School of Civil Engineering

Division of Construction Engineering and Management

CE 222/CEM 201
Life-Cycle Engineering and Management of
Constructed Facilities
Lecture 6
Legal Structures

 Relates to the legal organization of the company

Also considers the management organization
Dictates
How will the firm be taxed
Distribution of liability in the event the firm fails
State, city, and federal laws that govern firm operations
The firms ability to raise capital

Structure establishes:

Legal Structures

CE 222/CEM 201 Life-Cycle

Engineering and Management of
Constructed Facilities

Types of Organization

Areas and levels of responsibility

Road map of how members of the firm communicate

 Nature of business activity may point to legal

structure

Proprietorship
Partnership
Corporations (Public and Privately Held)
Joint Venture

CE 222/CEM 201 Life-Cycle

Engineering and Management of
Constructed Facilities

Legal Structure

Legal Structures
3

Legal Structures

Simplest form of legal structure

Individual owns and operates the firm
Proprietor makes all decisions regarding the firm
Assets of the firm held by one person and include
personal wealth
All 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 fortune
Life of proprietorship corresponds to that of owner

CE 222/CEM 201 Life-Cycle

Engineering and Management of
Constructed Facilities

Proprietorship

Legal Structures

Similar to proprietorship in the way liabilities are

transmitted to partners
Liability is spread among several principals
Why would you want to form a partnership?
Capital base of the firm is broadened
Control of the firm is divided among General
Partners
Partners 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 Facilities

Partnership

Partnership Exercise 1

Principals

Personal fortune

% ownership

Carol

$1,400,000

40%

Joan

$800,000

30%

Bob

$100,000

30%

Legal Structures

Given 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?

 Limited Partnership

Legal Structures

Provides a limit to the liability carried by some partners

Limited partner is liable only to the extent of their
investment
Provides 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 tangible

CE 222/CEM 201 Life-Cycle

Engineering and Management of
Constructed Facilities

Partnership (Contd)

Partnership Exercise 2

Principals

Personal fortune

% ownership

Carol

$1,400,000

40%

Joan

$800,000

30%

Bob

$100,000

15%

Mike (limited partner)

$500,000

15%

Legal Structures

Continue 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?

Legal Structures

Any partnership is terminated with the death of

partners
Arrangements can be made to provide for the
continuity of the partnership
General partners may pay themselves a salary
Partner Salaries and earnings are both taxable
The action of one partner is binding on all
partners

CE 222/CEM 201 Life-Cycle

Engineering and Management of
Constructed Facilities

Partnership (Contd)

Legal Structures

A separate legal entity created as such under the

law of the state in which it is chartered
Corporations are established by applying to the
office of the secretary of state
Office issues a chartering document and
approves the initial issuance of shares
Initial stockholders contribute financial capital,
expertise, and intangible assets such as patents
Level 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 value

CE 222/CEM 201 Life-Cycle

Engineering and Management of
Constructed Facilities

Corporation

10

Legal Structures

Most complicated form of ownership to establish

Can raise capital through the sale of further stock
Most desirable aspect of the corporate structure
is the limitation of liability
One disadvantage of the corporations is double
taxation
A 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 Facilities

Corporation (Contd)

11

Corporation Double-taxation Exercise 1

Legal Structures

Profit (p) taxed against the corporation aftercorporation-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 2

Legal Structures

Double-taxation is not always bad

Case 1: Uncle Fudd Proprietorship, profit $147,000, tax rate 25%, deductions and
exemptions - $12,000
Case 2: Fudd Associates, Inc., profit - $147,000,
salary - $85,000, corporate tax rate 25%,
personal tax rate 21%, deductions and
exemptions - $12,000

CE 222/CEM 201 Life-Cycle

Engineering and Management of
Constructed Facilities

Corporation (Contd)

Legal Structures
14

CE 222/CEM 201 Life-Cycle

Engineering and Management of
Constructed Facilities

Comparison of Legal Structures

Legal Structures
15

Joint Venture

Legal Structures

The approach of a group of firms or professionals

establishing a team to complete a project two or
more companies
Legally established owner deals with the single
entity, e.g. the joint venture
Exists only for a fixed period of time defined by
the duration of the project being undertaken
The legal aspects of joint venture are unique to
each project and varies due to special aspects of
team partners
A pool of complementary resources