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Last edited 09 Sep 2016

Types of construction organisations


[edit] Introduction

Construction organisations are a varied and complex array of combinations of people, skills, knowledge and expertise. The aims and objectives of organisations vary, however, they all have a feature in common – they are all a form of legal entity, that is, they have an economic identity, and they have a legally acknowledged structural form.

[edit] Legal entities

The entity view of organisations is that the organisation is distinct from any individual or group of individuals associated with it. This concept applies to all enterprises regardless of size, ownership, or legal status. There are two main differences between the various types of entities:

  • The legal liability of the owners for the management of the organisation.
  • The legal liability for the debts of the organisation.

The managers of each entity then have varying degrees of responsibility to produce reports on the operations and financial health of the organisation to satisfy particular stakeholders.

This entity concept also applies to groups of companies.

[edit] Sole trader

A sole trader is a legal entity consisting of one liable individual. The individual 'owns' the business. In effect this individual holds all of the equity and all of the liability for the business. Since this individual owns the entire business, the only financial reporting that is required is to satisfy Government requirements for taxation purposes.

Other parties are not entitled to obtain reports about the financial health of the business.

There are two forms of sole trader:

  • Sole proprietor.
  • Sole practitioner.

A proprietor is usually a trader selling physical products to customers. In the construction industry this may be, for example, an electrician, plumber or plasterer.

A practitioner is usually a professionally qualified person selling services to clients. In the construction industry this may be, for example, an architect or engineer.

Since the sole trader holds all of the equity in the business, there is no practical distinction between the business and the owner. The owner is responsible for all debts incurred by the business, regardless of how much has been invested in the business. This means that the owner has unlimited liability for the debts of the business, and if the owner cannot repay outstanding debts, then all of the personal assets of that individual may be used to repay the debts. In the event that personal assets do not cover the debt then the owner may be declared personally bankrupt.

For accounting purposes only, there is a distinction between the business finance and other personal financial activities of the owner. The business is considered as a separate accounting unit from the owner.

[edit] Partnerships

Partnerships are the same as sole traders' businesses except that the equity is owned by two or more individuals who are jointly and separately liable for all of the debts of the business.

Partners can be classified into three groups:

  • General partners – with unlimited liability for the debts;
  • Limited partners (Limited Liability Partnership LLP) – with liability for debts limited to the amount of investment;
  • Nominal partners – with liability limited to a stated cash sum.

Partners can distribute any profits from the business in any way that they wish.

A partnership is normally extinguished upon the death of a partner, or by notice of termination of the partnership agreement by one of the partners. Partnerships can have a standing agreement which avoids this necessity for reorganising.

For accounting purposes only, there is a distinction between the business finance and other personal financial activities of the owners. The business is considered as a separate accounting unit from the owners.

[edit] Companies

Companies tend to be businesses owned by many individuals who are often not active in the management of the organisation. Companies are legal entities, created in accordance with national laws.

Ownership is established by holding shares, and the owners are known as shareholders.

There are many forms of company, but, they can be roughly grouped as follows:

  • Unlimited companies.
  • Limited companies.

[edit] Unlimited companies

Very similar to a sole trader or partnership, but with many owners, most of whom have no management function within the business. This structure is an archaic form, and has largely been replaced by limited companies, because of the benefits conferred on the owners by the 'limited' status.

[edit] Limited companies

Archaic forms, such as incorporated, chartered, or joint stock companies still exist, however they are a specialised form only suitable for particular circumstances. An example of incorporated company is the Royal Institute of British Architects. An example of a chartered company is the Royal Institution of Chartered Surveyors.

A more generic and the typical form of limited company is the Company Limited by Shares.

Two typical versions exist:

  • Private limited company – XYZ Co. Ltd – shares not generally traded;
  • Public limited company – ABC PLC. – shares generally traded via stock exchanges.

Limited companies have an entirely separate legal identity from shareholders.

The debt liability of limited companies is restricted to the sum of the capital at face value of the share stock. Generally the liability of an individual shareholder is limited to the investment used to purchase shares. Companies continue indefinitely, and are not generally affected by the death of individual shareholders.

This limited liability, plus the ability to raise large amounts of money from having many investors, has made this the predominant organisational structure world wide

[edit] Private limited companies

Private limited companies are generally smaller than public limited companies. The shares are generally restricted to purchase by individuals fulfilling particular conditions. Frequently the shareholding is restricted to members of the same family group, or shareholding is by agreement of the existing shareholders. This means that the control of the company is more closely monitored, and unknown 'hostile' takeover is unlikely.

The requirements for financial reporting are restricted to reporting for taxation purposes. All other financial details can remain confidential to the shareholders. The general public does not have access to any financial records of these companies.

[edit] Public limited companies

PLC's are generally larger than Ltd Co's. The shares are openly traded on stock exchanges around the world. Shareholding is unrestricted and any individual can obtain shares if they are prepared to pay existing shareholders a sum at which they are prepared to sell. Normally the current selling price is well publicised, but is highly variable depending upon current events occurring within the company or within its markets.

A PLC can offer additional share issues and other securities and cash instruments to raise further capital. The ability to do this is constrained and regulated by much stricter regulation and accounting requirements than those required of Ltd. Co.

The requirements for financial reporting are more onerous. Financial records are available for public scrutiny. In most cases annual accounts and annual reports will be sent to any person requesting a copy, although in some instances a small charge can be made.

[edit] Holding companies and conglomerates

A holding company is a parent company that has subsidiary companies trading in related markets, either related by products and services or by geographical location. Holding companies have a legal identity separate from the subsidiaries, but are generally liable for debts of subsidiary companies.

A conglomerate is a parent company that has subsidiary companies trading in unrelated markets. Conglomerates have a legal identity separate from the subsidiaries, but are generally liable for debts of subsidiary companies.

The main advantage of holding companies and conglomerates is that taxes, for example, VAT, are not charged on supplies between group members.

The text in this article is based on a section from 'Business Management in Construction Enterprise' by David Eaton and Roman Kotapski. The original manual was published in 2008. It was developed within the scope of the LdV program, project number: 2009-1-PL1-LEO05-05016 entitled “Common Learning Outcomes for European Managers in Construction”.

It is reproduced here in a slightly modified form with the kind permission of the Chartered Institute of Building.


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