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How to set up a construction business

STEPDecide Upon Business Entity

 There are several general business structures. You can read the states website here but I also give you my opinion below.

[State Business Entities]

Sole Proprietor
The simplest form. A single person.
Pros
Easy Paperwork
Minor Tax Benefits
Cons
Full Liability
Income Taxes
Corporation
A legal entity that exists only on paper.
The listings below are created and recognized by the
state government.
The IRS can classify your business differently than the
state unless you request certain classifcations.S & C
prefixes are a tax status of a corporation and not a
business type per se.
Pros
Income Taxes
Flexibility
Reduced Liability For Stock Holders
Cons
Paper Work
Form Filing Taxes
LLC
Another corporation. Designed merely as a legal shield
to easily reduce liability of its members. There are state
restrictions on how they operate. Contractor’s can expect
a bill of $5,000.00 to meet the $100,000.00 bond
requirement.
Pros
Easy Paperwork
Reduced Liability
Income Tax Benefits
Cons
Specific legal requirements
Form Filing Taxes
Partnerships
Multiple people acting a either sole proprietor or limited
liability partner in a single business.
Pros/Cons
Its complicated. I don’t prefer these for many reasons. If
multiple partners are needed an LLC might be better.

Most startup start as a sole proprietor. There is no additional paperwork to file except at your city hall which will probably require a business permit.

 

 

STEP 2 Acquire Insurance

 Insure your business. Below is the SBA’s explanation of insurance. My opinion follows.

[SBA Insurance Summary]

Liability

This is a must 1million/2million aggregate. Monthly cost should be less than $100 for a small contractor. Make sure your policy allows you to additionally insure other parties. Some “cut-rate” policies may not offer this feature which is a requirement for many of the bigger and better jobs.

 

Workers Compensation
If you don’t have any employee’s tell your insurance agent that you want a no employee worker comp policy. Should be close to $800 a year. If you have employees then just shop pricing out. Why you ask? Because bigger and better customers will request workers compensation insurance no matter what.

 

Automobile

Compare with your personal insurance. Auto insurance for business has extra protections personal insurance does not. I have 1 million dollars in coverage and recommend it.Coverage is important. Understand insurance will not pay if you lied about anything and don’t follow good business practices. With rising legal claims insurance can sometimes fall short. A separate business entity can buffer exorbitant legal claims if a serious lawsuit occurs. The prices listed above are for a start up sole proprietor with good credit doing $500,000.00 in gross annual sales.

 

 

STEP 3 Create an Office Management System

 Office management will make or break your business. A business plan is at the core. These are the tools to exercise that plan such as standard paperwork, company manuals, storage of legal files and accounting.What happen if you lose your computer files?What will your contract look like?What information do you need from vendors and customers?

How will your customers or vendors contact you  ?

How will you store your estimation worksheets and past pricing data?

What are your tax requirements?

You need to have a plan for handling all this information and dishing it right back out.

Through this website you can purchase my contract documents on the products page.

My outline includes all the standard forms and data a large multimillion dollar company would use. But I have tailored it so that its scalable for even a small construction company.

There are many other organizations that sell different standardized contracts and forms. An example below I recommend and use is the AIA contracts below on bigger jobs as they have become industry standards. These are American Institute of Architect contracts.

AIA contracts here.

 

STEP 4 Learn About Taxes and Legal Reporting Requirements

These are the taxes most people will be filing.Business Taxes (Federal IRS and California Franchise Tax Board)Self employment Taxes (Federal IRS and California Franchise Tax Board)Personal Income Taxes (Federal IRS and California Franchise Tax Board)Employment Development Taxes (State)

Board of Equalization Taxes (State)

Miscellaneous Forms and Fees (State)

Also you will be required to report to the CSLB, Secretary of State and the county and city you operate your business in for a variety of reasons.

The reporting requirements template includes a calender summary of important tax dates in the products page.

CONCLUSION

Its easy to start out as a sole proprietor then switch to a corporation and tax status after you have earned some money. With a sole proprietorship you can start business very quickly. Filing state paperwork will take a few months and a few hundred dollars.If you are a small start up than a sole proprietor makes the most sense. But as soon as your annual gross personal income exceeds around $100,000 or you hire an employee you should incorporate.

That’s it! If you have taken care of these 4 impoirtant steps you are licensed, bonded and insured. Good luck!

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