This is part one in a five-part series on starting a contractor business. For part two, please click here.
Contracting can be a lucrative career opportunity, but failing to establish the proper business entities, systems, and structures could mean setting yourself up for failure. It’s important to establish a formal business entity that can grow with your business before taking on clients, so that you can focus your attention on providing excellent services instead of frantically trying to wrap up loose legal ends.
But understanding the legal nuances of setting up a formal business structure is not an easy task. There are decisions to make, such as the choosing the right legal structure for your company, and such decisions depend on factors such as whether you’ll be a sole proprietor or eventually hire staff, among others. Coupled with the myriad of paperwork that is necessary to form a business entity, this is no simple task for someone just starting out in business with no legal or accounting expertise.
That’s why we’ve put together this comprehensive guide for new contractors, to help you navigate the maze of information, make the right choices, and take the right steps to ensure that your business is legal and that you have the right protections in place, such as liability insurance, worker’s compensation insurance, and other essential steps to getting your business established and structured properly.
On This Page:
- Determining the Right Business Structure for Your Contracting Business
- State-Specific Resources: Where to Look For Information in Your State
- What You Need to Start a Contracting Business
- Insurance Requirements for Contracting Businesses
Determining the Right Business Structure for Your Contracting Business
There are several business structures to choose from, and the structure you choose impacts how you file your taxes and other aspects of your general accounting and record-keeping. But there is no single best business structure for contracting companies. The following resources will help you determine the best business structure for your new business needs.
There are various legal and tax implications for different business structures. The Small Business Administration outlines the various business structures and the specific implications of each choice. Business entities include a Sole Proprietorship, Limited Liability Company, Corporation, Partnership, and others.
The structure that makes the most sense depends on the individual circumstances of each business owner. This article from Entrepreneur explains the types of business entities and the legal and tax benefits (or downsides) of each.
The right business structure “depends on the type of business you run, how many owners it has, and its financial situation.” According to this article from NOLO.com, “No one choice suits every business: Business owners have to pick the structure that best meets their needs.” Factors to consider include the potential risks and liabilities of your business, the formalities and expenses involved in setting up and maintaining various business structures, your income tax situation, and your investment needs.
In most instances, a new business is set up as a limited liability company (LLC), a partnership, a corporation or a sole proprietorship. This article from FindLaw describes the various criteria to consider including varied liabilities, expenses and procedures, income taxes, and investment needs.
Liability, taxation, and record keeping are the key differentiators between business structures. The Internal Revenue Service (IRS) explains the differences between the various types of business entities. Additionally, this page offers links to more detailed tax reporting requirements for each type of business structure.
The LLC is a popular choice for contractors, but there really is no one-size-fits-all ideal business entity for contracting businesses. This article describes the pros and cons of each business entity within the context of contracting companies.
When in doubt, consult an attorney or a CPA for advice on the best business structure to suit your unique needs. These professionals can aid in setting up formal business entities and can help you understand the various record-keeping and reporting requirements required for each.
State-Specific Resources: Where to Look For Information in Your State
States have differing regulations and guidelines when it comes to setting up a business entity, such as tax filing requirements. The process for registering your contracting business may differ based on the state you are based in, as well. The following resources provide state-specific information on business licensing and taxation, as well as links to the agencies in each state that business owners should visit to determine state-by-state requirements.
Individual states have various resources available related to filing business taxes in your state. This resource from the Small Business Administration offers a list of state-specific resources on taxation, including tax registration, tax forms, and more.
Licensing and permit requirements vary based on the type of business you are operating, the business location, and any government regulations that apply. This resource from the Small Business Administration offers links to state-by-state business license offices.
State government websites are a valuable resource for researching the rules and requirements for setting up a business in your state. This resource from the IRS provides links to each state’s government website for information on conducting business in your state, taxation, links for employers, and other information.
For most contractors, it makes sense to set up a formal business entity in the state in which they conduct the majority of their business. If you are located near a state border or provide contracting services in other states as well as the one in which you reside, you may be required to have appropriate licenses in each state in which you do business. Incorporate.com provides individual guides for each state offering information on setting up and running a business in each state.
Laws, regulations, and tax demands on businesses may differ by state. Bankrate.com provides a helpful state-by-state breakdown of state agencies that entrepreneurs will want to consult to determine specific state requirements for starting and running a business, such as the state licensing organization, minimum wage information, state small business profile, and more.
