CHAPTER VII– BUSINESS FUNDAMENTALS

Forms of Business Ownership

◼ Each form of business organization has its own legal, tax
and financial implications A construction contractor
should select the ownership type that is most advantageous
for his circumstances.
◼ Main Forms of Business Ownership:
◼ Proprietorship (77%) owner
one

◼ Partnership (6%) La more partners

◼ Corporation (17%) organization where we have stocks I shares & shareholders
& a CEO I who isn't the owner
◼ Income:

© R. E. Awwad 2
 Individual Proprietorship
◼ One person owns and operates the business:
◼ Provides capital and furnishes all the necessary equipment and property
◼ All business transactions and contracts are made in the owner’s name in case
ofdebt,
he has to sell
his personal
belongings to
Disadvantage has to be
:

liable for all debts

[ ◼ Owner is personally liable for all debts, obligations, and responsibilities of the business cover (no seperation between
his personal income & the
-

◼ No continuity in the event of death of the owner businessowner & business are
one
entity
.
& corporation (personal
tares on

◼ Business income belongs to owner and thus taxed as personal income => here it's considered
personal
Disadvantage
=

◼ No separation between retained and distributed income.

◼ Easiest and least expensive to establish: earest in terms
of regulations & requirements
◼ Maximum degree of freedom from governmental regulations
◼ No legal procedures required except insurance, tax registration, and license.
◼ Decision making power vested in the owner
◼ Can select own hours and work from own home
◼ Advantages:
◼ Possible tax savings
◼ Simplicity of organization
◼ Freedom of action
© R. E. Awwad 3
 General Partnership < Lor more lat least 2)

◼ At least two people pool their resources and abilities to conduct

business together for mutual profit
◼ Formed by contract between partners that states what each partner
contributes and receives from partnership
◼ Profits and losses are shared in proportion to the amount of ownership
specified in agreement & Decision making is NOT based the highest shares
on

◼ Management of business is shared between partners

◼ Advantages versus Proprietorship: -
Capital ,
Pooling skills & expertise
◼ Pooling of resources: working capital, equipment, facilities, time, talents
◼ A partner can act for a partner on vacation or sick

© R. E. Awwad 4
 General Partnership (Cont’d)
◼ A partnership is not recognized as a separate entity from individual
partners: Ones & the business income
entity I that's why categorized personal
are one it's
=>

◼ Business income belongs to partners and is taxed as personal income:

◼ Pays no tax as partnership but must file a form.
though the "partnership" doesn't pay
even

◼ No separation of retained income from distributed income taxes but it still has to be
registered
◼ Each partner is responsible and personally liable for all debts and obligations of
business "Each is liable for all
one
"if partneryou bankrupt the other has to
one
,
one all debts
cover

◼ Sometimes a partnership can act as a legal entity

to
◼ Own property > we
register the partnership
◼ Have employees be a seperate entity /legally
◼ Sue and be sued
◼ Partners are restricted from selling, assigning or mortgaging individual
partnership assets without consent of other parties everything has to be with
agreement
© R. E. Awwad 5
 Establishing a Partnership
◼ Partnership agreement signed by all partners contains:
◼ Name of firm and copartners
◼ Nature and location of business what is the buinen supposed to do
◼ Statement of capital (what each party will contribute) money originally invested (4 %)
◼ Date the enterprise will commence its operations
◼ Designation of services to be rendered by each member, management duties
and restrictions Tasks that each partier will take
care
of
◼ Statement of the respective shares of the several partners in profits and losses
◼ Statement about banking matters, keeping books of account…
◼ Provision for arbitration of disputes how do resolve disputes
we

◼ Designation of the rights of the parties upon dissolution how to distribute everything ?
The agreement can be modified by mutual consent
Agreement notsetin stone
◼

© R. E. Awwad 6
 Responsibility and Liability of a
General Partner
Each partner represents theother & speaks up in the name
◼ Each partner is agent of the others
◼ Each can bind the others in normal business with or without others’ consent
of the partnership
◼ Notice to one partner is notice to all <
one
partner can bind all partners /shouldn'tdecide without
their concent
◼ Partners are individually liable for all debts of the partnership
◼ If partner withdraws from the partnership he is responsible for all
obligations up to time of withdrawal withdrawal future Cones
only saves from
◼ Must publish notice of withdrawal and send to creditors and others to protect himself from
future claims Important to remove all his shoulderclients debte
:
responsibility off comingfor
◼ It is very important that:
◼ Partnership organizes itself to act effectively and to protect the interests of the business
and its partners
◼ Split responsibilities according to abilities, location, interests, and needs

