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CE 222/CEM 201Life-Cycle Engineering and Management of Constructed FacilitiesLecture 6Legal StructuresSchool of Civil EngineeringDivision of Construction Engineering and ManagementLegal Structures1Relates to the legal organization of the companyAlso considers the management organization DictatesHow will the firm be taxed Distribution of liability in the event the firm failsState, city, and federal laws that govern firm operationsThe firms ability to raise capital Structure establishes:Areas and levels of responsibility Road map of how members of the firm communicate CE 222/CEM 201 Life-Cycle Engineering and Management of Constructed FacilitiesTypes of Organization2Legal StructuresNature of business activity may point to legal structureProprietorship Partnership Corporations (Public and Privately Held)Joint VentureCE 222/CEM 201 Life-Cycle Engineering and Management of Constructed Facilities3Legal Structure

Legal StructuresSimplest form of legal structure Individual owns and operates the firm Proprietor makes all decisions regarding the firmAssets of the firm held by one person and include personal wealthAll revenue is personal cash revenue All losses or expenses are personal expenses Credit and ability to generate new capital limited by personal assets of the proprietor Liabilities incurred are covered from personal fortuneLife of proprietorship corresponds to that of ownerCE 222/CEM 201 Life-Cycle Engineering and Management of Constructed Facilities4ProprietorshipLegal StructuresSimilar to proprietorship in the way liabilities are transmitted to partnersLiability is spread among several principalsWhy would you want to form a partnership? Capital base of the firm is broadened Control of the firm is divided among General PartnersPartners share profits and losses based on their percentage ownership Are liabilities shared based on this percentage ownership?CE 222/CEM 201 Life-Cycle Engineering and Management of Constructed Facilities5PartnershipLegal StructuresPartnership Exercise 1Given the personal fortunes and percentage of ownership of the three principals listed below, if the firm loses $1,000,000 and must pay this amount to creditors, how will the three principals share the loss?PrincipalsPersonal fortune% ownershipCarol$1,400,00040%Joan$800,00030%Bob$100,00030%Legal StructuresLimited PartnershipProvides a limit to the liability carried by some partnersLimited partner is liable only to the extent of their investmentProvides general partners with a mechanism to attract investors Limited Partners have no voice in the management of the firm There must be at least on general partner in any partnership Limited partnership is harder to form and is subject to more regulation Contribution of the limited partner must be tangibleCE 222/CEM 201 Life-Cycle Engineering and Management of Constructed Facilities7Partnership (Contd)Legal StructuresPartnership Exercise 2Continue from exercise 1. This time a fourth partner, Mike contributes $200,000 and becomes a limited partner with 15% ownership. Information related to personal fortunes and % ownership is updated in the table below. If the firm loses $1,000,000 and must pay this amount to creditors, how will the four principals share the loss?PrincipalsPersonal fortune% ownershipCarol$1,400,00040%Joan$800,00030%Bob$100,00015%Mike (limited partner)$500,00015%Legal StructuresAny partnership is terminated with the death of partnersArrangements can be made to provide for the continuity of the partnershipGeneral partners may pay themselves a salaryPartner Salaries and earnings are both taxableThe action of one partner is binding on all partners

CE 222/CEM 201 Life-Cycle Engineering and Management of Constructed Facilities9Partnership (Contd)Legal StructuresA separate legal entity created as such under the law of the state in which it is charteredCorporations are established by applying to the office of the secretary of stateOffice issues a chartering document and approves the initial issuance of sharesInitial stockholders contribute financial capital, expertise, and intangible assets such as patentsLevel of contribution recognized by the number of shares issued to each stockholder Each share has a par value (face value), a book value, and a traded valueCE 222/CEM 201 Life-Cycle Engineering and Management of Constructed Facilities10CorporationLegal StructuresMost complicated form of ownership to establishCan raise capital through the sale of further stockMost desirable aspect of the corporate structure is the limitation of liability One disadvantage of the corporations is double taxationA structure that avoids double taxation is the Subchapter (Type) S corporation Type S corporations allow income to be taxed personally but provide the limited liability Corporations have continuity independent of the stockholders CE 222/CEM 201 Life-Cycle Engineering and Management of Constructed Facilities11Corporation (Contd)Legal StructuresProfit (p) taxed against the corporation after-corporation-tax profit (p-)p- dividend to stock holders personal income (p--)p-- taxed against the individual after-tax income (p----)CarolJoanBob Corporation has a $100,000 before-tax profit.IRS tax rate for the corporation is 34% on before-tax profit.What is the after-tax profit?Assuming that all after-corporation-tax profit is shared among Carol (40%), Joan (30%), and Bob (30%) and each of them has a personal income tax rate of 25%, what is the net benefits, e.g. what is the total amount of the after-tax income generated from the $100,000 before-tax profit?

Corporation Double-taxation Exercise 1Legal StructuresDouble-taxation is not always badCase 1: Uncle Fudd Proprietorship, profit - $147,000, tax rate 25%, deductions and exemptions - $12,000Case 2: Fudd Associates, Inc., profit - $147,000, salary - $85,000, corporate tax rate 25%, personal tax rate 21%, deductions and exemptions - $12,000Corporation Double-taxation Exercise 2Legal StructuresCE 222/CEM 201 Life-Cycle Engineering and Management of Constructed Facilities14Corporation (Contd)

Legal StructuresCE 222/CEM 201 Life-Cycle Engineering and Management of Constructed Facilities15Comparison of Legal Structures

Legal StructuresJoint VentureThe approach of a group of firms or professionals establishing a team to complete a project two or more companiesLegally established owner deals with the single entity, e.g. the joint ventureExists only for a fixed period of time defined by the duration of the project being undertakenThe legal aspects of joint venture are unique to each project and varies due to special aspects of team partnersA pool of complementary resourcesLegal Structures