The Use of Business Structures to Encapsulate Liability

How does a long established privately held business protect itself from uninsured liabilities, the risks of doing work in new cities and states, taking on a new project, attempting delivery methods or new work areas and the other risks attendant to new and different business strategies? Some relief can be had through time honored structuring techniques, designed to limit the effect of these liabilities through the use of new and segregated entities. When approached by a contractor or other client, concerned about plans for expansion, working in new cities and states, etc., the construction practitioner will need to review the possible benefits of forming new business entities and structures.

This article will afford some basic review of Texas business structures, as well as new changes in the law effective January 1, 2006. In addition, it provides some practical assessment of tax considerations and compliance issues, as a necessary part of any business structure analysis. Principally, however, its purpose is to provide an overview of various structures available for use in protecting an established and profitable enterprise, as well as any owners, directors, managers, officers or employees, from harm due to the undertaking of new and different business plans.

A discussion on business structures and reducing risks and liabilities would not be complete without a discussion of veil piercing, fraudulent transfers and in the construction context, the Texas Construction Trust Fund Act. In that regard, this article provides a brief overview of the various veil piercing theories as well as the fraudulent transfer act and the construction trust fund act. This article concludes with a discussion of operational considerations including a brief, but important, discussion of the unique problems for contractors which arise out of the enterprise’s relationships with important outside entities such as insurers, lenders and owners.

It is assumed that practioners will have a good basis of knowledge and familiarity with business organizations and the tax implications before utilizing any materials presented in this article. In that regard, this article first turns to a preview of the Texas Business Organizations Code and the key distinctions between it and the laws that it is meant to replace.

Full Text

This paper is available as a benefit of membership to Construction Law Section members. If you are already a member, just use one of the links above and enter your username and password when prompted. Here's how to join Construction Law Section and gain access to this material.

You must have the free Adobe Acrobat Reader 4.0 (or greater) installed in your computer in order to view or print this paper. It is available as free download from the Adobe Web site. If you do not have Acrobat Reader installed, click the link to the left to download it. If menu window opens before the paper, choose the "View" option.