Staring a general contracting business is a great endeavor. The US construction industry had a value of $1.36 trillion by the end of 2020. We can only expect to see a rise as life returns to normalcy after the pandemic. So, now is the right time to start a general contracting business.
However, before you dive into the industry, there are a few things regarding finances you need to know. These things will ensure your business's sustainability and growth in the long run. We will give you some financial tips to start your business and take it to the next level in no time.
Know about the Tax System and Business Structure
The most important things when starting up a business is that you choose the right business structure. It will impact the tax slabs and the structure that you will follow. Here are some of the business models you can choose from:
Sole proprietorship gives you complete ownership and control of your general contracting business. You can be your boss and won't have to be answerable to anyone else. The tax structure for this type of business is also quite simple.
You can pay your business taxes along with your personal taxes. In addition, there is no mandatory requirement from the IRS to get an Employer ID Number (EIN). However, in case of bankruptcy, you will be liable for everything.
Partnership for a Limited Liability Company
Setting up an LLC for a subcontracting business is quite common. You can pair up with someone to start your own business under both of your names. A partnership can constitute two people and a maximum of 20 people. A sole proprietorship is prone to limited liability.
It means that if in case of business insolvency or bankruptcy, the owner will lose everything they own. But that is not the case when you decide to partner with someone and set an LLC. Since the business is a separate entity, it protects your personal belongings and savings.
If you want, your business can choose to be an S corporation instead of an LLC. You can get some tax advantages compared to the LLC business model. However, the paperwork and the documentation process for this system are complex. It is better to consult with an attorney before proceeding with it.
The difference between a C Corporation and S corporation is not that much. It offers the same features you get with S corporation. The main thing that distinguishes C Corporation from S corporation is that it is easy to raise capital.
The business model makes it easy for you to divide a company's ownership into multiple shareholders. As a result, you can pool up a large investment. Since C Corporation is a separate entity, it will go through double taxation. The corporation and the shareholders will be taxed accordingly.
Create a Business Plan
Another optimal financial advice for anyone looking to start their general contracting business is to write a business plan. It is something every new business needs to have to forecast and prepare for any unforeseen events. You will have an idea about the steps you can take to deal with that situation.
The business plan constitutes many things to give you a clear direction regarding your business. It can be beneficial if a business sees an influx in revenue or when the business is going through a difficult phase. So, when writing down your business place, you need to include the following things:
- Operational costs of running your business on a day-to-day basis
- Forecasted expenditure that you are likely to incur soon
- The target audience for your business and how you can capture their attention
- Charges of your services as per the market standards and how to recover payments from your clients
- Ways to make your business more lucrative throughout a period
- Solutions to the possible changing scenario that can impact your business, such as economic conditions
In addition, you can add more things to your business plans as per your preference. It will give you a better idea about how to proceed with your subcontracting business before starting it.
Get Licenses, Permits, insurance, and Other Important Documentations
Another crucial thing you need to look after is having all the documentation to start your business. If you miss any paperwork, you can be subject to penalties, dines, and losses. It can have a devastating impact on your business finances.
So, it is a piece of imperative financial advice that you need to follow to avoid any problems in the future. Here are a few documentations you need to know about before starting your general contract business.
Before you start your business, make sure you have all the different insurances necessary. There is a wide range of insurances you need to have for coverage in case of an accident. You will need the following insurance for your workers and other business aspects:
- Workers Compensation Insurance
- State Disability Insurance
- Property Insurance
- General Liability Insurance
- Unemployment Insurance
- Vehicle Insurance
Besides insurances, having the right licenses is also important for your business. You need to look for both the state and federal licenses necessary for your company. You can go online to find and register for the following on the state and federal government websites:
- General Contractors’ License - The majority of the states require subcontracting businesses to have these licenses
- Specialty Contractors’ License - For businesses that offer additional services relating to painting, carpentry, heating/cooling system installation, and etc.
Certifications and Permits
In addition to licenses and insurances, many states require you to have certain certifications and permits. These documentations are mandatory by state laws, and you need to acquire them before starting your general contracting business.
You can check with your state government's website to find out about all the requirements you need to fulfill.
These are some of the financial advice you should follow before starting your general contracting business. It will ensure you have all the accurate documentation to start your business and a proper business plan in place to deal with unforeseen situations.
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