1 Construction Engineering 221 Business Ownership

Construction Engineering RPQs 1. The acronym “ESOP” stands for “Employee Standard Operating Procedure”. A = True B = False 2. Corporations are regulated by the federal government. A = True B = False 3. A business corporation formed in the state of Iowa is considered a foreign corporation in the state of Texas. A = True B = False

Construction Engineering The acronym “ESOP” stands for “Employee Standard Operating Procedure”. The correct answer is B - False ESOP actually stands for Employee Stock Ownership Plan

Construction Engineering Corporations are regulated by the federal government. The correct answer is B – False Corporations are actually regulated by state government.

Construction Engineering A business corporation formed in the state of Iowa is considered a foreign corporation in the state of Texas. The correct answer is A – True

Construction Engineering Forms of Business Individual Proprietorship (sole ownership) Partnership Corporation (multiple forms)

Construction Engineering Individual/Sole Proprietorship Most commonly used by small businesses Simplest business entity Normally one or two person businesses Least expensive to set up and run Owner personally liable for all debts Also of all obligations and responsibilities Unlimited liability extends to personal assetsassets Taxed at normal individual rates (15% to 39.5%) Also pays Federal Self-Employment Tax Losses can offset other taxable income

Construction Engineering Individual/Sole Proprietorship Other advantages: Saving on unemployment taxes (considered self-employed – will not draw unemployment compensation). However a regular employee must be covered with unemployment benefits More freedom to withdraw assets No formal action needed to start a sole proprietorship – will need a business license and may need to register

Construction Engineering Example

Construction Engineering General Partnership Unincorporated association of two or more Co-owned with the goal of mutual profit Benefits Concentration of assets & personal credit Combining equipment and facilities Increase talent pool Increased bonding capacity

Construction Engineering Partnership Liability Liability of a general partner for the debts of the partnership is based on two legal principles. What are the principles? 1. Each general partner is an agent of the partnership and can bind the other partners in the normal course of business without expressed authority. 2. Partners are individually liable to creditors for the debts of the partnership.

Construction Engineering Partnership Liability What is meant by “without expressed authority”? Each full member of a partnership is a general agent of the partnership and has complete authority to make binding commitments, enter into contracts, and otherwise act for his partners within the scope of the business.

Construction Engineering Questions to Consider 1. What happens to the partnership when one of the partners dies? Automatic dissolution of the partnership. Remember dissolution is not termination of the partnership, but simply a restriction of the authority of the partners to those activities necessary for the conclusion of the business.

Construction Engineering Questions to Consider 2. When a partnership goes bankrupt or is dissolved for any reason who has first right in the settlement of partnership debts from the liquidation of remaining assets? Outside creditors, then repay loans, then advances by partners (beyond their initial capital contribution), then the capital investment, then a split of the profits.

Construction Engineering Questions to Consider 3. If partnership assets are insufficient to satisfy outstanding obligations when a partnership is concluded who is liable? The partners (the amount of each is determined by their percentage of ownership)

Construction Engineering Limited Partnership One who contributes cash or property Shares in the profits or losses BUT Has NO VOICE in matters of management Has NO VOTE in matters of management However, unlike the general partners the limited partners are liable for partnership debts only to the amount of their investment in the partnership.

Construction Engineering The Corporation An separate entity formed under STATE law One or more individuals united into one body under a corporate name. Have the right of perpetual succession Separate and distinct from their owners

Construction Engineering Principle Advantages to Corporations Limited liability of its owners (stockholders) Individual shareholders are immune from personal liability for corporate debt. Perpetual life of the company Ease of raising capital Easy provision for multiple ownership Owners can be also be employees

Construction Engineering DISADVANTAGES OF CORPORATIONS 1. The profits of a corporation are subject to BOTH federal and state taxation at the corporate rate. 2. Corporation pays taxes BEFORE any profits can be paid (dividends) to the shareholders 3. The shareholders are then taxed INDIVIDUALLY on any dividends paid to them on a cash basis

Construction Engineering The S Corporation Not restricted in size of business volume, profits or capital Taxed as a partnership rather than a corporation No more than 35 stockholders Limited shareholder liability Easily transfer ownership

Construction Engineering Limited Liability Company (LLC) Advantages Limited liability for all members No taxation as an entity (no double tax) More than one class of stock (unlike S Corp.) No limit to the number of members Disadvantages Fairly complex to set up No “continuity of life” like regular corporation Most common method used by contractors and real estate developers and business today

Construction Engineering Joint Venture Joint Venture happen for two reasons Spread or share risk Pool resources and facilities: People, bonding capacity, cash, equipment Members may be Sole proprietorships Partnerships Corporations But the joint venture itself is a separate business entity

Construction Engineering Joint Venture Common use of Joint Venture General contractors join for one project only to share risk and combine bonding capacity Subcontractors also join for one project only to share risk and combine expertise Was used by real estate developers for years – replaced by LLC