Many states also have a Small Business Development Center, an organization dedicated to helping entrepreneurs start and manage small businesses. This guide from FindLaw lists resources by state to help you locate information and other resources in your state.
What You Need to Start a Contracting Business
Contractors require a number of assets to successfully start a new business. From tools and software for estimating, invoicing, accounting, and other processes to insurance, registrations, and licenses (which also may vary by state), setting your new contracting business up for success means getting all of these things in place before you begin offering services to homeowners and business owners. The following resources provide information on what you need to have in place and the tools that will be helpful to streamline back-end business processes.
Consider getting a certification. This article from Entrepreneur points out that the National Association of the Remodeling Industry offers four different certifications for remodeling contractors. Obtaining a certification can lend credibility to your business.
Get to the root process and/or requirements and document it. This article in Business2Community explains that tribal knowledge is one of the most effective ways to streamline processes and ensure consistency, especially when you have staff who will be completing some of the hands-on work or handling back-office processes.
There are dozens of software applications designed specifically for contracting companies. Determining which application is best-suited for your business depends on your requirements, typical working methods, the number of employees you have, and other factors. Consulting reviews that rate and rank the top software programs for contractors is helpful for comparing features and narrowing down the options.
Accounting software is a must-have for contracting companies. These software programs will help you track expenses, manage invoicing, and generate reports for easy tax reporting. Starting out with manual record-keeping processes and trying to migrate to accounting software later is cumbersome, so it’s best to choose an accounting software application that can grow with you as your business grows.
Basic construction tools are also essential for starting a contracting business. Depending on the type of work you specialize in, or if you choose to be a general contractor, you should have the basic essentials on hand to tackle most jobs. This resource lists the essentials for a basic contracting tool kit.
A pricing and estimating process, completion schedule, and contracts are critical for managing the back-end operations of your contracting business. Decide on a software application that includes estimating forms, contracts, and other templates that you can customize to quickly generate needed documents to secure business from clients. Having a professional contract and formal templates with your company branding will convey professionalism to potential customers.
Insurance Requirements for Contracting Businesses
One of the most important aspects of setting up a new contracting business is obtaining the proper insurance coverage. In the contracting world, accidents can happen – whether these accidents result in injury to yourself or an employee or damage to a customer’s property, without insurance coverage, you could find yourself in hot water. Most states require contractors to carry a minimum level of liability insurance. The following resources provide information on the types of insurance contracting companies should have as well as information on obtaining the proper insurance coverage.
There are several types of business insurance contracting companies should carry. This resource from the Small Business Administration outlines the various types of business insurance that are available along with a description of the coverage each type provides for various circumstances.
Not every business must carry every type of insurance. This article explains the various types of insurance and offers insight on determining which types of insurance your business should obtain based on the type of work performed, the business location, and other factors.
Many contracting companies obtain surety bonds. The Surety & Fidelity Association of America provides helpful information on bonds for small and emerging contractors.
Contractors should obtain general liability insurance, automobile liability insurance, workers’ compensation and employers’ liability insurance (if hiring labor), and umbrella or excess liability insurance. This resource outlines the recommended insurance coverage options for general contractors.
Some risk is transferred to other parties through contracts, which can be confusing for contractors to navigate. This resource from the International Risk Management Institute explains managing risk when some risk is transferred to others, how the risk transfer process works, and the minimum insurance coverage contractors should obtain.
General liability insurance is essential for any business, but it’s particularly important for contractors due to the nature of the work. This article explains general liability insurance for contractors, the types of claims and coverage options you may encounter, and what general liability insurance typically covers.
Business Owners’ Policies and Contractors’ Insurance are other options to consider. This article explains these insurance coverage options and which business owners benefit from obtaining each type of coverage.
Homeowners are increasingly educated that they should ask contractors for proof of insurance coverage before engaging a contractor for work on their property. This article explains why it’s critical for contractors to have adequate coverage and who is responsible (the contractor or property owner) for various accidents, as well as the legal ramifications of having inadequate coverage.
The first step in starting a contracting business is to set up a legal business entity, get the legal requirements taken care of in terms of licenses and insurance, and set up appropriate back-office processes to ensure that you can manage your business both safely and efficiently. Following the guidance offered in this guide and consulting the recommended resources will help you navigate the complex maze of starting a new contracting business with ease.