By KELLY K. SPORS

Thinking about starting a business? Make sure you’re cut out for it first.

In this bleak economy, lots of people are contemplating striking out on their own — whether they’re frustrated job seekers or people who are already employed but getting antsy about their company’s prospects.

For some people, entrepreneurship is the best option around, a way to build wealth and do something you love without answering to somebody else. But it’s also a huge financial gamble — and some people, unfortunately, will discover too late that it’s not the right fit for them.

Building a successful business can take years filled with setbacks, long hours and little reward. Certain personalities thrive on the challenge and embrace the sacrifices. But it can be a hard switch for someone who has spent years sitting in a cubicle with a steady paycheck.

So, how can you figure out whether you’re suited for self-employment? We spoke with entrepreneurship researchers, academics and psychologists to come up with a list of questions you should ask yourself before making a big leap. Entrepreneurs, of course, come from all sorts of backgrounds, with all sorts of personalities. But our experts agreed that certain attributes improve the odds people will be successful and happy about their decision.

Keep in mind that any self-analysis is only as useful as the truthfulness of the answers — and most people aren’t exactly the best judges of their own character. So, you might enlist a friend’s help.

Here, then, are 10 questions to ask to see whether you’re up for the challenge of entrepreneurship.

1. Are you willing and able to bear great financial risk?

Roughly half of all start-ups close within five years, so you must be realistic about the financial risks that come with owning a business — and realize that you could very well lose a sizable chunk of your net worth.

Consider how much you’ll have to ante up and how losing it would affect your other financial goals, such as having a sound retirement or paying your kids’ college tuition. Weigh the importance of starting a business against the sacrifices you might face.

Entrepreneurs should be sure that “if they lose this capital, it either won’t destroy their financial situation, or they can accept the concept of bankruptcy,” says Scott Shane, an entrepreneurship professor at Case Western Reserve University in Cleveland. “Some people thrive on the financial risk; others are devastated by the thought of losing even $10,000.”

And don’t assume you’ll be able to lower your risk substantially by finding investors. Less than 10% of start-up financing comes from venture capitalists, angel investors and loans from friends and family combined, Prof. Shane says. And that’s true even in good economic times. Banks, meanwhile, often won’t lend to start-up founders without a proven track record. When they do, they generally require the founders to guarantee the loan or credit line with their personal savings or home — an incredibly risky proposition. (To learn how to mitigate risk by keeping your old job while starting a new venture, see “A Toe in the Water”.)

2. Are you willing to sacrifice your lifestyle for potentially many years?

If you’re used to steady paychecks, four weeks’ paid vacation and employer-sponsored health benefits, you might be in for an unpleasant surprise.

Creating a successful start-up often entails putting in workweeks of 60 hours or more and funneling any revenue you can spare back into the business. Entrepreneurs frequently won’t pay themselves a livable salary in the early years and will forgo real vacations until their business is financially sound. That can often take eight years or longer, says William Bygrave, a professor emeritus of entrepreneurship at Babson College in Wellesley, Mass.

Even if you can steal away, it’s hard to find somebody who can fill in for you. Many entrepreneurs must tow along their cellphone and laptop, so they can be available to answer questions from clients or employees.

Jennifer Walzer learned those lessons the hard way. In 2002, after being laid off from a $100,000 consulting job when the company closed, she started Backup My Info! Inc., which sells online data-backup services to businesses.

For the first year, the New York-based company brought in just $29,000 in gross revenue. Ms. Walzer didn’t pay herself a salary until the third year, and even then it was a slim $30,000. She could have taken more out, but she wanted to shovel as much money into the business as possible to keep it financially sound.

Having no income for two years meant that Ms. Walzer had to be extremely frugal; she virtually never ate out or went on vacations or clothes-shopping trips. Twenty-nine years old at the time, she says, “I got very jealous of my girlfriends who got home at 5 o’clock every night and could go out gallivanting and pretty much do whatever they pleased.” She’d occasionally meet friends for coffee instead of drinks, since coffee was less expensive.

Now that her business generates about $2 million in annual revenue, the tables have turned. Ms. Walzer says she earns more from the business than she did as a consultant, and “I have friends who are struggling to keep their jobs because they have bosses.”

3. Is your significant other on board?

Don’t ignore the toll running a business will take on your loved ones. Failed ventures frequently break up marriages, and even successful ones can cause lots of stress, because entrepreneurs devote so much time and money to the business.