© R. E. Awwad 7
 Dissolution of a Partnership
◼ Partnership automatically dissolves upon death of one partner
◼ Dissolution may result from:
◼ Bankruptcy
◼ Withdrawal of a partner & If partners still want to continue => new
agreement
◼ Mutual consent
◼ Death
◼ Dissolution is not termination
◼ Has no effect on outstanding debts and obligations . Ifwe dissolve the partnership today
&
not liable
◼ Partners are still liable up to dissolution doesn't mean we are
for
merious debte
In settlement of debts: Priority to settle debts
◼
after disolving :

◼ Outside creditors have first priority stricter doesn't care about the business
,

Return loans made by partners 2nd be patient

why ? Because the partner understands the situation
◼ can
,

◼ Return to partners capital invested

◼ Remainder treated as profit and distributed
8
© R. E. Awwad
 Limited Partnership
= General Partnership

◼ A limited partner:
Invests but
run
◼ Invests cash but does not share in operation or control of the business
doesn't
doesn't take part decisions
Part owner: shares in profit or loss of
>
◼

Liable only to the extent of capital contributed The to lose is the

original invest
Advantage
◼ max .

◼ Must not exercise any involvement in partnership management or control;

otherwise will be considered general partner
◼ At least one partner must be a general partner
◼ A partnership is not dissolved upon death of limited partner
◼ Limited partnership is used mainly for obtaining capital:
◼ Better than borrowing from an institution – less pressure and control
◼ Lower priority than lender upon dissolution
why have limiting paitner? Toget capital without paying
a interest on loans
+
Involving them in the business as partner makes them more understandingof the situation
© R. E. Awwad
(flexible 9
&The difference limiting partner's
: name Pr -
P2 - P3
shows in the
agreement &all partners know Sk 20k 30K
about him 15K

Friend

Sub-Partnership 10k Friend is

= no
a

personal
subpartner
liability not partof the agreement
,
a

.Pad Ps mightnot
& even know about Friend

◼ Agreement between a general partner and

an outsider to share in profits and losses
◼ A sub-partner:
◼ is not a member of the firm
◼ performs no active function and has no role in
management
◼ Is not personally liable to creditors of
partnership
© R. E. Awwad 10
 &

Corporation the owner (owner business

Separate entity from
◼ A legal entity under a separate name from its owner(s)
◼ A corporation can:
↑
under contracts => name
ofcorporation
◼ Enter into contracts
◼ Sue and be sued in its own name
◼ be public/private/profit/non-profit/foreign/ domestic
◼ Advantages of a Corporation:
◼ Perpetual life =even
if of the shareholden die the corporation stays
one

Limited liability of owners (stockholders)

only liable with capital anets at risk
◼ =>
no
,

◼ Allows owners to invest in corporation without incurring risk other than their investment can
not do this in general partnership because all personal assets are at risk in each general partnership
Large of
shareholders ◼ Ability to easily aggregate large capital via the large number of stockholders
Multiple ownership – employees can be owners
=>
LargeCapital
◼
employees can buy shars
Corporation is taxed separately from owners =>
Disadvantage
Double taxation
◼ :

◼ Corporation pays corporate income tax on profits Profit of corporation istaned

◼ Owners pay taxes only on distributed income or profit & distributed income is taxed

◼ Retirement benefits are possible 11

© R. E. Awwad
 Corporation (Cont’d)
Harder to start constraints on how much the initial capital should be
,

◼ Disadvantages:
◼ Corporation is regulated by law (each state has corporate code for
obtaining charter and residence requirements)
& usually /CEO President
is a the business
run

◼ Management can be separate from major ownership (managers

may have different agenda from owners and have limited
allegiance to firm) CEO might have personal
=>
gains other than
the business's interest

◼ Higher taxes than proprietorship or partnership

◼ Foreign Corporation: -you
startsomewhere & then expand /outside your country

◼ A corporation is foreign any place outside its state of incorporation

◼ To practice business in a foreign state, the corporation must be
licensed (certified) in the foreign state operate according to state's requir
=>

◼ Corporation pays taxes wherever business is done operating in dubai paytacces =

in dubai
© R. E. Awwad 12
 Stockholders
◼ Corporate ownership resides in stockholders
Corporation owns

◼ Stockholders do not directly own corporate assets them

◼ Stockholders have the right to sue the corporation, share in

declared dividends, share in assets if corporation is

dissolved, enact bylaws for the corporation, and elect
directors Directors elected by shareholders appoint president & treasure
= a president secretary
,
vice ,

