How a construction company organizes for its work depends on number and size of projects, project complexity, and geographical distribution of the work.
Sole Proprietor. This is a simple form of organization for construction contractors.
It is often used by subcontractors, including those licensed in plumbing, electrical, or mechanical work. The advantage of operating as a sole proprietorship is that taxes on profits are much lower for individual owners. But there is the disadvantage of having the personal exposure to potential debts associated with a disastrous job.
Partnership. This is the joint ownership and operation of a company by two or more persons. Each partner, however, is personally liable for all the debts of the partnership. Profits and losses are shared in some manner predetermined by the partners. A partnership comes to an end with the death of one of the partners. (For typical provisions to be included in a partnership agreement, see Richard H. Clough, ‘‘Construction Contracting,’’ John Wiley & Sons, Inc., New York.)
Corporation. This is the most common form of organization used by general contractors. A corporation is an entity that has the power to act as a separate body and enter into contracts. It has perpetual life and is owned by stockholders, each of whom has a share in the profits and losses of the corporation. An important advantage of the corporate form of ownership for general contractors is the absence of personal liability of the stockholders. This is desirable because of the risks of the contracting business, and is more than recompense for the additional burden of taxes that those taking part in corporate ownership must bear. (Small corporations can obtain some relief from Federal taxes, however.)
Corporations formed in one state must obtain, as a foreign corporation, a certificate of authority to do business in other states. This is important when bidding jobs in locations other than the home state of the contractor.
Some general contractor corporations are large enough to find it advantageous to raise capital by becoming public corporations, with shares sold over the counter or on the various stock exchanges. Such corporations publish financial reports yearly for the benefit of the stockholders, as required by law. A study of such reports is often helpful for those engaged in the contracting business.
Limited Liability Company. A form of organization known as the limited liability company (L.L.C.), permitted in most states, combines many of the attributes and advantages of the corporation and of the partnership. For example, the owners of an L.L.C., who are known as ‘‘members’’ after executing the required legal Articles of Organization, enter into an operating agreement in which one of their number is designated as the manager of the company.
The company does not pay taxes on its profits, but rather the individual members have the pro rata share of their percentage of ownership of the company added to their income for taxation purposes. On the other hand, there is no individual liability of any of the members for losses or debts of the company as there would be if the ownership were in the form of a partnership. Additional members may be added to or dropped from the company by a vote or written consent of 100% of all of the members.
No member, other than the manager, has any power or authority to bind the company, unless such a person has been specifically authorized in writing by the manager to act on behalf of the company. A manager may be removed in the event of his or her willful or intentional violation or reckless disregard of the manager’s duties to the company. The manager’s replacement will be selected by the members who originally selected the manager. Such replacement will be decided by a majority vote of the members.
Joint Venture. Often when an individual job is too large to be undertaken by one company, or the risks involved are too great for one company to want to assume (although it may be capable of doing so), a joint venture is formed. This is an association between two or more contracting firms for a particular project. It joins the resources of the venturers, who share the financing and management of the job and the profits or losses in some predetermined manner.
Generally, there are specific reasons for the formation of a joint venture between specific companies. For example, one may possess the equipment and the other the know-how for a particular job. Or one may possess the financing and the other the personnel required to perform the contract. Joint ventures do not bind the members to any debts of the coventurers other than for those obligations incurred for the particular jobs undertaken.
Staff Organization. An organization chart for a typical job by a medium-size general building contracting company is shown in Fig. 17.1. The organization shown is for a company that subcontracts most of its work and is engaged mainly in new construction.