Stephen Webster

“I’m always surprised at the number of husbands who start a business and don’t tell their wives,” says Bo Fishback, vice president of entrepreneurship at the Ewing Marion Kauffman Foundation.

You can avoid the heartache by talking at length with your spouse and family about how the business will affect home life, including the time commitment, changes in daily schedules and chores, financial risks and sacrifices. They must also understand the huge financial gamble they’re making with you.

4. Do you like all aspects of running a business?

You better. In the early stages of a business, founders are often expected to handle everything from billing customers to hiring employees to writing marketing materials. Some new entrepreneurs become annoyed that they’re spending the majority of their time on administration when they’d rather be focused on the part of the job they enjoy, says Donna Ettenson, vice president of the Association of Small Business Development Centers in Burke, Va.

“All of a sudden, they have to think about all these things they never had to think about before,” she says.

Jeromy Stallings, the 33-year-old founder of Ninthlink Inc., a San Diego interactive-marketing firm with 15 employees, always felt he had plenty of passion for entrepreneurship and self-motivation. But when starting his agency in 2003 and hiring his first couple of employees, he realized he wasn’t prepared for the day-to-day challenges of managing other people.

Mr. Stallings had assumed his passion would rub off on employees and they would do their jobs as enthusiastically as he did. But some clients started calling him directly, complaining that his employees weren’t returning phone calls or that projects were behind schedule.

“My clients were saying, ‘We love your passion, we love your skill, we’re just having a really hard time with your management style,’ ” he says.

So, Mr. Stallings turned to peers, mentors and guidebooks for help. He realized he needed to work more closely with employees and create a more structured project-management system. “I didn’t really have a plan in place for how they spend their time,” he says.

5. Are you comfortable making decisions on the fly with no playbook?

With a new business, you’re calling all the shots — and there are a lot of decisions to be made without any guidance. You might not be used to that if you’ve spent years working in corporate America, says Bill Wagner, author of “The Entrepreneur Next Door,” a book that lays out the characteristics of successful entrepreneurs.

“For most entrepreneurial ventures, there’s no structure,” he says. “You’re going into a business, and nobody has told you how to be successful.”

Mr. Wagner has surveyed more than 10,000 entrepreneurs to find out what traits distinguish successful start-up founders from less-successful ones. Among other things, most entrepreneurs he interviewed said they liked making decisions. He doesn’t rule out the idea that less-decisive people could become better at the leadership role. It’s just that they will have to work a lot harder at it.

6. What’s your track record of executing your ideas?

One of the biggest differences between successful entrepreneurs and everyone else is their ability to implement their ideas, says Prof. Bygrave of Babson College. You might have a wonderful concept, but that doesn’t mean you possess that special mix of drive, persuasiveness, leadership skills and keen intuition to actually turn the idea into a lucrative business.

So, examine your past objectively to see whether you have assumed leadership roles or initiated solo projects — anything that might suggest you’re good at executing ideas. “Were you senior class president? Did you play varsity sports?” Prof. Bygrave suggests asking.

Stephen Webster

You might even find clues back in your childhood, he adds: “A lot of successful entrepreneurs were starting businesses when they were still kids.”

7. How persuasive and well-spoken are you?

Nearly every step of the way, entrepreneurship relies on selling. You’ll have to sell your idea to lenders or investors. You must sell your mission and vision to your employees. And you’ll ultimately have to sell your product or service to your customers. You’ll need strong communication and interpersonal skills so you can get people to believe in your vision as much as you do.

If you don’t think you’re very convincing or have difficulty communicating your ideas, you might want to reconsider starting your own company — or think about getting some help.

In 2007, Brad Price left a $135,000-a-year job as an associate at a Baltimore law firm to purchase a PuroClean Emergency Restoration Services franchise, which cleans up property damage such as mold and flooded basements. A former Naval officer, Mr. Price felt he was very self-motivated and a good leader. But he was less comfortable cold-calling and striking deals — something he’d never had to do in previous jobs.

“There’s a big difference in waiting for the phone to ring and getting an assignment and having to make the phone ring,” says the 33-year-old Mr. Price.

Mr. Price says he now has his wife handle the marketing and networking. “My wife is very good at that, ‘Hey, next time a call comes in, how about you give it to us?’ ” he says.

8. Do you have a concept you’re passionate about?

Every morning you want to jump out of bed eager to get to work. If you’re not that exuberant about how you’ll be spending your time — or the business concept itself — running a business is going to be a rough ride.

