1 Construction Engineering 221 Business Ownership.

1Construction Engineering 221

Construction Engineering 221

Business Ownership

Construction Engineering 221 2

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


1. The acronym “ESOP” stands for “Employee Standard Operating Procedure”.

The correct answer is B - False

ESOP actually stands for Employee Stock Ownership Plan


2. Corporations are regulated by the federal government. The correct answer is B – False

Corporations are actually regulated by state government.


3. 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


Forms of Business

Individual Proprietorship (sole ownership)

Partnership

Corporation (multiple forms)


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 assets

Taxed at normal individual rates (15% to 39.5%) Also pays Federal Self-Employment Tax Losses can offset other taxable income


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


Example

John Kress operates a home improvement service as a sole proprietorship. With the help of an employee, John installed a new roof on an old house. During a subsequent rainstorm, the new roof leaked causing $30,000 in damage to the house and its contents. John's liability insurance covering his business was limited to $25,000 per project. John will be forced to pay $5,000 ($30,000 less $25,000) out of his own personal assets. He is UNDER-INSURED


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


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.


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.


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.



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.



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)


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.


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


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


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


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


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


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


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

1 Construction Engineering 221 Business Ownership.

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