Legal Structure

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Legal Structure
CEM 520 CONSTRUCTION CONTRACTING
ADMINISTRATION Module 2.0 Unit 2.1 By MOHAMMED
JALALUDDIN LECTURER CONSTRUCTION ENGINEERING
MANAGEMENT DEPT DEPT
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Presentation Outline

• Definition of Legal Structure
• Types of legal Structure
• Proprietorship
• Partnership
• Corporation
• Comparison of Legal structures
• Advantages disadvantages of Legal structures

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Objectives of Class

• To define legal structure
• To understand different types of legal
  structures and make comparison
• Define general and limited partnerships compare
  with Proprietorship and Corporation

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Legal Structure

• When organizing a company (an entrepreneur who
  has decided to become a construction contractor )
  Two organizational Questions need to be addressed
• One relates to the legal organization of the
  company.
• Definition The legal structure dictates how
  the firm will be taxed, the distribution of
  liability in the event the firm fails, the state,
  city, and laws that govern the firm's operation,
  and the firm's ability to raise capital.
• And the second focuses on the Management
  organization
• Definition Management structure establishes
  the relationship between the project
  participants, together with defining their
  duties, responsibilities and lines of authority
  and lines of communication.

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LEGAL STRUCTURE A. TYPES OF LEGAL STRUCTURE

• LEGAL STRUCTURE TYPES
• Proprietorship
• Partnership
• Corporation
• In any case, the legal organization of a firm
  influences
• Tax ( How a firm will be taxed)
• Liability ( Distribution of liability)
• Capital ( Raise capital)

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Types of Legal Structure

• Sole proprietorship
• Partnership
• General partnership
• Limited partnership
• Limited liability partnership (LLP)
• Corporation

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A. Proprietorship

• The simplest form of legal structure is the
  proprietorship.
• In this form of business ownership, an individual
  owns and operates the firm, retaining personal
  control.
• All revenue to the firm is personal cash revenue
  to the proprietor, and all losses or expenses
  incurred by the firm are personal expenses to the
  proprietor .
• The proprietor is, therefore, taxed as an
  individual and there is not separate taxation of
  the firm.
• Since the owner's capital and that of the firm
  are one and the same, the credit that the firm
  can obtain and its ability to generate new
  capital are limited by the personal assets of the
  proprietor.
• Any liabilities incurred by the firm are the
  owner's liability, and he must cover them from
  his personal fortune.
• Therefore, bankruptcy of the firm is personal
  bankruptcy. Since there is no limitation of
  liability, high-risk businesses do not normally
  use the proprietorship form of structure.

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Advantages of Sole Proprietorship

• Owner is the business no separate legal entity
• Easy and inexpensive to form
• Owner has right to make all management decisions
  concerning the business
• Sole proprietor owns all of the business and has
  the right to receive all of the businesss
  profits
• Sole proprietorship can be easily transferred and
  sold at owners discretion

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Personal Liability of Sole Proprietors

• Sole proprietor bears the entire risk of loss of
  the business
• He or she will lose his or her entire capital
  contribution if the business fails
• Sole proprietor has unlimited personal liability
• Creditors may recover claims against the business
  from the sole proprietors personal assets

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Sole Proprietorships - To Be or Not To Be
23.2

• Advantages
• Ease and low cost of formation.
• Freedom in decision making.
• Ownership of all profits.
• Transfer of ownership is easy.

• Disadvantages
• Limited capital, resources, expertise.
• Unlimited liability for contracts.

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Definition of a General Partnership

• A voluntary association of two or more persons
  created for carrying on a business as co-owners
  for profit

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Formation ofGeneral Partnerships
24.3
Must be two or more people
Must carry on a business
Must act as co-owners
Must operate for a profit
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Formation of General Partnerships

• Express partnership
• General partnership created by words, either
  verbal or written
• Certificate of partnership
• A document that a partnership must file with the
  appropriate state government agency in some
  states to acknowledge that the partnership exists

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Partnership Agreements

• A written partnership agreement should contain
• The firm name
• The names and addresses of the partners
• The principal office of the partnership
• The nature and scope of the partnership business
• The duration of the partnership
• The capital contributions of each partner

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Partnership Agreements

• A written partnership agreement should contain
• The division of profits and losses among the
  partners
• The salaries, if any, to be paid to the partners
• The duties of the partners regarding management
  of
• the partnership
• Limitations, if any, on the authority of partners
  to bind the partnership
• Provision for admission and withdrawal of
  partners from
• the firm
• Provisions for continuing partnership upon
  withdrawal of a partner, death of a partner, or
  other dissolution of the partnership
• Any other provisions deemed relevant by the
  partners