Ms. Ettenson of the Association of Small Business Development Centers has coached many prospective entrepreneurs about their chosen business. She always asks why they’re doing it. If they suggest it’s mostly for the prospect of making a lot of money or because they’re tired of working for someone else, she steers them toward something more in line with their interests or avoiding self-employment altogether.

“If you hate doing paperwork, the last thing you want to do is become a bookkeeper,” Ms. Ettenson says. “If you’d rather be outside taking people into the wilderness, then that’s the type of business you should be in.”

But it’s also usually wise to find a business in an industry you are very familiar with; it will be much harder to succeed if you know little about the field. Mr. Fishback at Kauffman says he has steered a doctor and other professionals away from starting restaurants because they often don’t grasp how difficult and risky restaurant ownership is. And they’d be competing against restaurateurs with years of experience.

9. Are you a self-starter?

Entrepreneurs face lots of discouragement. Potential buyers don’t return calls, business sours or you face repeated rejection. It takes willpower and an almost unwavering optimism to overcome these constant obstacles.

John Gartner, an assistant clinical-psychiatry professor at Johns Hopkins University and author of the book “The Hypomaniac Edge,” theorizes that many well-known entrepreneurs have a temperament called hypomania. They’re highly creative, energetic, impatient and very persistent — traits that help them persevere even when others lose faith.

“One of the things about having this kind of confidence is they’re kind of risk-blind because they don’t think they could fail,” Prof. Gartner says. And, he adds, “if they fail, they’re not down for that long, and after a while they’re energized by a whole new idea.”

You don’t have to be as driven as, say, Steve Jobs to succeed. But somebody who gets deterred easily, or too upset when things go wrong, won’t last.

10. Do you have a business partner?

If you don’t have all the traits you need to run the show, it’s not necessarily a hopeless endeavor. Finding a business partner who compensates for your shortcomings — and has equal enthusiasm for the business concept — can help mitigate the risks and even boost the odds of success.

David Gage, co-founder of BMC Associates, an Arlington, Va., business-mediation practice, points to a Marquette University study of 2,000 businesses. The researchers found that partner-run businesses are far more likely to become high-growth ventures than those started by solo entrepreneurs.

The key, Mr. Gage says, is finding a partner who prefers handling different aspects of the business, so you’re complementing each other — and not constantly at each other’s throats.

Someone who likes to take risks and be in the spotlight, for instance, might choose a cautious partner who prefers to work in the back room. “If they’re willing to work with that person, and not just look at them as a wet blanket, then it can be great,” Mr. Gage says.

But taking on a partner isn’t a light decision. Many partnerships split due to conflicts over everything from attitudes about money to miscommunication and contrasting work ethics. Mr. Gage recommends that potential partners spend several days hashing out the specifics of the business and how the arrangement will work to see if they’re compatible.

—Ms. Spors is a staff reporter of The Wall Street Journal in Minneapolis.

Write to Kelly K. Spors at kelly.spors@wsj.com

Printed in The Wall Street Journal, page R1

By KAREN DAMATO

The track records of target-date mutual funds for retirement got a double boost lately.

They benefited from the stock market’s powerful start to 2012, with the Standard & Poor’s 500-stock index rising 12% in the three months through March.

And three-year returns got an added bump as the last traces of the 2007-09 bear market receded into history. In the three-year performance figures, this year’s strong first quarter replaced the first quarter of 2009, when the S&P 500 declined almost 12%.

Saying goodbye to the bear made a big difference, indeed. Consider the T. Rowe Price Retirement 2040 fund. At the end of 2011, it had returned an annualized 16.1% over three years. While that beat most peers, the three-year figure as of the end of March is an even sweeter 23.7%.

Write to Karen Damato at karen.damato@wsj.com

Printed in The Wall Street Journal, page WSJ2

By RACHEL LOUISE ENSIGN

Fund investors can go wrong in all sorts of ways. But since mid-April is fast approaching, let’s talk about one of the most common and least understood: taxes.

Even if it is too late to do anything about this year’s returns, it is a good time to start planning for next year’s.

At the root of the most common blunders are three types of taxable fund payouts: interest income, dividends and capital gains. While all three are subject to a complex web of tax rates and regulations, investors can limit their tax bills by understanding their funds, planning carefully and staying abreast of tax changes in Washington.

