ACH 218 Lecture 03 (Organizational Structure) Part1


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ACH 218 Lecture 03 (Organizational Structure) Part1

  1. 1. Organizational Structure of Construction Companies Legal Organization Management Organization
  2. 2. <ul><li>When a construction contracting company is being developed, the prospective entrepreneur is making decisions on how best to organize the company. Questions are raised regarding profitability goals, control of business and technical functions. </li></ul><ul><li>Two organizational issues are contemplated: </li></ul><ul><ul><ul><ul><ul><li>Legal Organization </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Management Organization </li></ul></ul></ul></ul></ul>
  3. 3. Legal Organization Types of Legal Structures
  4. 4. Legal Organization <ul><li>Usual Forms of Business Ownership: </li></ul><ul><ul><li>SOLE PROPRIETORSHIP </li></ul></ul><ul><ul><li>PARTNERSHIP </li></ul></ul><ul><ul><ul><li>General Partnership </li></ul></ul></ul><ul><ul><ul><li>Limited Partnership </li></ul></ul></ul><ul><ul><ul><li>Sub Partnership </li></ul></ul></ul><ul><ul><li>CORPORATION </li></ul></ul><ul><ul><ul><li>Foreign Corporation </li></ul></ul></ul><ul><ul><ul><li>Public Corporation </li></ul></ul></ul><ul><ul><ul><li>S Corporation </li></ul></ul></ul>
  5. 5. Legal Organization <ul><li>OTHER Forms of Business Ownership: </li></ul><ul><ul><li>EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) </li></ul></ul><ul><ul><li>LIMITED LIABILITY COMPANY (LLC) </li></ul></ul><ul><ul><li>JOINT VENTURE </li></ul></ul>Each form of business organization has its own LEGAL , TAX and  FINANCIAL implications.
  6. 6. Legal Organization Sole Proprietorship <ul><li>One person responsible for owning and operating the business under their own name or company name </li></ul><ul><ul><li>Provides the necessary capital </li></ul></ul><ul><ul><li>Furnishes all the necessary equipment and property </li></ul></ul><ul><li>No major legal procedures required except for </li></ul><ul><ul><li>Obtaining required insurance </li></ul></ul><ul><ul><li>Registration with appropriate tax authorities </li></ul></ul><ul><ul><li>Possible licensure as a contractor </li></ul></ul><ul><li>Owner can transfer ownership as he or she pleases </li></ul>
  7. 7. Legal Organization Sole Proprietorship <ul><li>ADVANTAGES </li></ul><ul><li>Easiest and least expensive procedure in establishing and administrating a business </li></ul><ul><li>Any and all decisions are made unilaterally and acted upon when chosen </li></ul><ul><li>Possible tax savings </li></ul><ul><li>Simple organizational structure </li></ul><ul><li>No legal formalities barring termination of the business </li></ul><ul><li>DISADVANTAGES </li></ul><ul><li>Owner is PERSONALLY liable for all debts, obligations and responsibilities of the business </li></ul><ul><li>Liability is unlimited; extended to personal assets </li></ul><ul><li>Owner is responsible for contributions to future retirement funds </li></ul><ul><li>No continuity in the event of owner’s death </li></ul><ul><ul><li>Unless directed otherwise in Last Will and Testament </li></ul></ul><ul><li>Money is supplied through personal contribution, loan or sale of company assets ONLY </li></ul><ul><li>Pays income taxes at individual rates based upon full earnings of the business, regardless of use of profits </li></ul>
  8. 8. Legal Organization General Partnership <ul><li>Unincorporated association of two or more people who enter into and carry on a business for mutual profit </li></ul><ul><li>Each partner makes a contribution to the business and shares in the management responsibility </li></ul><ul><li>Profits and losses are allocated in the same proportion as the ratio of ownership </li></ul><ul><ul><li>Unless no prior agreement states as such, then partners share equally in profits and losses, regardless of investment </li></ul></ul><ul><li>Partnership agreements are bound to the laws of the jurisdiction in which the partnership is formed </li></ul><ul><ul><li>Uniform Partnership Act </li></ul></ul>
