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Developer project specific corporations 3

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glass99

glass99

Structural
Jun 23, 2010
944
How does everyone feel about the practice of developers setting up special purpose project corporations when they buy or develop a big building? It is to avoid liability, which has the effect of passing it onto everyone else, including engineers and contractors. I am about to sign a contract with a name brand NYC developer for the design of a feature element in a tall office building in LA, but nominally with the XYZ Holdings LP, the wholly owned subsidiary of the developer. Personally I think it's gross and dishonest.
 
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I have not worked on a commercial project in which the developer did not have a LLC set up. I agree in your distaste.

Makes you wish you could set up a LLC for each one of your projects... XYZ Holdings - Glass 99 Structural LLC.
 
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all corporations have a special purpose. I agree that developers can be gross and dishonest sometimes. but whats the big deal with forming a corporation to construct and operate a building?
 
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The intent would be to isolate the liabilities of the parent corporation, so that the assets of the financial beneficiary are not exposed to project failure.


Cheers

Greg Locock


New here? Try reading these, they might help FAQ731-376
 
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@glass99....common practice and shady. Be sure if you work for one you get your money quickly, particularly when your services are done. The developer LLC will dissolve quickly when the project is done and they'll claim they have no means to pay you since they no longer exist!

 
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Thanks all - I wonder how my developer would feel if I set up a special project corporation to do the design. I would explain that in the event that the building fell down and they wanted to sue me, I would simply disband my corporation.

It's so sketchy that I really wonder why its allowable.
 
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It's so sketchy that I really wonder why its allowable.
Click to expand...

Not going fly, since your engineering liability is personal, not corporate. You cannot shield yourself, ala LLC, since the engineering design is stamped by you personally.

TTFN (ta ta for now)
I can do absolutely anything. I'm an expert! faq731-376 forum1529 Entire Forum list
 
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Just to play devil's advocate, it's not all about shielding themselves in case it all goes wrong (though that's certainly part of it). They're also playing a complicated tax game. By carefully managing where and how the money flows, they can hold on to a larger amount of said money. (I don't claim to know how it works, just that it does. Not that this alleviates any of the "shady" labeling...)
 
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There are other reasons besides liability for forming purpose-specific corporations; is one where liability isn't necessarily an issue, but there's a desire for joint cooperation with limited data rights and technology transfer.

TTFN (ta ta for now)
I can do absolutely anything. I'm an expert! faq731-376 forum1529 Entire Forum list
 
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@IRStuff: yes technically you are right that my liability is "personal", but its normally the corporation they come after so shutting down my project specific corporation would add some more legal hoops for them to jump through. For example, the contract which defined all the liabilities and terms of engagement would be with an entity which did not exist. A court may find that an individual engineer be held to a different standard of care to that outlined in the contract.

Yes, a joint venture would be a legit reason to form a corporation.

phamENG said:
They're also playing a complicated tax game
Click to expand...
Do they actually do this? What's the rationale? I would have thought that any profit would simply be passed up to the main corporation.
 
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I would have thought that any profit would simply be passed up to the main corporation.
Click to expand...

A corporation headquartered in, say Ireland, would have a different tax burden than the same company headquartered in New York; a way to avoid moving one's headquarters would be to create a separate corporation headquartered elsewhere to take advantage of the tax shelter.

TTFN (ta ta for now)
I can do absolutely anything. I'm an expert! faq731-376 forum1529 Entire Forum list
 
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for insurance, tax, accounting and numerous other reasons, it is much simpler to run a separate corporation. its not unusual or shady and makes business sense. however, some developers are sleazy and you really do need to protect yourself if you work for one of them. Mechanics Lien is one way to do it.
 
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cvg said:
for insurance, tax, accounting and numerous other reasons, it is much simpler to run a separate corporation
Click to expand...

Could you elaborate on what those reasons are?

Large companies have divisions with their own operational structures all the time - should Ford have one company to make F150's and another to make Econovans? There is nothing stopping Ford from tracking F150's sales figures separately to the Econovans, or even using different dealers (aka real estate brokers) for different models. These "different corporations" are usually run by the same people in the same headquarters office (as is the case for at least three of my developer clients).

What if Ford said "aha, our lawyers are so clever, I know the Pinto blew up but it was sold by Pinto LLC, not Ford, so it's not our problem!"
 
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Many large corporations including Ford have fully owned subsidiaries to avoid entangling the management and legal/financial/other obligations of unrelated businesses. Usually when you look at a corporate website there will be a page showing their various brand logos, many of which openly say "a subsidiary of..." to keep the folks managing real estate investments from screwing up things for the folks manufacturing widgets.

Personally I dont see what the big deal is, everybody including engineers leverage corporate liability laws to shield themselves to one extent or another and there are various legal ways for potential victims to breach those shields and seek damages. Usually when you take the time to dig into the legaleze, the boogeymen disappear.
 
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This practice is very, very common in my location. Almost all building projects are set up as their own corporation, i have even seen it on developments of a single house!

Also common is the establishment of "trusts", often in the form of a "family trust" by almost every business owner, especially architects and engineers. The purpose of the trust is to take care of the family members, keep the family house for the family, etc. So people pile all their money into family trusts, then if they get sued, there is nothing to take. They simply shut down their company and become a trust fund baby.
 
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@cvg: The first advantage of multiple corporations listed in that article is liability control.

@NorthCivil: Is it really common for engineering firm owners to transfer their assets to a trust? I have thought about doing that.
 
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yes it is liability control. if the corporation gets sued, they cant take all the company assets, because the corporation only owns limited assets.
 
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if you have ever been sued, than you will wish you had done something to limit your liability. you dont want to lose the farm just because you were too lazy to set up a LLC or trust
 
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" Is it really common for engineering firm owners to transfer their assets to a trust? "
SOP in Oz for directors and so on.

Cheers

Greg Locock


New here? Try reading these, they might help FAQ731-376
 
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