◼ Stock dividends can be paid only from earned surplus

stockholders L
manager /president
The
might get
not ◼ Stockholders are not liable for failure or debt Idoesn't but Liable is
is

pay
profit/if have ◼ Stockholders can not act as agents of the corporation (only
we

surplus they do
designated officers can) They can'tspeak in the up of the corporation
name

agent Irepresent)
I do not represent)
© R. E. Awwad
(any employee is an

13
Corporate Directors and Officers
◼ Articles of incorporation provide for:
◼ Annual meetings of stockholders
◼ Periodic meetings of board of directors
◼ Directors must serve the corporation interests with prudence and
reasonable care
◼ Directors appoint four necessary officer positions:
◼ President
◼ Vice-president
◼ Secretary
◼ Treasurer
◼ Officers are agents of the corporation and thus may be held personally
liable for losses due to neglect or misconduct
responsible but doesn' have to
They are cover
up from their own
money
© R. E. Awwad 14
* Difference between regular company &
a a

limited Not s a
liability company: way
to have

legal economic advantages over the traditional

force of busines ownerships

Limited Liability Company (LLC)

I have a tax
benefit not taxed corporation
as a (no double taxation(
* LLC : partners only liable up to the paid in capital
are

◼ Offers legal, tax, and economic advantages over the traditional forms
of business ownership
◼ Combines limited personal liability feature of a corporation and pass-
through tax benefits.
◼ Formed by two or more members with an LLC agreement similar to a
partnership agreement.
◼ It is typically easier to start an LLC than a corporation and it has lower
filing fees
◼ An LLC differs from a corporation in that it has a finite life and can be
dissolved with the death, bankruptcy or retirement of a member.

* If we want to starta corporation but don't have the requirements/ex : required capital
Easier to start , lower
fees
© R. E. Awwad 15
 The Joint Venture
Exactly like a
for project only
partnership but one

◼ It is a special purpose partnership used to pool resources and skills and to

spread the risks
◼ Very common for construction of individual projects huge scale
mo
ects= one contractor
is not
enough
◼ Many of America’s largest structures have been built by joint ventures ( ex: Hoover Dam
was constructed by an association of six companies)
◼ Members of a joint venture can be proprietors, partnerships, or
corporations. Partnership between 2 types
any
◼ Each member of the JV participates in conduct of business according to abilities and to JV
agreement the role each I clear
Agreement
should
specify of very
◼ A joint venture is a separate legal entity that has no value by itself because it
has no assets and no continuity
◼ As with the partnership, responsibilities and duties, contribution by partners,
shares of profit and loss, dispute resolution, limitations of liability, details of
contract administration and project management, termination of agreement,
etc. should be legally established

© R. E. Awwad 16
 The Need for a Company
Organization
◼ A construction business involves a number of separate and diverse
activities such as cost estimation, bidding, contract negotiation,
procurement, project planning and scheduling, material control and
movisionof L

material subs
storage, project safety and supervision, etc. ↳ warhouses

◼ The basic ingredient in this entire process of business management is

the contractor’s company organization in order to achieve the
company objectives. of All

of
these tasks have to be
defined
we can see
hierarchy
all levels
Company
presidentof company top
in a structure where we have the

Organizational
supervision Iwho's
supervising who ?) =
the
Chart
on and then

◼ The contractor needs to define:

◼ A suitable field organization for each of its projects Field Organizational Chart
◼ A general company organization that acts for the total of company operations
◼ It is common practice for the contractor to locate all of its functional
groups together in a central office and to locate needed management
capabilities on a given project site.
© R. E. Awwad 17
Organization Basics /the requirements/partners
Securing the capital important
is

But we also need to have a plan Most important step to start a

company developjob
:

◼ Establish purpose of enterprise positions

What's the
/what the skills that are I need?

of scope services ?

◼ Define overall scope of operations

◼ Set long-term objectives short term reach
longterm expanding
certain quality for product
gulf region
:
: a

into or
a

europe

◼ Establish a general plan of action

Define company organization
◼ Establish functions and duties of its several parts
◼ Determine responsibilities and scope of authority of
each position in the management structure
◼ Define how each company segment interrelates with
the others

© R. E. Awwad 18
 Organization Basics (Cont’d)
◼ The organizational framework of a contractor’s company is responsible
for:
◼ Obtaining construction contracts
◼ Planning, directing and controlling the resources associated with field
operations Material Equipment neededin the
, field
◼ Collecting and managing resulting revenues Studying the financial status
◼ The authority, responsibility and duty of each employee in the company
should be clearly defined who's managing & who's executing
◼ Decision-making people should not be expected to act on every matter
arising within their general jurisdictions but should be referred to
subordinates Check with supervisor then to the CEO (ex) Istart from lower positions & up)
first go
...

go
◼ There is no one organizational pattern that can apply to every
construction firm however, there are certain well-recognized
principles of organization that can be applied by any contracting firm.
© R. E. Awwad 19
 Principles of Organization
◼ An organizational plan defines departments and their responsibilities, their
interdependence, working rules and procedures
different departments
& units communicate This removes confusion, indecision, duplication of efforts and neglect of
together duties
◼ The steps towards developing an effective organizational plan are:
skill

President VP,
,
...