  9. 9. Legal Organization General Partnership <ul><li>ADVANTAGES </li></ul><ul><li>Concentrated assets and personal credit, equipment, facilities, and individual talents </li></ul><ul><li>Increased bonding capacity </li></ul><ul><li>Each general partner has an equal right to participate in the management and control of the business (without a partnership agreement) </li></ul><ul><li>Liability is shared, regardless of investment </li></ul><ul><li>Partners are taxed on a individual basis based upon their allocated shares of the partnership’s profits </li></ul><ul><li>DISADVANTAGES </li></ul><ul><li>Liability is extended to personal assets </li></ul><ul><li>Liability is shared regardless of co-partner’s wrongdoing </li></ul><ul><li>Partnership terminates upon the death, disability, or withdrawal of any one partner </li></ul><ul><ul><li>Unless partnership agreement states that share of the departed partner will be purchased by the remaining partners </li></ul></ul><ul><li>Partners are responsible for contributions to future retirement funds </li></ul>
  10. 10. Legal Organization Limited Partnership <ul><li>A limited partner contributes cash or property to the business and shares in the profits or losses BUT has no say or vote in matters of management </li></ul><ul><ul><li>The “Silent” Partner </li></ul></ul><ul><li>Limited partners are only liable to the amount of their investments; immune to personal liability </li></ul><ul><ul><li>Name must not be used as a part of firm name </li></ul></ul><ul><ul><li>Must not participate in management of business </li></ul></ul><ul><li>Used primarily as a means of raising capital without individual burden of personal investment </li></ul><ul><ul><li>Preferable over borrowing funds from bank </li></ul></ul>
  11. 11. Legal Organization Limited Partnership <ul><li>Limited partnerships may be formed by two or more persons, at least one must be a general partner </li></ul><ul><ul><li>These agreements are also bound to the laws of the jurisdiction in which the partnership is formed </li></ul></ul><ul><ul><ul><li>Uniform Limited Partnership Act </li></ul></ul></ul><ul><li>Limited partners are taxed at individual rates based upon their investment </li></ul><ul><li>Death, illness or incompetence of the limited partner has no bearing of the vitality of the partnership </li></ul>
  12. 12. Legal Organization Sub Partnership <ul><li>A general partner enters into an agreement with an outsider (the subpartner) </li></ul><ul><ul><li>The subpartner will share in some designated way the general partner’s profits and losses </li></ul></ul><ul><ul><li>Subpartner is not a member of the business </li></ul></ul><ul><ul><ul><li>Performs no active function </li></ul></ul></ul><ul><ul><ul><li>Does not participate in management </li></ul></ul></ul><ul><ul><ul><li>Has no contractual relationship with other partners </li></ul></ul></ul><ul><li>Acts as a vehicle for capital in the interest of that general partner only </li></ul><ul><ul><li>Therefore, there is no personal liability to the partnership </li></ul></ul>
  13. 13. Legal Organization Corporation <ul><li>Corporation is an entity, created by law, that is composed of one or more individuals united into one entity under a corporate name </li></ul><ul><ul><li>It is separate and distinct from its owners (the stockholders) </li></ul></ul><ul><li>Corporations own real and personal property under their own individual name </li></ul><ul><li>Incorporation of the entity is filed within the state of domicile (known as domestic corporation) </li></ul><ul><li>Several different classifications </li></ul><ul><ul><li>Public and Private  Profit and Nonprofit </li></ul></ul><ul><ul><li>Quasipublic  Foreign and Domestic </li></ul></ul>
  14. 14. Legal Organization Corporation <ul><li>ADVANTAGES </li></ul><ul><li>Limited liability of its owners; does not extend pass the corporation boundary </li></ul><ul><li>Perpetual life of the company, regardless of death, illness or incompetence </li></ul><ul><li>Ease of raising capital </li></ul><ul><li>Easy provision for multiple ownership </li></ul><ul><li>Owners only pay taxes on profits (dividends) actually received </li></ul><ul><li>Owners can be employees of the corporation </li></ul><ul><li>A Board of Directors are primarily responsible for management and control </li></ul><ul><li>Can offer better medical and retirement benefit options (fringe benefits) </li></ul><ul><li>Shares of stocks can be completely transferable without permission from other stockholders (public corporation only, some restrictions apply) </li></ul><ul><li>DISADVANTAGES </li></ul><ul><li>Bound by the state laws and regulations in which incorporation is filed </li></ul><ul><ul><li>Depending on state’s charter laws, this could be good or bad </li></ul></ul><ul><li>Vast amount of paperwork must be filed to become incorporated </li></ul><ul><ul><li>High fees paid to the state to start the incorporation process </li></ul></ul><ul><li>Subject to double taxation </li></ul><ul><ul><li>Taxed as a corporation, then taxed on individual incomes and dividends </li></ul></ul>
