in their names or the contribution made. In other words, personal
assets will not be required to cover debts and other obligations in case the business fails
to settle.
c. Transferability of shares: Shareholders can transfer their share to others without
consulting other shareholders. The owners can sell their shares or give freely for anyone
as they wish without the consent of other shareholders.
d. Perpetual existence: A corporation can be dissolved in only three ways; by court order,
by the approval of the majority of the stockholders or by expiration of the corporate
charter. Corporation is not affected' or interrupted by the death, insolvency or
retirement of any shareholder or director.
e. Common seal: A company, not being a natural person, cannot sign documents for itself.
Therefore, the common seal with the name of the company engraved on it is used as a
substitute for its signature.
f. Separation of ownership from management: Here all owners, large in number, do not
have the opportunity of managing the day-to-day working of the company. The
shareholders who own the capital are kind of absentee owners who are engaged in their
respective locations or activities while holding shares of the company.
Corporate Structure: There are three groups that comprise the corporate structure: the
shareholders, the board of directors and the officers of the corporation.
Stockholders: The stockholders are owners of the corporation. They are individuals who
buy shares of stock that show proof of ownership. Stockholders do not own property in
same legal sense that the proprietor or partners do in the other forms of ownership.
Besides, the corporation must have a charter. A corporate charter is the written by law of
the company and usually contains:
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Name and address of the corporation
Names and addresses of the directors
The purposes for which the corporation is formed
Amount and kind of stock to be authorized (common/preferred stock)
Privileges and voting power of each stock
Duration of life of the corporation
On approval, the charter becomes a three-way contact between the state and the
stockholders, the stockholders and the corporation, and the incorporators and the state.
By electing a board of directors, stakeholders delegate their authority and usually exercise
only indirect control over the affairs of the business. The board of directors, which consists
of three to twelve individuals in Ethiopia, is the chief governing body of the corporation.
Because they hold a position of great trust, directors may be held personally liable to the
stockholders for gross negligence, fraud, or the use of corporate assets for their personal
gains. They cannot be liable for mistakes in business judgment. The board of directors is
responsible for the following activities.
Declaration of dividends: the board has the sole responsibility of declaring dividends.
This involves such decisions as the percentage of the earnings to be retained and the
method of dividend payment (cash and/or stock).
Major decision making: the board decides on major areas including expansion,
withdrawal, change of product, and the selection of the corporate officers.
The board of directors elects the officers of the corporation who are directly responsible
for running the corporation. The board usually appoints a president, executive vice
president and a number of additional vice presidents who are responsible for various
divisions of the firm. These officers act as agents of the firm because they have the power
to bind the corporation in contracts.
Advantages of Corporation
i. Financial strength: Corporations can raise a large amount of capital by issuing shares
to the general public. They can also expand as long as investors are willing to purchase
additional shares of stock. Corporations find it easier to borrow large sums of money
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because the amount pays large interests to those agencies that market securities.
ii. Limited liability: The shareholder's liability is limited to the extent of the face value
of her share in the corporation. Thus, the organization can attract more investors who
do not want to take more risk. The creditors cannot look beyond the assets of the
corporation to settle their debts because the corporation is a separate legal entity that
owes all the debt.
iii. Scope of expansion: As large capital is invested, it would be possible to use up-to-
date equipment and expensive machinery and carryout operation at large scale. This
will make the cost of production less resulting in a higher profit and creating the
possibility to have big reserve that can be used for the expansion of the company.
iv. Stability: Corporations enjoy perpetual succession. That is bankruptcy, insanity or
death of a shareholder, change in management, or dispute over the ownership cannot
affect the continuity of a corporation. Thus, corporations are well suited for business
which requires a long period to establish and consolidate.
v. Efficient and bolder management: There is availability of managerial talent because
the most efficient persons may be chosen as directors and if found unsatisfactory they
can be fired. Since the persons who manage the company have relatively smaller
financial stake, they will have an adventurous spirit to take big risks and bring success
to the business.
vi. Diffused risk: The risk is spread over several members of the company and is reduced
for each member, which helps the business to attract more investors and to venture on
new opportunities.
vii. Voting: Normally, each share of stocks carries with it one vote. If a shareholder can be
present at the meeting, they may cast their votes in person. If, as is more likely, they
cannot attend the meeting, they may send their proxy, which is a written authorization
for someone else to cast their votes for them.
