Updated: Apr 25, 2020
A Better Way to Establish Your Business:
A business begins with an idea that there is ‘A Better Way.’ Starting a business will be one of the hardest things you ever do, the daily grind will challenge you to your core and only through sheer force of will power can you sustain. The choices for every aspect of business are your responsibility, the freedom to decide if your business will win or lose. As an entrepreneur this can sound like a dream, ready to take on the world and become your own boss. We will show you how to start your enterprise and lay the foundation for success.
1. A new business must be ready with all due diligence (a comprehensive appraisal of a business undertaken by a prospective buyer, especially to establish its assets and liabilities and evaluate its commercial potential) and your entire business strategy must be constantly reexamined. The first step to starting a business is to conduct market research. If there are fifty general contractors in your immediate area with fierce competition and you were thinking about opening up shop as the fifty first general contractor, make sure you are the Wyatt Earp (best of the best) of general contracting. You have to know your immediate market, start thinking about supply and demand. Is there enough demand for work and is the supply of general contractors relative to the amount of work available? Don’t shoot yourself in the foot by not studying the market you are entering first.
2. Most contractors skip this next step, whether it is a false preordained wisdom or the strong urge to lick windows (we may never know). The step I’m talking about is a business plan! Why don’t contractors write business plans? Is it because we all copy each other as we look across the Home Depot parking lot taking mental notes on what other contractors might be doing better? Writing a business plan and identifying what makes your business unique will be your competitive advantage. Finding your niche and defining it on paper will help your mind come back to what makes your company great. Not only will your business plan be your guide, it will be your goal setting as well. You decide how much money your company will make by planning the blueprints of your company. Every detail on how your company makes money and sees the industry will be spelled out in your business plan. Let it be your starting point on your road map to winning. If you need help with business plans, please contact us - we can help.
3. Businesses cost money, they begin with capital and end when capital runs out. Where are your start up funds going to come from? In a perfect world, your soon to be contractor has been working hard to hone their skills, build their tool supply and save as much money as possible. Realistically most contractors start off by saving up funds from a couple side jobs, it is the water to grow the seed which is your business plan. Of course starting a business isn’t cheap, so most contractors start out with one or more forms of financing, whether it is a credit card, personal loan, line of credit, etc. Capital is universally important for all businesses, no matter what we think about it - without it there is no business.
BW Builder started with zero debt and operates on zero debt to this day. Initial funds from the owners were deposited into the business account and revenue was used to help grow the business. If this is not an option for you, then how are you going to fund your initial start up costs? Planning ahead and saving money on the side is the most effective way to fund your new business. Your business plan will outline how you are going to fund your company as well as initial revenue strategies.
The structure of your business, as defined in your business plan, has to match your overall strategy. There are multiple forms of company structures including Sole Proprietor, Limited Liability Company, Corporation (S, C, B, Close, Non-Profit), Partnership (Limited) and a Cooperative.
Each form of business structure can be strategically used for different liability and tax implications. For our purposes will highlight Sole Proprietorship, Limited Liability Company and a couple forms of Corporations.
The above image is an oversimplified breakdown of different business structures, the overall decision should be made with advice from your CPA and attorney. There can be severe legal and tax consequences of the proper entity guidelines are not followed.
Sole proprietorship is the most common business entity for contractors, which has a direct correlation with the size of the contracting company. A small company working on smaller project sizes let's say under $10,000 has less potential liability than a company working on larger projects. The biggest con of being a sole proprietorship is liability, you assume all personal liability. Personal liability directly affects all assets attached to your name including your home, vehicle, bank accounts, etc. We will talk about general liability insurance soon, a must for any size contractor, but the possible exposure on larger jobs makes a sole proprietorship exceedingly risky.
Any business that does not register their business as a partnership or corporation is automatically considered a sole proprietorship. This means you are the one and only boss with everything to gain and unfortunately everything to lose. If you are working on small projects with a small crew, this business entity may work for you.
A partnership is the simplest business entity with two or more people. This does not necessarily mean you are a fifty percent owner with another person, you can have any percentage split with one or more people. A person who owns a small portion of the company is still a partner, how you run the company with your partner can be tricky. Expectations and agreements must be made with each business partner before starting business activities, it is imperative.
Imagine you are running a successful company with a business partner and at the year end profits are ready to be distributed to each partner. Only there is a problem, your business partner says they worked harder than you so they are “entitled” to more of the company profits. No agreements or contracts were signed previously and even if you are 50/50 partners, your so-called partner could now take you to court. Of course with no agreement made beforehand, this now becomes a hearsay argument and the outcome might depend on how good or bad of a day the judge was having.
Don’t be that partnership, if you go into business with someone - set the expectations before you run into trouble.
Partnerships like sole proprietorship have unlimited liability exposure unless you set up a Limited Partnership, which like the name implies limits your personal liability. The choice will depend on your unique position and how much exposure you have while conducting business.
Limited Liability Company (LLC)
Moving down the chart, we find the Limited Liability Company, a type of business entity that limits your exposure to liability. Construction, as most of us know already, is a risky business and having your company tied to your personal assets can be scary.
Especially if you do business in California, a lawsuit is all too common. Unless there is no other solution left available should someone resort to a lawsuit, but unfortunately that is not always the norm. There are those that do not conduct business with empathy, they will step on you and move on without thinking how your life has been affected. Even as I write that, it goes against everything I was taught by my family and friends. Business should be conducted with honesty and integrity, at the end of the day your integrity is all you take home with you. As a business owner you have to be careful, LLC’s and Corporations were created to protect personal assets.
