Structuring A Construction Business
As an owner of a construction company, one of the most important decisions that you must make is to determine how your company will be structured. The type of business organization that you select can have a large impact on your autonomy and flexibility as a business owner, as well as your duties and expectations within the construction field. Construction law experts at Warner, Sechrest & Butts, P.A. can help you select the most appropriate business organization structure for your construction company.
Construction Law Attorneys for Business Organizations
The business organization and/or structure of a construction company provides the template for governance within the company for all levels of the employment hierarchy. A construction attorney in Gainesville, FL, can help you weigh the pros and cons of varying business structures to make decisions for your company. There are unlimited possibilities about the unique legal configurations of a business. The structure selected for your construction company may influence:
- The rights and responsibilities granted to partners in the company's ownership;
- Autonomous control and flexibility;
- Personal liability; and
- Methods used to earn, analyze, account for, and distribute finances.
Business owners seeking to determine an organizational structure should answer the following questions:
- How big do you want your construction company to become?
- How much control, autonomy, and flexibility is important to you as a business owner?
- What are your tax considerations? How much money in taxes are you willing to pay on behalf of your construction company?
- What is the possibility that your construction company will be sued? What are the company's risks and liabilities?
- How rigid of a business structure are you willing to accept?
- How much profit do you expect your company will generate? How much debt do you expect will accumulate?
- Are you, or could you potentially be, interested in reinvesting, or buying and merging smaller companies?
- Are you interested in cashing out or funding your business solitarily?
After considering and evaluating these questions, a Gainesville business law firm can offer guidance for adopting a business organization plan. Generally, there are four types of business organizations employed by construction corporations. There are drawbacks, advantages and specific requirements and risks for each possibility.
A sole proprietorship is popular within the interrelated fields of business and construction. It's recommended for owners who desire the most amount of autonomy, control, and flexibility. Sole proprietorship allows an individual to engage in business by way of his/her own name or of an individual entity.
Because a sole proprietor has unlimited freedom over the operation of the construction company, there are fewer formalities required. A sole proprietor may only have to register his/her name, or the fictitious entity, with the Secretary of State and post an ad in the newspaper.
Owners should understand that because a sole proprietor operates independently, there may be some drawbacks. For example, the sole proprietor operates off of his/her own funds and earnings, which taxable up to 15.2 percent. A sole proprietor is responsible for debts accrued, damaged assessments, and general liability. There is not a protective form of insurance — even workers’ compensation is inapplicable — that prevents a sole proprietor from being responsible for everything that occurs. Because construction companies encounter risks such as personal injury claims and/or lawsuits, contract disputes, and catastrophic failures, it places an individual and/or entity in a vulnerable state. The funds of the company are limited to the amount the sole proprietor earns and/or is able to contribute. With the threat of risks and only one source of funding, the capital growth of the constriction company may become stagnant or decrease.
Business owners craving independence and control over their construction company should be sure that they, and their respective companies, have the financial strength to survive a sole proprietorship. It's suggested to contact an experienced business law attorney in Gainesville, FL to review your company's finances to measure and evaluate the company’s ability to succeed in today's evolving market with a sole proprietor.
A general partnership is common within the construction field. Two or more individuals merge together to combine assets and skills to engage in business for profit. The construction company establishes in names of the partners or a fictitious entity. If two or more owners decide to enter into a partnership under a fictitious entity, they must register the name with the Secretary of State and place a newspaper ad.
General partnerships are generally considered safe because there are more individuals available to contribute ideas and capital, such as income and resources, to the company. The partners share management and new partners may be added over time. This allows for a greater chance of continuity, perpetuity, and growth since multiple partners can contribute additional funds at any given time. Each individual is taxed according to income/earnings and is required to file an annual informational return and a Schedule K-1.