Disadvantages of Corporation
i. Difficulty of formation: Before a company can start functioning there are numerous
requirements of law to be complied with. Generally, the legal procedures required to
establish corporations are very complicated and lengthy. In addition, establishing
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corporations requires huge sum of money, and thus large number of people have to be
approached for raising the required capital.
ii. Lack of owner's personal interest: these forms of organizations are managed by
directors and paid officials and employees who may not be expected to have such an
intense interest in the success of the business. Besides, the owners who usually own a
very small of the business will not put forth their maximum effort on the total success
of the business like the previous forms of organizations.
iii. Delay in decision-making: Corporations do not enjoy the same amount of flexibility
and promptness of decisions as the other forms of business do. Decisions, specially,
on key issues requiring general meeting of share holders may be delayed because of
the time interval between meeting, difficulty of getting the required number of
members to pass decisions and the presence of diverse interests which may lead to
disagreements.
iv. Oligarchic fraudulent management: Though in theory, it is said democratic
principles are followed in the management of corporations, in practice the
concentration of managing power is in the few hands of the managing directors thus
leading to oligarchy of managing or rule- by few. Many times dishonest persons at
the top succeed in cleverly misleading and cheating the shareholders and as a result
leading the companies to be managed by cheating and fraudulent hands.
v. Double tax: on the average, not less than forty percent of the profit is taxed as federal
income tax. Corporate profit tax and personal income tax on shareholders’ dividends
by states are common taxes imposed on corporations.
vi. Lack of secrecy: Corporations are required by law to report their financial
performance annually to the general public. Therefore, the large corporation is
unable to keep confidential certain areas such as profits or dividends. This allows
competitors to alter their plans based on the corporation’s open books.
IV. FRANCHISING
Today, more than a third of all retailer sales and an increasing part of the gross domestic
products are generated by private franchises. Franchising is a marketing system that revolves
around a two-party legal agreement whereby one party is granted the privilege to conduct
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business as individual owner, but is required to operate according to certain terms and methods
specified by the other party. The legal agreement is known as the franchise contract, and the
privilege it contains is called the Franchise. The sponsor of the privileges is the Franchisor. The
party that receives the privilege is called the Franchisee.
What do you think are the reasons for some entrepreneurs to establish a venture through
franchising contract? There are a number of advantages associated with franchising that have
potential to convince entrepreneurs to choose franchising over other venues for business:
Training and Guidance: - Perhaps the greatest advantage of buying a franchise, as compared to
starting a new business or buying an existing one, is that the franchisor will usually provide
both training and guidance to the franchisee. As a result, the likelihood of success is much
greater for national franchisees who have received this assistance than for small-business
owners in general.
A Proven Track Record: - Another benefit of buying a franchise is that the franchisor has
already proved the operation can be successful. If all of the other units are still in operation and
the owners report they are doing well financially, one can be certain that the franchisor has
proved that the layout and location of the overall management system are successful.
Financial Assistance: - Another reason that makes a franchise a good investment is that the
franchisor may be able to help the new owner secure the financial assistance needed to run the
operation. In fact, some franchisors have personally helped the franchisee get started by lending
money and by avoiding requiring any repayment until the operation is running smoothly.
V. CO-OPERATIVES
Co-operatives can be defined in the widest sense as voluntary organization of economic
units, based on equity, carrying out an allocated or self-given economic objective.
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Features of co-operatives
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vi. The capital for the enterprise is subscribed only by members.
