Welcome back to our Construction Accounting series! Let’s jump right back into our role as construction controllers! Our company has been thriving, and now, our company is evolving. Instead of focusing on construction, our company is going to move to just owning equipment. However, the company has decided to split the construction portion into an entirely new company. And, while this construction specific company will be a whole new company, the leadership of our old company will still be involved. So, now, we need to learn about the four main types of structure for these types of businesses

These are the four main types of company: There is a holding company, where the company just holds investments or other companies. There is also a joint venture, which is a temporary relationship between two or more parties with the object of completing a single project. And finally, there are individual companies and DBAs. These are your standard traditional types of businesses: proprietorships, partnerships, corporations, LLCs, etc. Let’s talk about each of these options a little bit more. 

First, we’ll start with a holding company. These are like silos that just hold assets. Let’s imagine that we had a design firm which was owned by a holding company. If that design firm had an employee embezzle some money, rather than losing everything and all the other companies that it owned, the holding company could just create a new design firm and only lose what was put into that original design firm. This helps businesses minimize risk. 

A holding company is often used to transfer wealth to families. It is much easier to transfer shares in a parent company than to transfer shares in individual assets. Holding companies are only in the business of providing capital and people. They do not take part in the business of making or servicing things like a construction company would. A good example of a holding company is Warren Buffet’s Berkshire Hathaway, which is in the business of owning businesses. 

Joint ventures are temporary partnerships with other businesses. Usually, they are used to enter markets that are hard to break into alone. Joint ventures allow companies access to equipment and knowledge of local market conditions, and can help boost working capital. They are a great way to pull together a lot of resources.

You’ll see this a lot in massive projects such as new railways or airports.  These massive projects are great places to use joint ventures because they spread risk for the project among two or more contractors.  

When it comes down to it, neither of these types of companies would be very useful for our company’s new venture. So, let’s take a look at the other two types of companies: individual companies and DBAs. 

So, what’s the difference between these two types of companies? They are actually very similar.  Creating an individual company isolates risk. With this method, if we have our individual companies and one of those companies isn’t doing so well, we have isolated risk to just that one company. The other company will not be affected. However, one downside to this type of company is that there is a lot of paperwork involved. We will have to file separate tax returns, and the companies will have their own associated tax ID numbers. The companies are entirely their own entities. 

DBAs are fairly similar, but a DBA is just one company with multiple companies doing business as entities. The upside with DBAs is that we get rid of a lot of paperwork, because we only have one tax entity to manage. However, because a DBA is just one entity, risk is not limited to only one entity. Each DBA is unprotected from the other. So, if one DBA is not performing well, all of the other DBAs are put at risk. 

After researching all of our options, we have decided that our new construction company is going to be an individual company with an LLC. 

This means that, while new people are going to have majority ownership of this new company, the owners of the old construction company are still going to hold interest in this new company. The companies have common ownership, and are going to be sharing resources. 

Accounting between multiple companies can be quite complicated, and this is where intercompany transactions come in handy. The new and old companies plan to share resources, thereby eliminating the need to manage multiple records and multiple databases. The companies will share one vendor database, one customer database, and one employee database. They also plan to automate accounting  around crucial areas like AP, AR, payroll, inventory, general ledger, materials, and equipment. This way, when cash from one company is used for something in the other company, they will use an ERP system to record that transaction in both companies at the same time. This eliminates double data entry, and saves lots of time doing reconciliations. 

Now, we can look forward to getting good use out of this consolidation when we use equipment owned by our old company on projects contracted through our new company! 

Multi-company considerations, along with other accounting workflows, can be difficult to manage in a way that maximizes your organization's efficiencies.

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