1 construction engineering 221 business ownership
TRANSCRIPT
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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