Business Ownership & Legal Structure

How Do Contractors Get Business? Three most common methods: A. Bidding on public work (competitive bidding) B. Bidding on private work (select list) C. Negotiating private work

How Do Construction Companies & Contractors Promote Future Business?  Stable work force  Actions outside of the work environment PEOPLE LIKE DOING BUSINESS WITH SUCCESSFUL PEOPLE!!

Good Subcontractor Relations  Direct jobs well  Plan well  Timely payment

What kind of business structures are most common to construction companies & contractors?

The Individual (Sole) Proprietorship  There are no legal procedures necessary to begin business.  There are few government imposed regulations.  The proprietor provides all capital, equipment and property.  All assets are held in the name of the proprietor.  Personal assets are at risk if litigation occurs.

Advantages include:  Simple organization  Freedom of actions  No legal formalities to terminate business operations

Disadvantages include:  Owner personally liable for debts of business Liability extends to personal property  Owner solely responsible for all management duties Sickness or absence can devastate business  Owner must pay income tax at individual rates: Profits are added to his/her total personal income

The General Partnership Advantages:  Combined assets of multiple parties increases bonding & credit opportunity  Shared management responsibilities  Partners draw from the company account for salary Salaries are considered operating expenses and are tax deductible ** Partners cannot sell, mortgage or assign any assets of the business without consent of all parties of the partnership.

The Limited Partnership  A limited partner: Shares in the profits/losses of the business Has no authority in management matters Are liable for partnership debts proportionally to their investment in the business

Legal aspects of a Limited Partnership  Contract is drawn between parties % interest is assigned  Limited Partnership Certificate must be filed with designated public office (Secretary of State)  Limited Partnership is not automatically dissolved upon death  The limited partner is immune from personal liability

The Corporation Features of a corporation are:  It can do business in its own name: Own property Enter contracts, etc.  A corporation has “perpetual life” unaffected by death of participants  Corporations find it easier to raise capital Sell shares Find investors

A corporation is formed under state law and receives its “charter” from the state.

The Corporate Charter  Specifies: Corporation’s powers Includes bylaws of business conduct  The corporation is bound to the provisions of the bylaws which define how business is conducted

The Corporate Board Of Directors  Bylaws define how Board of Directors is established: Usually by election  Directors cannot act individually cannot act as agents for the corporation can only act through majority vote of the board  Officers are appointed by the board of directors and are the people who carry out routine administration for the corporation. Dissolution of the corporation is accomplished by surrender or expiration of the charter. Dissolutions are governed by state law.

The Joint Venture  Temporary partnership between companies.  Resulting entity is larger and stronger than either party acting alone Ie equipment, facilities, personnel, assets and skills are pooled  Large projects can be accomplished that could not have been completed by the participants independently  Companies use this type of contract to break into new areas of work or new geographic locations

The Limited Liability Corporation

What Is The LLC?  A legal business structure  Defines business as a “Legal Entity” separate from its “members”.  Hybrid between a Limited Liability Partnership and a Corporation.  However, most states and the IRS recognize the single- member LLC as a legitimate business structure.  Members are shielded from individual liability.  Only the LLC is responsible for the company's debts

What Is The LLC?  Most states require fewer formalities be observed in an LLC in comparison to a corporation.

LLC Management & Control  Management and control of an LLC is vested with its members -UNLESS-  the Limited Liability Company's articles of organization provide otherwise.

Voting Interest  Voting interest in an LLC directly corresponds to % interest held by each member -UNLESS-  the articles of organization provide otherwise

Transferability  Unlike a publicly held corporation-  No one can become a member of an LLC without the consent of members having a majority in interest.

Duration of the LLC  An LLC does not have a perpetual life.  The articles of organization must specify the date on which the Limited Liability Company's existence will terminate.  An LLC is dissolved at the death, withdrawal, resignation, expulsion, or bankruptcy of a member.

Formalities of the LLC  An LLC begins upon the filing of the Articles of Organization with the Secretary of State.  LLC finances and records are established and maintained independently of the members' personal financial records

Dissolution of the LLC  LLC may be dissolved when: (a) a life span specified in the articles of organization expires, (b) the members unanimously agree in writing that it should be dissolved, (c) a court rules that the LLC should be dissolved.

Taxation of the LLC  Unless the LLC elects to be taxed as a corporation, a single-member LLC is taxed as a sole proprietorship.  A multiple-member LLC is taxed as a partnership.

Summary: Some considerations when contemplating a legal structure: 1. Taxation benefits 2. Risk & liability allocation needs 3. Need of continuity of the firm 4. Required administrative flexibility 5. Impact of structure on decision making 6. Means of attracting of capital