View Full December PDF Issue - Utility Contractor Online

Eight Ways to
Protect Your
Construction
Company
Make Sure Your Business Decisions
Match Up with Proper Legal Compliance
By Paul Tonella and Benjamin Greenberg
All contractors are facing difficult times. While minor
mistakes can doom a bid in this economy of
increased competition for scarcer work, the smart
contractor will pay as much attention to his or her
business practices as to bidding and construction methods.
Following is a list of legal topics regarding the other aspect of
construction — sound business legal strategy.
1. Choose the Right Entity
Limiting your personal liability is critical. All forms of business
organizations have their strengths and weaknesses. A sole proprietorship
is the least complex and least expensive, but it has the
most risk of liability for the owner. For an owner also desirous of
protecting personal assets, it can be a dangerous choice. For this
reason we always recommend setting up a business in a limited
liability form.
LLC’s and Corporations are more complex and cost additional
administrative time and fees. The single most important characteristic
of these limited liability entities is their shield of liability for the
owners. Provided an owner observes the formalities required by law,
this shield should not be able to be breached, allowing the owner
to safely accumulate wealth outside of the business. Regardless of
the form — observing good corporate practices, regular meetings
of directors or managers, keeping detailed minutes of meetings and
otherwise — complying with the formalities will help keep your
limited liability shield intact.
As companies grow and desire to expand their capacity for bidding
and winning either larger jobs or jobs with specific technical
issues, they will be faced with the choice of entering into joint ventures
with other entities. Unless created as an LLC, a joint venture
relationship will be treated as a partnership under state law. Partnerships
are easy to form and maintain under Washington law (at
least) and do not even require a written agreement; however, all
partners are typically liable for the obligations incurred by the partnership.
Therefore a careful understanding of the bid requirements,
24 Utility Contractor | December 2011
each party’s insurance and bonding coverage and capacity and balance
sheet health is important in answering the question — should
I be a partner in a partnership or a member of an LLC?
2. Separate Ownership of Operations
A company should consider forming separate business entities
(using the guidance above for each entity) for operations, holding
equipment and, if applicable, office ownership. An operational
entity should, among other things, handle the business of entering
into contracts with owners and the various subcontractors, suppliers
and other third party vendors. A separate entity should buy
most or all equipment and lease the equipment to the operational
entity. Finally, any building or office space that is purchased should
be owned by an entity separate from the previous agreements and
leased to the operational entity. An important advantage of this
practice occurs in the case of a judgment being rendered against
the operational entity. In this circumstance, if properly organized
and operated, the assets of the other entities cannot be touched.
3. Properly Document Infusions of Cash
Owners generally fund working capital needs of their companies
through two ways — by making capital contributions or through
lending. There are large advantages to using the latter. In case the
company fails, the owner may have an interest in the company assets
ahead of other creditors. However, in order for this to occur, any
loan should be properly documented at the time it is made, and in
order to obtain priority over the business’ other general unsecured
creditors , it should be secured by company assets through a written
security agreement and proper state filings and recordings.
4. Work Toward Consistency in Your
Contracts
A company will enter into numerous agreements. A few examples
are: construction contracts, loan agreements, employment
agreements and vendor agreements. Consistency in clauses across