Here, according to financial advisers, are five of the biggest mistakes many fund investors make:

1. Keeping ‘tax-inefficient’ funds in a taxable brokerage account

Some types of funds distribute lots of dividends, interest income and capital gains, all of which can boost tax bills. Many investors would be better off holding those funds in tax-sheltered retirement accounts. With a standard 401(k) plan or individual retirement account, you pay tax only when you make withdrawals; earnings and withdrawals usually are tax-free in a Roth 401(k) or Roth IRA.

Tax-efficient funds—those unlikely to make big distributions—can be left in a taxable account, says Michael Gibney, a financial adviser in Riverdale, N.J. You will owe capital-gains tax if you sell those securities at a gain, but at least the timing of such sales is under your control.

Financial adviser Ken Weingarten talks with WSJ’s Rachel Ensign about the tax uncertainties facing investors as they look ahead to 2013.

Taxable-bond funds, including high-yield funds and funds holding Treasury inflation-protected securities, are among the investments you might consider holding in an IRA, advisers say. Ditto for funds that emphasize high-dividend stocks. Meanwhile, index funds that track a broad stock-market benchmark—and most but not all ETFs—might be candidates for a taxable account, as would municipal bond funds, since interest earned is tax-free.

Determining whether a fund is going to have capital gains can be tricky. Each year, funds must distribute gains if portfolio managers sell securities for a net taxable gain. One indicator is the level of turnover in the portfolio, though, admittedly, it is an imprecise gauge.

The higher a fund’s turnover, a figure that can be found on Morningstar.com, the more likely it is to pay out capital gains, says Mark Armbruster, president of Armbruster Capital Management, which is in the Rochester, N.Y., area. If a fund has paid out capital gains in the past, something that also can be found on Morningstar, that also is a sign it may do so again, he says.

Small-stock funds may produce more capital gains than large-stock funds, advisers say, because there are many more small stocks to trade among.

Broad index funds, which don’t change their holdings very often, are less likely to pay out capital gains than some actively managed funds that change their investments based on market conditions. The Vanguard 500 Index

fund, for example, has a 4% turnover ratio and hasn’t distributed capital gains since 1999. The actively managed CGM Focus,

on the other hand, has a nearly 500% turnover rate. It has performed poorly in recent years, so it hasn’t been in a position to distribute gains, but it distributed $8.21 a share in mostly short-term capital gains in 2007.

Still, when and why a fund realizes capital gains is complex, so “turnover is only a very rough gauge of tax efficiency,” says Christine Benz, director of personal finance at Morningstar. Another gauge is Morningstar’s “potential capital-gains exposure” statistic, an estimate of the percentage of a fund’s assets that represent mostly unrealized gains.

ETFs, in particular, rarely distribute capital gains, Mr. Armbruster says. That is because most are index funds but also because they are structured to minimize taxable sales of portfolio securities.

2. Holding on to funds that cost you big

Capital gains, whether taken on purpose by the investor or passed along by a fund, can add to your tax bill. But you can lessen their impact by strategically booking capital losses when holdings decline in value, so that they offset any gains dollar for dollar. In any year, if your capital losses exceed your capital gains, you can take up to $3,000 of the loss as a tax deduction and carry the rest of the loss forward to offset gains in future years.

This “tax-loss harvesting” has to be done carefully, however, to comply with Internal Revenue Service rules. Once you sell a fund or other security at a loss, you have to wait 30 days before buying either that same fund or a very similar fund (for instance, one that tracks the same index), or the loss is invalidated. “The securities cannot be ‘substantially identical,’ ” says Gil Charney, principal tax researcher at the Tax Institute at H&R Block, a division of H&R Block Inc., but “the IRS never clearly defined what substantially identical means.… It’s gray.”

If you want to keep exposure to the sector that fund covered, you can buy a slightly different fund—for instance, you likely could sell a fund tracking the Standard & Poor’s 500-stock index and immediately buy one tracking the Russell 1000, says Mr. Armbruster. You could later return to your original holding.

Keep tax-loss harvesting in mind any time the market or a particular holding suffers a major decline; you’ll miss opportunities if you think about this only near year-end.

3. Buying an ETF without learning what its tax treatment is

Gains and income from certain ETFs are subject to funky tax rules because of the funds’ holdings or their corporate structures. Though most of these aberrations invest in niche industries, some of the most popular ETFs could leave you with a surprisingly large tax bill.

The most popular offender: Gains from selling SPDR Gold Shares,

the second-largest exchange-traded product by assets, are taxed at a top 28% rate on collectibles, rather than the maximum 15% rate on long-term capital gains. That is true for all other funds that hold physical precious metals.