  15. 15. Legal Organization Foreign Corporation <ul><li>A corporation that extends its operations beyond the borders of its state of incorporation </li></ul><ul><ul><li>Must be applied for and receive certification to do business in that given state </li></ul></ul><ul><ul><li>It is unlawful to perform operations in that given state until that corporation has been certified to business in that state </li></ul></ul><ul><ul><li>The corporation is subject to the laws and regulations to that given state as well as the state of original incorporation </li></ul></ul><ul><li>Sometimes companies seek incorporation in other states merely for more favorable corporation laws </li></ul><ul><ul><li>But maintain residence in another state; still need to be certified as a foreign corporation </li></ul></ul>
  16. 16. Legal Organization Public Corporation <ul><li>When a corporation’s stock can be bought, sold or held by anybody that has an interest in the company </li></ul><ul><li>Two type of stock ownership </li></ul><ul><ul><li>Common </li></ul></ul><ul><ul><ul><li>Generally entitles owners to voting privileges </li></ul></ul></ul><ul><ul><ul><li>Possible for greater ultimate profits to its owners </li></ul></ul></ul><ul><ul><li>Preferred </li></ul></ul><ul><ul><ul><li>Subject to less risk than common stock </li></ul></ul></ul><ul><ul><ul><ul><li>Certain preference as to dividends and distribution of assets on liquidation of the corporation </li></ul></ul></ul></ul><ul><ul><ul><li>Carries no voting privileges </li></ul></ul></ul>
  17. 17. Legal Organization S Corporation <ul><li>All the benefits of a general, for-profit corporation, but taxed as a partnership or sole proprietorship. </li></ul><ul><ul><li>Income is &quot;passed-through&quot; to the shareholders for purposes of computing tax liability </li></ul></ul><ul><ul><li>Must meet certain IRS criteria </li></ul></ul><ul><ul><ul><li>Closely held corporation with no more than 35 stockholders </li></ul></ul></ul><ul><ul><ul><li>Stockholders must be U.S. citizens, estates or trusts </li></ul></ul></ul>
  18. 18. Legal Organization S Corporation <ul><li>ADVANTAGES </li></ul><ul><li>Limited shareholder liability </li></ul><ul><li>Ability for easy transfer of ownership </li></ul><ul><li>Beneficial in early years of business when operating losses occur and equipment must be acquired </li></ul><ul><li>Corporate profits and losses are taxed directly on the shareholder’s personal income instead of a corporate level </li></ul><ul><ul><li>No double taxation </li></ul></ul><ul><li>DISADVANTAGES </li></ul><ul><li>Stockholders must agree to S-Corporation status with a majority vote </li></ul><ul><li>Once status is terminated, can not re-elect S-status for five years </li></ul><ul><li>Can not be done in publicly held or non-profit corporations </li></ul><ul><li>S Corporation shareholders are taxed based on their pro-rata share of corporate income regardless of whether the corporation actually distributes that income to its shareholder </li></ul><ul><ul><li>Your company makes $200k. If you draw $50k as your personal income and re-invest the remaining $150k, you will be taxed on the $200k </li></ul></ul>
  19. 19. Legal Organization Employee Stock Ownership Plan (ESOP) <ul><li>A deferred compensation to employees consisting of investing primarily in the stock of the employer corporation and funded by tax-exempt contributions made by the employer. </li></ul><ul><ul><li>Employees pay no tax on their stock ownership until they withdraw from the plan </li></ul></ul><ul><ul><li>Tax-advantageous way to transfer ownership in a closely-held corporation </li></ul></ul><ul><li>Similar to profit-sharing or stock bonuses </li></ul><ul><ul><li>But invests its assets primarily in company stock </li></ul></ul>