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Duration of Partnership

• Partnership for a term
• A partnership with a fixed duration

• Partnership at will
• A partnership with no fixed duration

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B. Partnership

• If two or three individuals decide to form a
  partnership, the division of ownership is decided
  by the initial contribution to the formation of
  the company on the part of each partner.
• The division of ownership may be based solely on
  the monetary or capital assets contributed by
  each partner.
• The size of a partnership is not limited to two
  persons and may consist of any number of
  partners.
• The partnership is similar to the proprietorship
  in the sense that liabilities of the firm are
  directly transmitted to the partners.
• That is, there is no limitation of liability.
• However, in this case, since there are two or
  more partners, the liability is spread among
  several principals.

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B. Partnership

• Partners share the profits and losses of the
  firm according to their degree of ownership as
  defined in the partnership agreement, but since
  the liability of each of the partners is not
  limited, one partner may carry more liability in
  the case of a major loss.
• The reason for forming a partnership is based on
  the principle of division of risk and pooling of
  management and financial resources.
• Since several persons come together to form a
  partnership, the capital base of the firm is
  broadened to include the personal assets of the
  partners involved.

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Limited Partnership

• A type of partnership that has two types of
  partners
• General partners
• Limited partners

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B. Partnership ( Contd.)

• Limited Partner
• A limited partnership, as the term implies,
  provides a limit to the liability that is carried
  by some partners.
• This concept allows the general partners to
  attract capital resources to the firm.
• The limited partner is liable only to the extent
  of his or her investment
• partner whose only risk is the amount of
  investment, and who is NOT involved in
  decision-making
• General Partner
• Partner whose assets are tied to the company and
  who is involved in decision-making
• The general partners retain the same level of
  control but increase the capital and credit bases
  of the firm by bringing in limited partners.
  There must be at least one general partner in any
  partnership.
• Taxation, in any case, will be on both salary and
  earnings deriving from the operation of the
  partnership.

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Limited Partnership
Debt or obligation owed
Limited partnership
Third party
Capital investment
Limited partner
General partner
Personal liability for partnerships debts and
obligations
Liability limited to capital contribution
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Limited Liability Partnership (LLP)

• A limited liability partnership is a special form
  of partnership where all partners are limited
  partners and there are no general partners

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Limited Liability Partnership (LLP)
Debt or obligation owed
Limited liability partnership (LLP)
Third party
Capital Investment
Limited partner
Limited partner
Limited partner
Liability limited to capital contribution No
personal liability for partnerships debts and
obligations
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C. Corporation

• A corporation is a separate legal entity and is
  created as such under the law of a state
• This form of ownership recognizes the company
  itself as a legal entity and makes only those
  assets that belong to the firm attachable for
  settlement of claims in the event of bankruptcy
  or damage claims
• This allows principals or stockholders in a
  corporation to protect their personal and private
  assets from being called in to settle debts or
  claims arising out of the firm's operation or
  insolvency.
• The level of contribution is recognized by the
  number of shares of stock issued to each of the
  founding stockholders.
• Ownership of company is determined by of stock
  held

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C. Corporation

• The value of shares of stock
• par value - unit used to recognize ownership (1
  per share)
• book value - net worth of the corporation divided
  by number of shares issued
• market value
• value listed on the stock exchange
• indicates what the general public or stock
  traders are willing to pay
• Advantages
• can attract capital by selling stock, rather than
  by borrowing
• has continuity
• Disadvantages
• reduced level of control in management
  decision-making
• restrictions when operating outside the state of
  incorporation (they are foreign outside the
  state)
• A drawback is double taxation (except for a
  subchapter S corporation)
• Closely-held corporation
• One in which the majority of stock is held by a
  small number of people
• Public corporation
• One in which the stock is bought and sold to the
  public at large

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C. Corporation
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Legal Structures Compared

• 7 Major aspects to consider when choosing a legal
  structure for a firm
• Taxation
• Costs associated with the establishment of the
  firm
• Risk and liability
• Continuity of the firm
• Administrative flexibility (decision making)
• Laws constraining operation
• Attraction of capital

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Legal Structures Compared
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CONCLUSION

• LEGAL STRUCTURE TYPES
• Proprietorship
• Partnership
• Corporation
• the legal organization of a firm influences
• 1.Tax ( How a firm will be taxed)
• 2. Liability ( Distribution of liability)
• 3.Capital ( Raise capital)