Types of Co-operatives
Advantages of Co-operatives
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dominate its affairs even if it happens to command more capital than the other members
do.
ii. Limited liability: The liability of the members of a co-operative is limited to a
certain proportion of their capital contribution mentioned in the by-laws.
iii. Continuity: The life of a co-operative society is not affected by the death,
insolvency or conviction of a member.
iv. Tax concessions: The law may give a preferential treatment to co operatives in the
form of concessions and exemptions below a specified amount of income.
v. State assistance: Since a co-operation is an instrument of the economic policy of the
government, the state offers many types of assistance including cheap loan assistance to
co-operatives.
Disadvantages of Co-operatives
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form form
Availability of capital Corporation Sole proprietorship
Cost of organization Sole proprietorship Corporation
Ease of organization Sole proprietorship Corporation
Ease of expansion Corporation Sole proprietorship
Ease of dissolution Sole proprietorship Corporation
Ease to transfer ownership Corporation Sole proprietorship
Ease of withdrawing from ownership Corporation Sole proprietorship
Efficiency of management Corporation Sole proprietorship
Government controls Partnership Corporation
Length of life Corporation Sole proprietorship
Liability of owners Corporation Sole proprietorship
Secrecy of operation Sole proprietorship Corporation
Tax position of owners Sole proprietorship Corporation
Tax position of operations Sole proprietorship Corporation
Table1. Comparison of sole proprietorship, partnership and corporations
Ease of Formation
An ideal form of organization is one that can be brought into existence with the
least difficulty. A good form of organization, as judged from the point of view of
ease of formation is one that involves the least expense in formation and minimum
legal formalities.
Ease of Raising Capital
Where a large amount of capital is needed, it is desirable to ensure that investors
in the business are assured of safety of investment, fair return on investment and
the transferability of investment.
Limited Liability
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From the point of view of risk, the entrepreneur will naturally prefer limited
liability. That is in case of insolvency or winding up, the owners will be held
responsible only up to the amount of capital contributed by them while
establishing the business.
Direct Relationship between Ownership Control and Management
The right of an individual or a group of individuals represents ownership of a
business. As a rule, the control should lie where the ownership lies. This will
ensure that the management will take active interest in the efficient running of the
enterprise. If the responsibility for management or the control of management is
not with the owners, the management may not have a direct personal interest in
maximizing profits through increased efficiency.
Flexibility of Operation
A good form of organization offers the maximum flexibility and adaptability to
situations. That is the organization should lend itself to change and adjustment
without much difficulty as the need be.
Continuity or Stability
. An ideal form of organization enjoys uninterrupted existence over a long period.
From the entrepreneur's viewpoint, it is important that he/she be able to
formulate plans for the future and make investments paying for considerable
periods. From the social point of view also, it is desirable that there be an agency
that meets its economic needs continuously and provides continuous employment
to the society.
Keeping of Business Secrets
The entrepreneur will also have to be careful to ensure that the form of
organization chosen will allow the vital business secrets to be kept confidential.
Freedom from State Regulation
Various forms of organizations are exposed to varying degrees of control and
regulation by state. Where the extent of regulation by government is considerable,
the enterprise may have to spend considerable amount of time, money and energy
in complying with legal formalities and instructions.
Low Tax Liability
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Various forms of organizations are assessed to income tax on different bases.
Obviously, other things being equal, the ideal form of organization will be that
which attracts the minimum amount of tax liability.
I. Patents
One of the avenues to the establishment of the new business is invention. An entrepreneur who
invents a new thing or improves an existing invention needs to get legal protection for his/her
invention through a patent right. A patent is a contract between an inventor and the government
in which the government, in exchange for disclosure of the invention, grants the inventor the
exclusive right to enjoy the benefits resulting from the possession of the patent. A patent prevents
anyone except the inventor from making, using or selling the invention for a specified amount of
time.
II. Copyrights
A Copyright protects the original works of authorship. However, it does not protect the idea
itself, and therefore it allows anyone to use the idea in different manner. Among the things that
need to be protected through copyright arc music, books, software, scripts, articles, poems,
sculptures, models, maps and blueprints.
III. Trademarks
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