  20. 20. Legal Organization Employee Stock Ownership Plan (ESOP) <ul><li>Benefits both employer and employees </li></ul><ul><li>Accomplishes different purposes </li></ul><ul><ul><li>Promotes company growth by providing a new source of equity capital </li></ul></ul><ul><ul><li>Improves benefits for long-term employees </li></ul></ul><ul><ul><li>Allows the retirement of company owners without selling stock; transfers ownership of stock to others in plan </li></ul></ul><ul><ul><li>Allows employer to determine the quantity of stock to be divested and the rate at which it will be sold to the employees </li></ul></ul>
  21. 21. Legal Organization Limited Liability Company (LLC) <ul><li>Hybrid between a partnership and a Corporation </li></ul><ul><ul><li>Combines the &quot;pass-through&quot; treatment of a partnership with the limited liability accorded to corporate shareholders </li></ul></ul><ul><li>Must be formed by two or more members with an LLC agreement; becomes a separate legal entity </li></ul><ul><ul><li>Members must enter into an Operating Agreement </li></ul></ul><ul><li>Not required to have stock ownership </li></ul><ul><li>Members are taxed upon the personal incomes in the company </li></ul>
  22. 22. Legal Organization Joint Venture <ul><li>A General Partnership typically formed to undertake a particular business transaction or project rather than one intended to continue indefinitely </li></ul><ul><li>Two or more contracting firms unite forces </li></ul><ul><ul><li>Members can be a combination of sole proprietorship, partnership or corporation </li></ul></ul><ul><ul><li>Joint venture itself is treated as a separate business entity </li></ul></ul><ul><li>Spreads the risks between the joint members and pools each of their resources to handle a large project </li></ul>
  23. 23. Legal Organization Joint Venture <ul><li>A joint venture may be sought in the following: </li></ul><ul><ul><li>When a project is too large for an individual company to handle </li></ul></ul><ul><ul><li>When a public-sector project requires part minority status </li></ul></ul><ul><ul><li>When a contractor is contemplating work in a new geographical area or a new discipline </li></ul></ul><ul><li>All entities entering into the joint venture are individually liable for the performance of the entire contract </li></ul><ul><ul><li>Shares in the profits and losses equally (unless agreement state otherwise) </li></ul></ul>
  24. 24. Legal Organization Joint Venture <ul><li>The participants enter into a written agreement that defines the aims and objectives of the association </li></ul><ul><li>Clearly delineates matters such as: </li></ul><ul><ul><li>Advance of working capital </li></ul></ul><ul><ul><li>Obligations and rights of each party </li></ul></ul><ul><ul><li>The percentage interest of each party </li></ul></ul><ul><ul><li>Which contractor will play the leadership role in the project </li></ul></ul><ul><ul><li>Limitations of liability </li></ul></ul><ul><ul><li>Settlement of disputes among the co-ventures </li></ul></ul><ul><ul><li>Division of profits and losses </li></ul></ul><ul><ul><li>Specific responsibilities and contributions of the individual parties </li></ul></ul>
  25. 25. Legal Organization Joint Venture <ul><li>The participants enter into a written agreement that defines the aims and objectives of the association </li></ul><ul><li>Clearly delineates matters such as: </li></ul><ul><ul><li>Details of contract administration and project management </li></ul></ul><ul><ul><li>Supervision of accounting and purchasing </li></ul></ul><ul><ul><li>Procedure in case co-venturer defaults on its commitments </li></ul></ul><ul><ul><li>Termination of the agreement </li></ul></ul><ul><li>For a joint venture to exist legally, there must be: </li></ul><ul><ul><li>A contract between the co-venturing parties </li></ul></ul><ul><ul><li>A common purpose </li></ul></ul><ul><ul><li>A community of interest </li></ul></ul><ul><ul><li>An equal right of control </li></ul></ul>
  26. 26. Homework A short essay: Based upon the types of legal entities that can be formed in ownership of a company, what type of legal entity would you enlist for your own construction company? State the reasons why; be specific and give intelligent, honest answers. Advice: You should do a little more research on each form of business to fully support your answer. See discussion page for due date