There comes a day for many construction companies when their business names or corporate structures cease to serve every need. So, in order to limit their legal exposure, update their brand identity or to provide some flexibility for investors and local contracts, creating a new entity or even establishing a whole new identity might be in order.
Brand and market perception
It happens all the time, said attorney Laura Colca with Goldberg Segalla in Buffalo, New York. A construction company starts out with a practical name, perfectly fine for conducting business, but then wants to switch to a catchier or streamlined moniker. This could be the case if the contractor gets into a related trade that doesn’t exactly fit its existing identity or simply wants to include a "dot com" in the name to make it easier for customers to find its website.
Companies often can make a significant rebranding effort just by creating a “doing business as” (DBA) identity, Colca said. This is typically used when the contractor is going to be doing the same or some variation of work it already performs.
DBAs can give construction and other companies a fresh look, but those considering such a change need to take heed, said attorney Andrew Ruben with Sandberg Phoenix & Von Gontard PC in St. Louis.
“A DBA is simply a different name,” he said. “It does not have any legal impact. [Creating a DBA] is for convenience and for marketing and for branding but it's the same entity."
This means, Colca said, that any action on the part of the DBA exposes the entire company to lawsuits or other claims.
Another reason to use a DBA, Ruben said, is that a company might not want to broadcast that it’s starting to compete in a new geographical market or taking on an additional line of work.
Both Barnard Construction and Kiewit Infrastructure, for example, have affiliated companies that have bid on or even performed work on the U.S.-Mexico border wall. Kiewit has other subsidiaries through which it does business around the country, and the division that specializes in border wall construction, Southwest Valley Constructors Inc., according to its website, is dedicated to building large-scale infrastructure in general for the federal government.
The border wall has understandably been a contentious political issue, so if a contractor chooses to perform the work but wants its parent company's name to stay out of the fray, carving out a special-purpose entity to perform the work may make sense for Kiewit or any other well-known or growing enterprise.
And then there’s the desire for privacy, which could lead a firm to decide to open a subsidiary in a new state. Some states, like Nevada, Colca said, offer privacy by not disclosing certain company officials, associates or even shareholders. Similarly, Delaware does not make public the names of certain shareholders, directors or officers.
“I think the primary reason [to form a new entity] is to limit liability and to shield assets,” said attorney Barry Lapides, partner at Berger Singerman LLP in Miami.
If something goes wrong with the new company, then the original one can be protected from most of the fallout.
There's a caveat to that, Colca said, when it comes to joint ventures. Even if a joint venture creates a new entity for the project on which they are working, Colca said, the two parties still need to draw up a detailed joint venture agreement as to how liability and every other aspect of the relationship will work. “Joint venturers still have to be careful … in setting forth responsibilities of the parties,” she said.
But sometimes contractors have to weigh shielding their assets against being able to engage in critical construction business activities like getting bonded, a process in which a company’s history and experience plays a big role, Lapides added. “Sometimes [surety] companies won’t bond the contractor because it’s a new [entity].”
Some contractors, Lapides said, also use separate entities for each of their projects, further isolating liability.
However, this can be difficult as a practical matter, Ruben said. Typically, this kind of approach is reserved for real estate transactions to hold assets. “You’re suddenly having to start over with your bonding, and then you’re giving guarantees and the corporate parent is on the hook anyway,” he said. If the original company or its offers have to guarantee the debts or take on other liabilities of the new entities, that defeats the purpose of forming a new company.
But as far as starting work in a new state, Ruben said, there are plenty of situations when forming a new entity makes sense. “There are still lots of reasons why you might want to be a domestic LLC or corporation [formed] in, for example, New Jersey, rather than a [formed-in] Florida construction company doing business legally in New Jersey,” he said.
In many jurisdictions, for instance, there are benefits to being local, such as when public agencies encourage or mandate that local companies be given preference in the awarding of contracts.
Setting up a separate entity whether in a new state or in the firm's current jurisdiction can allow companies the freedom to deal with different investors or joint venture partners outside the confines of an existing corporate structure, particularly when trying to grow a business, Ruben said.
Investors, for example, might want to invest in a major project but not in an entire business. ”So if they want to invest, but they want their funds to be used for a specific purpose, that’s a reason to [form a new entity] so that they know the money they’re going to invest is going to go directly to this project as opposed to just putting it into the corporation [into which] who knows where it could go,” she said.
Much of construction is local, Ruben said, and union relationships are another reason why a company would want a separate legal entity on the ground in a different state or jurisdiction so that it can hold any collective bargaining agreements and related contracts.
The choice to form a new entity, Ruben said, particularly when it comes to how a company will approach working in multiple states, should ideally come down to its CEO, accountant and legal counsel. “A lot of [these decisions] have direct financial implications,” he said.
And one size does not fit all. If a sole proprietor whose operations border another state, for example, is trying to decide how it will approach its first project in that state, Ruben said, that’s a much easier conversation than one in which a mature company must develop a strategy for a major regional or national expansion.
“You get different results for different companies based upon their priorities, their backgrounds and what kind of work they’re doing,” he said.
Another thing to remember, Ruben said, is that additional entities mean more work. “Any time you set up a separate entity, it … dramatically increases the work you have to do to keep yourself in compliance from a legal and a tax standpoint with the jurisdiction,” he said. For example, a company that is doing business through separate entities in 20 different states needs to have state-specific expertise in all 20 states, as well as substantive expertise in areas such as mechanic’s lien laws and potential different contract requirements. “That’s where your accounting, legal and project management expertise comes in,” Ruben said.
Part of establishing a new entity, locally or in another state, is a regular evaluation in order to determine if it’s still needed. And taking the proper steps to shut it down properly, Ruben said, is important. All of the protections [that a new entity offers] are based on the assumption that you follow the rules, and if you don’t follow the rules, you [may] lose the benefit,” he said.
Despite the extra work, Lapides said, forming a new entity could offer the most protection as a construction company grows into new business lines and geographic areas. “This is the best way to prevent unintended liability from creeping into your corporate structure.”