There are different rules for ETFs that provide commodities exposure by investing in futures contracts: Gains are taxed 60% at a long-term rate and 40% at a short-term rate. ETFs structured this way include some from the U.S. Commodity, PowerShares and ProShares families.

Also, some non-stock ETFs are structured as partnerships and report their tax information on a Schedule K-1 instead of the common 1099 form. Schedule K-1 typically is sent later than a 1099—it may not even arrive before your tax return is due because the partnership has to file its own return before sending you this form, says Eric Smith, an IRS spokesman. In this situation, you’ll want to ask for an extension from the IRS, he says. You can avoid these hassles by holding these funds in an IRA.

4. Fudging the new forms

Reporting securities sales on your tax return has gotten more complex, with new rules that require brokerage firms and fund companies to report to the IRS what you paid for some securities you sell. Because that reporting applies only to securities purchased after specified dates, you may have sales of both “covered” and non-covered assets. As in the past, for non-covered securities, the financial firm may voluntarily provide cost information only to you.

The new rules could make tax preparation more complex, tripping up some investors.

“Basically what they’ve done is taken Schedule D and added a new schedule behind it—Form 8949. All the transactions you used to put directly on Schedule D…are now on this new form,” says Robert Schmansky, a financial adviser in Bloomfield Hills, Mich.

The most important thing to know about Form 8949 is that you will have to separate the covered transactions from those that aren’t and report them on different lines. Individual stocks purchased on or after Jan. 1, 2011, are covered; for mutual funds and most ETFs, the new treatment applies to purchases on or after Jan. 1, 2012. Then, you must add the covered and non-covered transactions and put the total on Schedule D.

5. Investing without paying attention to the tax debate in Washington

When deciding when to take gains and what account to hold various funds in, it is important to stay abreast of what is going on in Washington.

Think hard about where tax rates are likely headed in the future. While some tax changes affecting funds are already in store, some experts watching the political debate—and the ballooning federal deficit—say investors may want to hedge their bets against higher rates and pay taxes on their gains soon.

There are a number of big tax changes on tap starting in 2013 that could deal a huge blow to your funds. If the Bush tax cuts are allowed to expire, the top rate on ordinary income and short-term capital gains will rise to 39.6% from 35%.

The current top 15% rate on long-term capital gains is set to rise to 20%. Qualified dividends will no longer be taxed at a top 15% rate and will be taxed as ordinary income. Also, net investment income, which includes dividends, interest and capital gains, will be subject to a new 3.8% Medicare tax, part of the Affordable Care Act, for married couples filing jointly who earn more than $250,000 a year and individuals earning more than $200,000 a year.

One possibility is that some of the current rates will be extended for most taxpayers, but not for high earners. “People who are over the $250,000 mark—Obama has drawn a line in the sand for those people,” says Ken Weingarten, a financial adviser in Lawrenceville, N.J. “It’s going to be crazy after the election. There is going to be a lot of horse trading to get these things straightened out.”

If you think that your tax rate on capital gains will rise soon, you may want to book a capital gain this year to lock in the 15% rate. Unlike with a capital loss, if you’re booking a gain you can repurchase the same exact fund in any quantity immediately after selling it.

Ms. Ensign is a staff reporter for The Wall Street Journal in New York. She can be reached at rachel.ensign@wsj.com.

A version of this article appeared April 5, 2012, on page C7 in some U.S. editions of The Wall Street Journal, with the headline: Tax Pitfalls for Fund Investors.

By JAIME LEVY PESSIN

For U.S. troops returning from overseas, personal-finance issues can be a sobering part of homecoming.

Nearly 150,000 service members returned from Iraq and Afghanistan last year, and 35,000 more came home from Afghanistan in the first two months of 2012, according to the Defense Department.

“It’s a feel-good moment, but it’s also a time of adjustment,” says Brenda Linnington, director of the Better Business Bureau’s Military Line, a program covering consumer issues for service members. For reunited families, and young couples especially, desires to celebrate or make a big purchase can collide with realities such as reduced income and increased expenses.

Recognizing the challenges its personnel face, the military provides financial counseling for troops both before and after deployment in combat, though it doesn’t say how many service members seek such assistance.

What follows is a look at some of the issues, and advice from experts in the field.

Time to Adjust the Budget

Perhaps the most important challenge has to do with budgeting. Service members get extra pay for the time they spend in a combat zone; that hazardous-duty pay bump—and associated tax benefits—can significantly boost troops’ incomes.