In an LLC, business taxes are transferred directly to the LLC owner’s as personal tax. There is fee for an LLC directly proportional to the company’s revenue, the more revenue the higher the fee. If you are a smaller company with modest revenue and income, an LLC may be a good option for you.
S and C Corporations
These business structures are their own legal entities, they hold all of the liability for business operations. They are taxed as a legal entity, only an S Corporation will pass some of the profit and loss to the individual shareholders. C Corporations are taxed completely separate from shareholders and managers, which means there are two rounds of taxation. The company is taxed as an individual at the standard corporate tax rate and the owners/officers are taxed at a personal level as well.
S Corporations are the most common corporations for smaller companies that are privately owned while C Corporations are most common for publicly traded companies. Unless you are really kicking butt and have the need to raise lots of money through an IPO (Initial Public Offering) then an S Corporation is more your style.
The Benefit Corporation is, in my opinion, the Corporation of the future. They carry the benefits of a standard S or C Corporation and are taxed the same, but the B Corporation requires a commitment to social responsibility.
A Better Way of thinking about business is brewing, different from the neo liberal economic principles of today’s society. Neo liberal economics means companies are dedicated to creating profits for their shareholders no matter what the cost is to the community around them. A construction company who accepts social responsibility and is accountable to the stakeholders that are affected by the business can apply to be a B Corporation. From a marketing standpoint there isn’t a better business structure, your clients will be more inclined to work with a company that shares their sense of social and environmental responsibility.
There is always a better way to do business and a better way to live life, this manual is exactly focused on what that means.
Registering Your Business
The county and the city you do business in will require you to register your business. If you are conducting business under a different name than your own legal name then you will need to file a DBA (Doing Business As), also called fictitious name statement, with the county clerk’s office. Whether you visit their office or fill one out online, you will need to do so and pay a recording fee. For example if my name is Bill Wallace and my construction company DBA is Build Right Contracting, this DBA must be registered with the county. The county will then instruct you to post the DBA in the classified ads of a local newspaper to inform the general public that you are associated with the DBA.
The city you do business in will require a business license in most cases, this will require a small fee and possibly even a small percentage of revenue in some cities. Every city you do business in, may require a business license and you can be fined without one. Make sure to review every city and county’s website for business requirements before conducting business in that specific jurisdiction.
Federal and State ID
You are now to the fun part… not really. You must register with the IRS to obtain a Federal ID Number or Employer ID Number. You can apply for this number online at:
The ID number is used to catalog your business for federal and employer taxes. Every business must have this if you have employees, if you are a lone wolf in the contracting world, you may use your social security number, but only as a sole proprietor. Any corporate entity must have its own EIN number.
Some states require a separate number for state tax purposes, California is a good example. The Employer Development Department of California requires you to register as an employer if you pay more than $100 per quarter in payroll.
Now that you have registered your business, you are ready to pay taxes (exciting, isn’t it?).
Business Bank Accounts
This is often an overlooked segment of starting a contracting company, most contractors will open their business accounts at the bank that their personal accounts are at.
Before you jump into a new business account, you need to ask the bank in question a few questions yourself. Are there any fees for business banking? How much are business checks? Do you offer construction loans, what kind of construction loans and what are the basic requirements of qualifying for such loans? All banks handle their fee and lending systems a little differently, figure out which bank might work for you. Sometimes local credit unions or smaller banks will offer incentives to earn your business, it is worth your while to shop around when opening up your business accounts.
Construction like most and more than some is a risky business. Between employee safety, employee disputes, client issues, property damage - there are possible financial windfalls that could adversely affect your business. We pay insurance premiums every month indefinitely so we are covered if the need arises. The same as paying your health insurance, the company’s health is looked after by adequate insurance coverage.
General liability is a must if you are thinking about contracting, you risk everything without it. Accidents happen, life happens, stuff happens and there are only so many things you can control. A good business owner will write and put in place proper company procedures and policies to help reduce company risk, but you can never 100% eliminate all risk factors.
There are tons of insurance carriers, a little research can go a long way in matching you to the right carrier. You can spend fifteen minutes of your time asking online insurance companies for quotes along with comparing peer reviews on those specific companies. A local builder’s exchange is a good resource when looking for trusted construction insurer’s. A broker can help find the lowest cost, but sometimes the lowest cost isn’t always the best bet. A policy is only good if the insurance company backing it can actually pay the claim. Insurance companies do go bust and can potentially leave you high and dry when you really need them. Make sure you do your research along with your due diligence.
Workers compensation insurance is a must in many states and if you are in California is also very expensive. When you first obtain your contractor's license and start your business, you will have a slim pick of workers compensation insurance companies. The policy will also be more expensive at first until you have a proven track record of good company safety practices. Having insurance for when you need it is important, but it normally hurts the pocket book to make a workers compensation claim. I can not tell you enough how important it is to promote safety on your job sites and actively work to improve company procedures in regards to safety.
There are many times especially in my young adult life where knowing these basics would have saved me a lot of trouble. All businesses will struggle, there will be some hard decisions ahead that make you question why you went into business for yourself in the first place. My goal is that you won’t have to make the same mistakes I made or that thousands of other contractors make when starting their company.