Why should a contractor create multiple corporations\LLCs?

A question that is often asked is why should I as a business owner have multiple business corporations or LLC. I often use multiple entities to shift risk, distribute income from certain assets to selected owners and create simplified way for managment to gain ownership on a limited basis. My succession planning mentor John Brown of the Business Enterprise Institute, Inc. explains it this way:

"The fundamental purposes for creating multiple entities for your business owner clients may include:

• Minimizing or shifting taxes that a company is required to pay.
• Minimizing or shifting the risks that are associated with business operations.
• Managing income distribution to all of the individuals who are involved in the business.
• Connecting income to the performance of the business.
• Connecting operations with ownership.

Particularly, the strategy of creating multiple entities can be most effective in situations where business owners want to provide income to young children, deduct premiums for long-term care insurance, wind down a C Corporation, pay for life insurance funding a buy-sell agreement, include employees in ownership, and provide liability protection to the core business."

With your end tax planning it is a good thing to talk to your attorney and CPA about the value to undertaking a new business entity!

Common Myths When Selling Your Company

Another nice article by my friends at Vercor...this article is courtesy of Mark Jordan:

"Many people hesitate when contemplating the sale of their company. Without first hand experience, many business owners buy into numerous myths or misconceptions related to selling a company. Consider some of the more well known myths and their corresponding clarifications.

Jobs Are Jeopardized
The most common belief when selling a company is that the jobs of employees will be lost under the new employer. This is far from the truth. Financial and strategic buyers, in fact, do not like to disturb the inner workings of a company at all. Fiddling with a company will absorb resources and substituting a large employee force is not an easy option. Furthermore, a company’s existing staff is experienced in working in the various sections of the business. Buyers are unlikely to tamper with an experienced staff and see them as a bonus rather than a liability. Therefore, jobs of the current employees of the target company are generally secure. The one exception is mediocre employees who may find that they need to pick up the pace to ensure longevity.

All or Nothing
Many business owners believe that need to sell all of their company or none at all. In reality, there are numerous ways to exit a company and one may decide to choose between any of them. The seller could opt for an outright sale, plan a merger, decide to go public or even sell part of the company. With such varied options available, it is imperative to be certain which exit form is most suitable to the seller. For this purpose, the seller must analyze the reason for the exit and then, in consultation with their adviser, decide upon the most appropriate course of action. 

Public Knowledge
Most entrepreneurs who decide to sell their companies fear that the sale shall be public knowledge. In reality, the seller has extensive control of who receives confidential information. Most investment banks go to great lengths to keep the sale of a company under cover. The key is a strong confidentiality agreement - one that does not unduly hamper the buyer, but one that does protect the seller’s interests. The most common mistake occurs when a seller handles a transaction himself or herself. The minute a seller talks to a buyer and says his company may be for sale is the minute it becomes public knowledge. On the other hand, when an investment banker is in the loop they are able to provide blind executive summaries that protect the identity of the seller.

Selling a Company Is Simply a Matter of Finding the Right Buyer
Selling a company is not an easy job. Most who attempt it on their own experience a rude awakening. Managing a transaction is a complicated process and finding the right buyer is simply one part of it. Researching the universe of prospects, assembling the deal book, conducting the marketing outreach and managing the due diligence process are all areas that require detailed and professional attention. 

Any Buyer Will Do
When seeking an exit, many sellers believe any buyer will be suitable. Price is not the only driving force in a deal. Therefore, just any buyer is not suitable for any seller. The first step is reaching clarity on one's objectives. If you want to be satisfied post closing, you need to find buyers that are in alignment with your desires. The more buyers you have to deal with, the greater likelihood the right buyer will come to the surface.

Even more myths concerning the sale of a business exist, but these are the most prevalent. Educating yourself on them and avoiding all misconceptions will enable you to make a sound decision concerning the sale of your business. "

_________________________________________________________________________

Let me add to the list...in the construction world you probably know who your buyer is or at least the potential list of buyers to draw upon......industry trade associations will tell you this and most of the intermediaries I have hired over the years would typically start by looking at the industry in which you work to determine a potential buyer for your business!

Finding the Right Buyer for Your Business

Mark Jordan of Vercor has a nice article about this subject:

Finding the Right Buyer for Your Business

by Mark Jordan

Selling a business is a time-consuming task. From preparing the business for the sale to finding the right professionals to assist you through the process, there are many options to consider and choices to make. One important consideration is selecting the right buyer for your company.

When making such a choice, it is important to understand the different types of buyers and know what issues each type brings to the table.

Financial Buyers

One of the most common business buyers, a financial buyer can be an individual or investment group who purchases companies with the intent of exiting them within a few years. For the financial business buyer, the most important aspect of the sale is the return on investment; they want to make the most amount of money with the least amount of invested capital. The financial buyer usually tries to obtain financing on a significant portion of the purchase price. Often, these buyers will not pay based on projections, and they are unlikely to offer top dollar for your business relative to a strategic buyer. 

Financial buyers are typically not interested in being involved in the daily operations of the business, so they will thoroughly analyze financial statements and assets to make sure your company is well managed. This type of buyer may be best for the business owner who has capable management in place or is in a situation where the current business owner is willing to continue to work in a management role for a period of time following the sale.