Getty Images

Returning soldiers saluting after their flight home from Iraq landed at Fort Hood, Texas, in December

So when they return from a deployment in Iraq, Afghanistan or other countries with the combat-zone designation, troops often see a decline in income. At the same time, they’re also faced with paying bills that they were able to put on hold while they were away—the soldier’s car insurance, for example.

“If you relied on the additional money, you have to change your lifestyle to accommodate the change in pay,” says Gerri Walsh, president of the Finra Investor Education Foundation. The foundation, based in Washington, D.C., is affiliated with the Financial Industry Regulatory Authority, a self-funded industry watchdog group, and is a co-sponsor, along with the Defense Department, of the website www.SaveandInvest.org/MilitaryCenter, a resource center for military families.

Avoid the Feel-Good Splurge

Robert Gerstemeier, a Chicago financial adviser and a commander in the U.S. Navy Reserve, says that when troops return from deployments, many are eager to enjoy themselves and pamper their families. Mr. Gerstemeier, who has provided financial counseling through the military and has clients who are service members, advises returning troops to not “go blowing all your hard-earned money. Treat yourself to something, but don’t do it so that in six months you’re still paying for it.”

Ms. Linnington, who is married to an active-duty soldier who has been deployed three times, says she and her husband don’t make any big-ticket purchases while still in the “honeymoon phase” after a deployment. “We know decisions need to be made when we’re calmer and less emotional,” she says.

Don’t Raid Your Thrift Savings Plan

Although the military does provide a pension for career service members, it’s important to set aside money for retirement anyway. Service members have to stay in the military for 20 years to qualify for a pension, Mr. Gerstemeier notes—and that doesn’t always happen.

While serving in combat zones, soldiers can put extra money into their Thrift Savings Plan accounts, which are essentially 401(k)s for government employees. Troops serving in combat zones this year can deposit as much as $50,000 in a thrift account, far more than the $17,000 that civilians can put into a 401(k). But thrift plans have the same early-withdrawal penalties as 401(k)s. Taxes and a 10% penalty apply in most cases if withdrawals are made before the investor turns 59½.

Civilians Face More Decisions, Fewer Benefits

For those who leave the service when they return from a deployment, the potential financial obstacles can be even more complicated. For many young people, it’s the first time they have to find a job and make other important financial decisions.

“A lot haven’t had to fend for themselves—they haven’t had to choose a health-care plan or life insurance,” says June Walbert, a lieutenant colonel in the Army Reserve and a financial planner with USAA, a financial-services firm that provides insurance, banking and financial advice to service members, veterans and their families. “They’re starting from ground zero with huge decisions,” Ms. Walbert says.

Another big challenge for many: A person who made $50,000 in the military can find that the same salary in a civilian job doesn’t stretch as far, considering that the military provides a housing allowance, subsidized health care, cheap life insurance and other perks.

The Better Business Bureau recommends that soldiers considering leaving the service take advantage of some resources available to them, like the Army Career and Alumni Program and the Labor Department’s Veterans’ Employment Training Services (www.dol.gov/vets), to help smooth the transition.

Beware of Scams Aimed

At the Recently Returned

Regardless of whether a soldier stays in the military or leaves, financial experts warn them to beware of schemes targeting members of the armed forces coming home from deployments. In particular, Finra and the Better Business Bureau advise service members to be wary of payday loans, identity theft and investment schemes touted by scam artists who claim to have ties to the military.

“There will be a slew of people waiting for you to spend money, whether it’s a motorcycle salesman or a financial-services professional,” says Ms. Walsh, adding that investors can check out financial-services professionals through BrokerCheck, a tool on Finra’s website. “You will be surrounded by people who want a piece of that pie.”

Ms. Pessin is a writer in New York. Email her at
reports@wsj.com.

A version of this article appeared May 7, 2012, on page R10 in some U.S. editions of The Wall Street Journal, with the headline: Tips for Returning Troops.

By EMILY MALTBY, SCOTT DENNE and SHIRA OVIDE

Employees are often required to cede the rights to their designs and inventions to their employers. But Twitter Inc. has recently upended that tradition by drafting a policy that will put control over how such patents are enforced into the hands of its engineers and employees.

