Construction Engineering 221
Business Ownership
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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
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1. The acronym “ESOP” stands for “Employee
Standard Operating Procedure”.
The correct answer is B - False
ESOP actually stands for Employee Stock
Ownership Plan
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2. Corporations are regulated by the federal
government.
The correct answer is B – False
Corporations are actually regulated by state
government.
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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
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Forms of Business
 Individual Proprietorship (sole ownership)
 Partnership
 Corporation (multiple forms)
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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
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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
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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
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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
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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.
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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.
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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.
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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.
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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)
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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.
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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
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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
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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
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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
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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
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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
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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
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