(Organizational chart)
Advertise
job positions & hive people
Horizontal lines I lines ofsupervision are verticall

Having personnel policy

a

© R. E. Awwad 20
 List of Duties for a Construction
Company
Different Departments
President Vice president,
* Salaries of people working
,
Secretary Treauner
,
here is a G& A
expense
(Manager

© R. E. Awwad 21
List of Duties for a Construction
Company (Cont’d)
People taking care of bids ,
project evaluating

© R. E. Awwad 22
List of Duties for a Construction
Company (Cont’d)
Responsible for everything on site
After the bid ,
planning the project
(office

Warehouses

23
 Next Step :

Division of Duties
◼ The next step after defining the list of duties of an
organization is to subdivide them into groups which
become the assigned responsibilities of a single individual.
job positions↳

◼ Example: In case of a small partnership consisting of two

partners and an employed bookkeeper, the duties will be
divided as follows:
◼ Both partners in charge of executive duties
◼ The office partner responsible for all duties related to procurement and
estimating and supervision of the bookkeeper
◼ The field partner’s duties are related to engineering, construction, and yard
facilities
◼ The bookkeeper performs the accounting and payroll tasks

© R. E. Awwad 24
Organizational Structure
◼ Employment positions are divided into departments each
responsible for a specialized function (horizontal division)
◼ Each department is assigned a specific area of
responsibility and is headed by a manager who has the
necessary training, experience and skills
◼ Each department is then divided vertically to establish
lines of supervision
◼ An organization chart presents the company’s
organizational diagram showing every position of
responsibility and all lines of supervision and authority

© R. E. Awwad 25
Organization Chart

© R. E. Awwad 26
Organization Chart (Cont’d)

VICE-PRESIDENT

© R. E. Awwad 27
 Staffing, Responsibility and
Authority, Communication
◼ It is very important to select the right person for each position
◼ In the construction industry, supervisory personnel are typically selected on the basis of their
field construction knowledge and managerial ability.
◼ Authority accompanied by responsibility must apply at all operating levels
◼ Authority is the power to act and make decisions that are necessary in the process of meeting
one’s assigned responsibilities
They respond to their supervisor butstill have a margin ofauthority
◼ Proper functioning of a business depends on a good information exchange
system within the firm itself and with external agencies The flow ofinformation between depart .

Ihas to be clear procedur

very important
i

Periodic meetings of various groups within company management are standard...)

,

necessary because they allow for exchange of ideas, resolution of conflicts,

and planning for future courses of action. Important togather employees & tell them what's happening
◼ Bulletin boards or the company publication help circulate company information of general
interest such as firm’s safety records, new projects, personnel changes, company policies
Many companies have ajournal to reporton the activities events projects
, ,
..

* Most important thing to consider when

choosing a
manager
:
managerial
& communication skills I knows how to make
things happen © R. E. Awwad 28
 The Manual of Policies and
Procedures
Every company has a
(dayslunch
personnel policy
of vacation innance, overtime payments ...
hour promotion(
,
,

Decision making is the essence of management

,

◼ Some situations are unique and must be handled separately and individually
conflicts things should standardized)
how to resolve problems
I that
* be
And some other situations are standard and recurring
ex: ,
new
,

◼ we don't know or have procedure to solve require

go managers
a us to to

Company rules and regulations or policies serve as guides for action by all
levels of company management
◼ Operating written procedures establish general rules governing Employees must be
communications, the flow of paperwork and other routine operations familiar
with these
policies
↑

◼ Ensure uniformity of action, help in training personnel, and reduce the need for close
supervision
◼ The company manual should also cover routine company reports
concerning project costs, accident experience, current financial status, cash
projections and others
◼ Each company should prepare and distribute an employee handbook that
describes personnel policies
29
© R. E. Awwad
The Operating Chart
To know
for each task who's responsible for it

© R. E. Awwad 30
 A -
> P

-12
Pr P2 T3
5000 15000 20000 30000

I
B10000 B is a sub partner

ex : Pr 60 30 %
they
200K
haveSoko
a ok
paye
150K Pr 3
%so

Pr 100 50 % 100K 250k 100k

P3 48 20 % 150K 100k 100k P220/so

PC = 200