Because general partnerships allow owners to share equal control, there is a merging of risks, debts, and liabilities that partners must share and divide. This is a risk as the consequences for the misjudgment of one partner affects all owners involved. Business lawyers in Gainesville recommend partners enter into a partnership agreement before merging together. This is not a required formality. But, a detailed contract can help to prevent long-term internal struggles at the company by expressing:
- The rights, responsibilities, expectations of each partner;
- How earnings, debts, and income will be fairly distributed;
- The contributions that each partner will make to the company; and
- Detailed instructions on how to handle emergencies and/or unforeseen conflicts.
A business lawyer can review a contract to ensure it includes clauses necessary for the construction field and each partner’s legal rights and contributions have equal protection.
A limited partnership permits individuals to combine their skills and assets to engage in business for profit. Under a limited partnership, a construction company must file a Certificate of Limited Partnership and register its fictitious name with the Secretary of State. Florida law governs a limited partnership and optional limited partnership contracts.
The management of a limited partnership is governed differently. The general partners have ultimate legal control. Limited partners are also restricted in the extent they're allowed to invest and their participation in the company. Typically, the limited partnership requires an annual informational return and each partner is required to file a Schedule K-1. Each individual’s income is taxed in proportion to their unique earnings.
It can be tricky deciding if a limited partnership is appropriate for your construction company. If you desire little control and little liability, this business organization may be the best option for you.
The formal organization of corporations is set up differently. There are several different types of corporations, so it is best to consult a business lawyer in Gainesville, FL about your construction company to ensure that it is taxed and operated according to Florida Business Corporation laws.
There is more formality required with corporate business structures. They are strictly organized according to principle and procedures. Annual fees are applied, and owners must file an Articles of Incorporation. This is a document drafted by a Gainesville attorney establishing the rights and structure of the organization in a timely manner. Depending on the type of corporation, there may be a limited number of shareholders — usually no more than 75 — and class of stock — usually no more than 1. The type of corporation that the construction company forms limits the amount of taxes it's subject to. While some corporations are double taxed, others are not subjected to state taxes because only the personal income of shareholders is taxed. Business owners should contact a business law attorney to be certain of the specific laws that govern taxation over various types of corporations.
Corporations are usually structured with centralized management. This means that a selected team of directors vote on key decisions that govern the company. Meanwhile, appointed offices run everyday operations of the company.
Because of the many parties involved in corporate ownership, shareholders’ levels of liability and contributions are contingent upon their extent of investment in the company. This is both an advantage and a disadvantage. The best thing about corporate business structures is that there is a greater sense of security, instance, and protection. It is far more difficult for a corporation to lose its prominence. Corporations are typically able to successfully defend against lawsuits and are more likely to expand and increase profit and size.
Limited Liability Company
Lastly, a limited liability company allows one or more persons to merge together in efforts to join a business and make a profit. A limited liability company is subject to:
- annual fees (usually $250) per year,
- the terms specified in the filing of an Articles of Organization, and
- operating under a fictitious name that contains L.C. (“Limited Company”).
Management of a limited liability company is governed according to the unique contributions of each member. This means that a partner’s level of control is directly proportional to the level of capital and resources that are invested in the company. Likewise, these partners have no individual liability beyond their investments. In the event that a breach of duty or white collar crime occurs, managers may be subject to heavy liability fees and legal consequences.
A limited liability company can elect to be taxed as a general partnership OR taxed individually depending on each partner’s income and investments in the company. Income is usually taxable up to 2 percent.
The structure of a limited liability company is unique and may not work for everyone. It is best to consult with a business attorney before making a final decision.
Combined Experience in Business & Construction Litigation
At Warner, Sechrest & Butts, our attorneys have combined experience in both business law and construction litigation. We understand what's required to run an effective business while also being sensitive to the unique needs and risks faced by owners within the construction industry. Do not make a decision on the governing structure of your construction company until you consult with our construction law experts. We will help you outweigh the pros and cons of business organizations so that you ultimately select a structure that will help your organization thrive while providing the appropriate level of access, control, and flexibility.
Contact our Gainesville, FL construction law firm today.