Strategic Buyer

Strategic buyers are most commonly companies who obtain other businesses that harmonize with their own. The objective for the strategic buyer is to find other companies that would greatly increase their market share, add additional synergy to their business, or eliminate competition. Of particular interest to strategic buyers are competing companies or similar complementary businesses from other geographic regions. A primary goal is to acquire a company that will fit well into their own.

Industry Consolidators 

Although problematic industry consolidations exist, as seen through companies such as Enron, the industry consolidator may still be a good choice for some people selling a business. An industry consolidator typically focuses on highly fragmented industries with companies similar in type who are generally relatively small. By “rolling up” these companies into one larger company they create the potential for higher valuations. One key ingredient is that the seller of the smaller company rarely receives cash at closing rather they receive stock in the larger entity being created through the roll up.

Individual Buyers

The individual buyer umbrella covers a number of different types of buyers including company insiders, international buyers, and displaced executives. A more important classification relates to the individual buyer’s motivation – whether they are buying a job or a company. Generally, the individual buyers looking to buy a job have minimal financial resources and are focused on purchasing a small main street company. Those buyers with substantial financial resources and operating experience will are looking to buy a middle market company.

Insiders who may be family, friends or employees know the business and likely have a personal interest in seeing the business succeed may be willing to pay more for the company than other types of buyers. On the flip side they rarely have the resources to provide substantial cash at closing which means a large portion of the deal will be deferred.

There are many combinations of the various buyer categories. The more clarity you have regarding the type of buyer you are dealing with and their motivations, the more likely you are to avoid wasting time and resources dealing with the wrong buyer. Regardless of the type of buyer you choose to deal with, it is advantageous to deal with multiple buyers at the same time. 

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You know, at this time I have only been able to locate Strategic Buyers for my construction company clients. While I work with Rick Dillon at Vercor, Ltd., to help examine all opportunities for clients, I would focus on Strategic Buyers only as it is very hard for those unfamiliar with the construction world to see the benefit of acquiring a construction company.

Subcontractor ordered to pay attorneys fees....of property owner?

Kudo's to Nancy Zabala Graham for reporting on this California decision:

The California Court of Appeal in the third appellate district recently affirmed the award of almost $200,000 in attorney fees pursuant to a "prevailing party" attorneys' fees provision in a contract. What makes this case interesting is the fact that the property owner, who was awarded his attorneys' fees, was not in contract with the subcontractor who was ordered to pay the fees. The Court based its award on a contract between the general contractor and subcontractor and found that the owner was an intended third party beneficiary to that contract. Vincent Loduca, Jr. v. George Polyzos (2007) 153 Cal. App. 4th 334. 

A few lessons may be learned from this case. First, all construction participants should be acutely aware of any prevailing party attorneys' fees clauses in their contracts. These provisions can vastly increase a party's exposure and most insurance policies do not cover their contractually agreed upon transfer of risk. In order to avoid potential liability to a third party, contracts should specify the parties who can enforce the prevailing party clause. Good drafting techniques can assist in avoiding this type of third party liability. Further, all construction participants should always be aware of the established contractual relationships and their associated chains of communication. Deviating from the norms could unknowingly subject you to the terms, and obligations of a contract between others.

Mis-matched Social Security Numbers and Midwest Construction issues

As pointed out in yesterday's teleseminar (www.midwestconstructionlaw.com) the issue that will ultimately lead to the displacement of numerous works, not to mention the civil and criminal prosecution of employers is a bollix to the American economy. Numerous articles are being written by all sides to the debate. Yet at the end of the date no one has quite figured out how to obtain a proper handled on the immigration issue, Congress must figure out either how to effectively allow millions of undocumented immigrants to fulfill the American dream by keeping the jobs they have at the present time...perhaps a moratorium on all future criminalization or risk jeopardizing the American economy by having millions of folks disengaging from industry critical jobs.

Only a complete solution by all parties to the issue will resolve the issue that may haunt our country for years to come.

Developers and Contractors in Missouri beware: Immigration issues impact tax credits or how to loose valuable incentives in Missouri by having illegal immigrants on your payroll!

Dave Wing of www.midwestconstructionlaw.com fame shares the following:

"Pursuant to Gov. Blunt's exec order, the Missouri Housing Development Commission has adopted an I-9 Workforce Eligibility Policy. It applies to all Missouri projects involving low income housing tax credits (either federal or state) and is found at the site below:

http://www.mhdc.com/rental_production/workforce_policy/Workforce_Eligibility_Policy.pdf

I have also seen an enforcement memo from the MHDC that appears to go beyond the requirements of the policy by requiring all developers, contractors, subs and independent contractors (sole proprietors) to use E-verify to check the SSNs of all employees and to certify to MHDC in writing that they will continue to use the federal E-verify system for all new employees.