The company’s unusual approach—aimed at curbing patent litigation—is triggering fresh discussion among the founders of some tech start-ups about weaknesses in the current patent system. For small companies with minimal resources, they say, it’s often better to focus energy and resources on executing an idea rather than researching patents and filing patent applications. They argue that patents left in the hand of individuals are less likely to be exploited as a litigation weapon between companies. What’s more, software engineers may be more keen to waive patent rights to work collaboratively.

The debate comes as entrepreneurs generally are paying closer attention to patents’ potential value because of a coming change in patent law. Under the America Invents Act, which will take effect next March, a patent will be awarded to the first person who files an application. Historically, patents have been awarded to the first person who created the invention.

Twitter’s “Innovator’s Patent Agreement,” which was introduced last month, prevents the company from suing others for patent infringement unless it’s acting defensively or the employees whose creations were patented give it permission to do so.

Adam Messinger, Twitter’s head of engineering, said his company’s approach isn’t appropriate for everyone, but he said that if others adopt similar principles, “You will reduce the overall amount of patent litigation, which I think is not value creating” for Silicon Valley.

Mr. Messinger said Twitter’s policy was a reaction to growing concerns about how patents are being used in litigation. “Everyone is not quite sure it’s right. Everyone would like it to be better somehow,” Mr. Messinger said. “This is our small contribution.”

With the values of some technology patents reaching frenzied levels, few, if any, big tech companies with lots of patents are likely to take a similar stance.

Even at nascent companies, some lawyers argue, giving employees control over the ideas and designs they develop is risky and perhaps even foolish. They note that patents can be critically important assets for start-ups. Since such companies generally don’t make much of a profit, many investors zero in on their patents as a way to get some value from a company if it eventually fails.

Adopting an agreement like Twitter’s would be akin to “taking bullets out of my own gun,” said Nick Soman, the founder of LikeBright.com, a social-media dating start-up. Investors and new hires “want to know where you are driving unique value,” he said. “The best value is your ideas, and sometimes the best protection for that” is the intellectual property itself.

Come Lague, the chief executive of Zetta Research, which buys patents from failed start-ups and sells them to other companies, believes Twitter’s new policy could affect the value of its own patents. If a patent has encumbrances on how the intellectual property can be used, “that is not a free and clear title,” he said.

At this point, Twitter doesn’t have any patents of its own, but it has at least two patent applications pending. Some of its critics say Twitter’s new position is merely an attempt to discourage other companies from filing patent-infringement lawsuits against it. “This is a P.R.-and-pray strategy,” said Robert Aronoff, the founder and managing partner for Pluritas LLC, an advisory firm for companies buying and selling patents.

Twitter’s position has supporters, though, including some venture-capitalist investors. They say that patent litigation chills innovation and that they’re frustrated nascent companies must spend time and money defending themselves against patent-infringement claims. “In the software field, you don’t need a patent to innovate,” said Jason Mendelson of the Foundry Group, a venture capital firm in Boulder, Colo. “It’s not making a new lawnmower or drug or solar cell. It doesn’t cost millions in R&D.”

Because companies that own patents can later sell them, patents can even wind up in the hands of “patent trolls,” a derogatory term for companies that enforce patents they have acquired by going to court. Lawsuits brought by trolls, also called nonpracticing entities, have become more than five times more common now than they were in 2004, according to a 2011 Boston University study. The study estimated that from 1990 through 2010 such lawsuits cost innovators $500 billion in lost wealth.

Software-company founders generally have neither the time nor the money to file patent lawsuits themselves, but it can also be close to impossible for them to know in advance whether they are infringing on someone else’s patent, some founders and venture capitalists say.

Twitter itself has been hit with several patent-infringement claims, including one that alleges it violated a patent that covers methods for delivering messages from known senders over the Internet, which is still pending, and another involving creating an interactive virtual community of famous people. In that case, a jury found last fall that Twitter hadn’t infringed any of the asserted claims.

Start-ups may also have to contend with bigger rivals that hoard patents strategically and then use them as a basis for infringement suits. For instance, about 20% of the start-ups backed by venture-capital firm Spark Capital received “threatening letters” at some point from companies claiming potential intellectual-property infringement, according to Bijan Sabet, a general partner. Mr. Sabet said such threats force the companies and investors like Spark to spend time and money they can’t afford to waste. (Mr. Sabet used to be on Twitter’s board; Spark invested in Twitter.)

Many of Twitter’s supporters hope it has the clout to create a new movement among tech start-ups. If founders adopt Twitter-like agreements, software engineers will be able to create new products that build on others’ innovations without as much fear they will trigger lawsuits, these supporters say.

