EZG Manufacturing
Federated Insurance
Fraco USA, Inc.
Hohmann and Barnard, Inc.
Husqvarna Construction Products N.A.
Hydro Mobile, Inc.
iQ Power Tools
Kennison Forest Products, Inc.
Mortar Net Solutions
Non-Stop Scaffolding
Southwest Scaffolding
Tradesmen's Software, Inc.
November 12, 2004 8:04 AM CST

Top 10 Legal Issues Facing Construction Companies


Okay, I'll admit it: I am not a big Letterman fan. Like most of you, my alarm goes off well before dawn, which makes it next to impossible to watch this cult show (notice the implication that if I did watch, I would be a fan). So, while I am not sure whether Letterman has ever done a "Top 10" list for construction companies, he should have. In writing this article, Mr. Letterman, I mean no disrespect or infringement.

Running a successful construction business requires the orchestration of a number of competing issues, including balancing business realities and legal concerns. Being responsible for the constant weighing of interests requires knowledge of the issues, savvy to strike the correct balance, and a bit of humor to navigate around the crushing seriousness of it all. In this article and the articles that follow, we will identify the legal issues and provide suggestions for how to best deal with them.

What are the top 10 legal issues facing construction companies, you ask? Without the $2,000 suit, the wide-toothed grin and the 12-piece band, we present...

The Top 10 Legal Issues Facing Construction Companies:

Number 10 ? How to Select a Business Entity for a New Construction Company...
If you want to form a company with some of your buddies, you need to decide which entity is right for your new business. You can form a general partnership, where all of the partners are personally liable for the debts of the company.

You can also form a limited liability partnership (LLP), in which one or more of the partners has limited liability. A LLP has a general partner, which can be a corporation to shield liability, and limited partners. It is important to note, however, that the general partner will be liable for the company's debts. If you decide to form a LLP, you will need to file a certificate of limited partnership with the appropriate state offices; otherwise your business will be considered a general partnership by operation of law.

Finally, you can form a limited liability company, where all of the members have limited liability, or you can form a corporation. If you form a corporation, you can make an election under Subchapter S of the Internal Revenue Code, and all amounts earned by the corporation and distributed to the owners are taxed only once, thereby escaping the so-called "double tax." A C-corporation, on the other hand, is subject to the "double tax" as income received by the corporation is subject to corporate tax and profits distributed to the owners or shareholders is subject to their personal income tax.

Number Nine ? How to Finance a New Business Venture...
Starting a company or just need to make payroll and do not have the capital? There are a number of funding options, including private and public financing. If you do not have the capital to start a new business, you could apply for a loan with a bank, including small-business loans that are guaranteed by the Small Business Administration at traditionally lower rates than regular bank loans. You could also seek to raise funds through a private placement, where money is raised through accredited investors and syndicated bank loans, where a number of banks join in the loan. If you want to take the company public to raise capital, you can offer your shares to the general public through a public offering. This, however, is a very expensive proposition because of the required filings with the SEC and other regulatory bodies.

Number Eight ? How to Defer Business Risks...
Insure against risks that could otherwise impair or even bankrupt your company. In addition to Comprehensive Liability Insurance that was discussed in Cassidy's "Insurance Issues" article, and depending on the type and size of your business, you should consider other types of coverage. These include: Contractors General Liability ? this coverage is usually for specialty trade contractors and heavy construction contractors; Workers Compensation; Management Liability ? including Directors & Officers (D&O), Employment Practices Liability (EPLI), Fidelity Bond for corporate crime, and ERISA Liability (arising out of a company's fiduciary responsibility for employee pension and welfare benefit plans as regulated by the Employee Retirement Income Security Act of 1974); Environmental Liability; Accidental Death & Dismemberment (AD&D); and Excess Casualty and Umbrella coverages ? for protection against catastrophic loss.

Number Seven ? Contracting from Beginning to End...
Before you submit that bid, make sure you have thoroughly considered all angles of every facet of the proposal. Already submitted a bid and miscalculated the bottom line? Should you fulfill the contract and take the loss or breach the contract? That depends on the amount of the loss. Sometimes it is more beneficial to breach the contract and pay damages than to fulfill it and take a larger loss.

Number Six ? Agency...
You hire someone to answer your phone because he or she has a great phone voice and will be pleasant and engage your customers. That's great, until the new receptionist tells your customer that the job will be completed by the end of the week or that you will apply a masonry sealant for that 21,000-sq.-ft. building at no extra cost. Has your receptionist just bound the company? That depends on whether you have given the receptionist the authority to make such statements or created an atmosphere in which it reasonably appears to others that the receptionist has such authority.

Number Five ? Subcontractors...
Working on projects in which you will need to engage subcontractors? Make sure they have general liability insurance, which names your company as an additional insured and includes a defense obligation, as may be required by your insurance. If you are a contractor hiring subcontractors or if you are a subcontractor, be aware that there are issues relating to the nature and extent of the defense and indemnity protection a subcontractor provides to a contractor.

Number Four ? Sexual Harassment...
This can be a big problem for small companies. Sexual harassment laws can create liability for companies, individual managers and employees for both physical and verbal acts. Liability may also come from permitting a sexually "hostile work environment," where women are made uncomfortable from such things as Penthouse pin-ups in the break room or a group of guys talking dirty. Employers can also be liable if their female employees are subject to similar behavior from subcontractors' employees. Men are likewise protected from sexual harassment by women; and where local laws prohibit discrimination based on sexual preference, harassment protection for gays and lesbians also applies. Bottom line: all employers should have a written, well-disseminated anti-harassment policy and train their supervisors on these issues.

Number Three ? Regulatory Compliance...
How is a small business to keep track of the ever-changing municipal, city, state and federal regulations? There are many regulations to keep track of ? compensation, benefits, payroll, hiring/firing, ERISA and most of all OSHA.

Number Two ? Tax Concerns...
How do you pay the least amount of tax allowed under the tax code? That depends on the type of company you own. How much your company pays in taxes impacts cash flow, and thus debt repayment and capital expansion. Proper tax accounting is important, because the financial statements may show losses from depreciating fixed assets (e.g., trucks and equipment), which can be included in the proprietor's personal tax return. This is where a Subchapter S election can come in handy under certain circumstances, because losses and deductions can flow through to the owner's personal income tax return.

And the Number One legal issue facing construction companies is...

Litigation Avoidance...
Litigation is a costly, time-consuming drain on any business, and litigation that could have been avoided is a complete waste. To the extent that companies recognize and take steps to minimize the potential for litigation, they will improve the bottom line. Litigation avoidance measures include appointing a risk manager who can evaluate claims, make tactical judgments, understand insurance coverage issues, and analyze and make sound judgments with respect to uncovered claims to avoid company sponsored litigation. Where litigation is unavoidable, a risk manager will be in a good position to retain counsel best suited to defend the company.

Okay, so these issues are not necessarily in order of importance because, depending on the type of work your company does and the stage of your company's formation, any of the above issues could be your number one legal concern. In the upcoming articles, we will address most, if not all, of the above issues in detail.

We may not be comedians like David Letterman ? we are, after all, only a bunch of lawyers ? but we will do our best to help you avoid the pitfalls posed by the above legal issues.

About the Author

Elisa A. Eisenberg, Esquire is a Director with the Washington, D.C., law firm of Jackson & Campbell, P.C. She is a litigator who specializes in toxic torts, environmental, products and construction liability and insurance coverage issues.

This article is not intended to provide legal advice, but to raise issues on legal matters. You should consult with an attorney regarding your legal issues, as the advice you may receive will depend upon your facts and the laws of your jurisdiction.


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