Not mentioned in the enforcement memo is that to use the E-verify system, the user will be agreeing that the federal government will have essentially open access to the user's I-9 and other records to ensure compliance. It is important to understand that using the E-verify system will preclude numerous employees from being hired because of errors in the E-verify system that are unrelated to whether the employee is a documented worker. The states are all over the place on the issue. Arizona is requiring employer use of E-verify on a far wider basis than Missouri and there is litigation challenging the Arizona law. Illinois has gone the other direction and is prohibiting employers from using E-verify until such time as E-verify meets certain percentage tests of reliability. The Illinois law is being challenged by the Department of Homeland Security. A new set of federal regulations concerning the employer's obligation to take certain steps to ensure the work eligibility of employees for whom the employer receives SSN No-Match letters were enjoined by a federal judge in part because of the tremendous number of errors within the SSA database that cause such letters to be generated. (140,000 letters covering 8,000,000 employees would have been sent this year, but for the injunction.)

There is much upstream pressure in the MHDC policy and the memo (as well as in the exec order) to make the entities and principals higher on the organizational chart responsible for errors and violations downstream. In the past, employers have only been held responsible for their direct employees. The Missouri executive order is far broader than just the projects funded through the MHDC. Policies similar to the MHDC policy are being instituted for any construction project involving Missouri funds.

What is left out of these policies and enforcement memos are the legal risks of employers in over-reacting. If employers go too far in imposing barriers to employment that impact protected groups, they will be discriminating on the basis of national origin or religion. They will then be subject to other enforcement efforts for violating other provisions of the Immigration Reform and Control Act or the federal Title VII or state and municipal counterparts to Title VII. For example, employers would violate these laws by insisting on evidence of US citizenship for new hires.

I ask your assistance in passing on to me information you gather about the Missouri or federal enforcement of workplace eligibility requirements. The MHDC policy and the enforcement memo are subject to interpretation. It would be good to know how the inspectors enforcing the memo are in fact interpreting it. Please send even good anecdotal info on this my way.

New AIA A312 Payment

Subject AIA A312 Payment

Bond

The purpose of this memorandum is to notify you that courts in three states (

Florida

,

Maryland

, and

Virginia

) have issued rulings interpreting Paragraph 6 of the AIA A312 Payment Bond in a manner adverse to the surety industry, and to provide you with direction regarding how to address this issue.

Paragraph 6 provides that sureties must, within 45 days after receipt of a claim, notify the claimants of the amounts that are undisputed and the basis for challenging any amounts which are disputed.  Based on this language, these courts have ruled as follows:

·        The

Florida

federal court held both that the surety forfeited any right to dispute the claim by not making an acceptable, timely response and that the 45-day period began on notice of the claim even though the notice did not include substantiation for the claim. 

·        The

Virginia

federal court held that the surety could not raise any defense not asserted in its 45-day response letter.

·        The

Maryland

appellate court held that the surety waived its right to contest the claim by not responding within the 45-day period set forth in Paragraph 6.

While it is our opinion these courts improperly construed the language in Paragraph 6, we will continue to face this issue as long as we use the AIA A312 payment bond form (the SFAA has approached the AIA on more than one occasion requesting the language in Paragraph 6 be changed in light of these erroneous court decisions, and the AIA refused to change the language).  To address this issue, the following steps are to be taken:

New Claims:  Please continue to immediately transmit all claims to the appropriate Regional Claim Office upon receipt.

Use of AIA A312 Payment

Bond

 

Form

:  If the obligee insists upon the use of the AIA A312 bond forms, it is strongly recommended the following language be inserted into the modification section of the AIA A312 payment bond:

Paragraph 6 is deleted in its entirety and the following is substituted in its place:

6.  When the Claimant has satisfied the conditions of Paragraph 4, and has submitted all supporting documentation and any proof of claim requested by the Surety, the Surety shall, within a reasonable period of time, notify the Claimant of the amounts that are undisputed and the basis for challenging any amounts that are disputed, including, but not limited to, the lack of substantiating documentation to support the claim as to entitlement or amount, and the Surety shall, within a reasonable period of time, pay or make arrangements for payment of any undisputed amount; provided, however, that the failure of the Surety to timely discharge its obligations under this paragraph or to dispute or identify any specific defense to all or any part of a claim shall not be deemed to be an admission of liability by the Surety as to such claim or otherwise constitute a waiver of the Contractor’s or Surety’s defenses to, or right to dispute, such claim.  Rather, the Claimant shall have the immediate right, without further notice, to bring suit against the Surety to enforce any remedy available to it under this

Bond

.    

Indemnification laws in Colorado....2007 update

In April of this year, Colorado enacted Senate Bill 07-087, which provides that construction agreement provisions requiring indemnification, insurance, or defense for liabilities arising out of death or bodily injury to persons or property caused by the negligence or fault of the indemnitee (or any third party under the control or supervision of the indemnitee) are void as against public policy and unenforceable. 

There are important exceptions. For example, the statute permits contract provisions that require the indemnitor to purchase, maintain and carry insurance covering the acts or omissions of the indemnitor, as well as contract provisions that require the indemnitor to name the indemnitee as an additional insured for liability due to the acts or omissions of the indemnitor on the indemnitor's policy of insurance. This statute only applies to "construction agreements," but its indemnification restrictions are applicable to environmental risk allocations in such agreements.