David Sacks, founder and CEO of Yammer Inc., a San Francisco business-software company, said he will throw out Yammer’s existing employee patent agreements, which turn over patents based on employee work to the company, and replace them with something similar to Twitter’s policy. “What we hope is that more entrepreneurs and engineers will want to work for us because we’re an ‘IPA’ company,” he said, referring to the Twitter policy.

“It solves a problem for me that I’ve been thinking about for two years,” adds Angus Fox, founder and director of Multizone Ltd., a mobile-applications developer for the public sector based in Leatherhead, U.K. “We hire subcontractors, and we need to protect our [intellectual property] but preserve their rights. It’s a very difficult area for a start-up.” The company hasn’t yet filed for any patents, but it plans to patent several ideas before turning them into products, he said.

Reece Pacheco said he is “certain” he will adopt an IPA at his New York start-up, Shelby.tv., a video-sharing website. “If the innovators had a vision for the technology, that’s what’s best for it, rather than using it to be litigious,” he said.

Last month Twitter posted its draft patent policy on GitHub, a website for sharing software code, to solicit feedback and spark conversation. It says it’s incorporating the feedback into its draft.

Write to Emily Maltby at emily.maltby@wsj.com, Shira Ovide at shira.ovide@wsj.com and Scott Denne at scott.denne@dowjones.com

A version of this article appeared May 10, 2012, on page B1 in some U.S. editions of The Wall Street Journal, with the headline: Twitter Gambles On a Patent Plan.

By STEPHEN MILLER

Art Bartlett wasn’t the first to apply to home sales a franchise model more often associated with selling hamburgers, but he was the most successful.

As co-founder of Century 21 Real Estate Corp., Mr. Bartlett, who died Dec. 31 at age 76, sought to make his company “the McDonald’s of real estate.”

Los Angeles Times

Art Bartlett, who co-founded real-estate company Century 21.

By 1979, when Mr. Bartlett sold his interest in the company, Century 21 had grown to more than 7,000 offices in 50 states and Canada. Today the company’s 120,000 gold-jacketed staff sell homes in 67 countries.

“His concept was imitated by everybody, and it became spectacular,” says Dave Liniger, chairman of RE/Max International Inc., another big real-estate franchisor.

The son of a Glens Falls, N.Y., truck driver, Mr. Bartlett moved to Long Beach, Calif., in the 1940s to care for a sick relative. After working as a salesman for Campbell Soup Co., he took up real estate. He founded his own agency, then formed Comps Inc., an Orange, Calif.-based firm that was one of the earliest to use computers to track comparable home sales.

In 1971, he teamed with a former employee, Marsh Fisher, to form Century 21. Others had tried real-estate sales franchising, including Red Carpet Corp., another California-based company founded in 1966. But Century 21 became franchising on steroids, growing to 2,600 offices within five years of its founding.

Rather than build up a network from scratch, Mr. Bartlett signed up thousands of independent real-estate brokers across the nation in a process that came to be known as “conversion franchising.” To spur growth, he sold regional licenses, and the licensees sold individual franchises. At one point in the mid-1970s, Century 21 was opening over 100 new offices per month.

In exchange for an annual fee and a percentage of sales, Century 21 offered its brokers a range of services from training to purchasing, a referral network, and national advertising, an innovation in residential real estate.

“You can’t overstate the challenge of getting this off the ground,” says Matt Shay, president of the International Franchise Association in Washington. “We’ve lost a true pioneer. He was up there with Ray Kroc of McDonald’s and Kemmons Wilson of Holiday Inn.”

Century 21 went public in 1978, then was acquired by Trans World Corp. in 1979 in a stock and cash deal valued at $89 million. Mr. Bartlett sold his shares and retired, but found retirement uncomfortable.

“When you’re on a fast track of building a company you can’t just turn it off and slow down,” Mr. Bartlett told a reporter in 1982. He tried to apply his franchising expertise at Mr. Build, a home-remodeling chain he hoped to take national. But Mr. Build stalled, and Mr. Bartlett turned to real-estate investments.

Mr. Bartlett lived in an exclusive section of Orange County, then built what his family calls his “dream home” overlooking San Diego Bay. He collected classic cars, from Packards and Fords of the 1930s to Corvettes and Thunderbirds of the 1950s.

Write to Stephen Miller at stephen.miller@wsj.com

Printed in The Wall Street Journal, page A4