Is it time to level up from employee or subcontractor to small business owner?
Knowing when the time is right to take the next step to establish a business around your work as a contractor or subcontractor can be complicated. Depending on where the majority of your business comes from, the answer may be clear. For example, if you are already soliciting and getting work from individual customers, rather than other contractors or construction business owners, establishing your business and brand gives you an advantage. On the other hand, if the majority of your work comes from another contractor that specializes in your trade, opening your own business may be seen as competition.
If you are considering starting your own business, the first thing to think about is whether there is demand for your skills or services. If so, then really ask yourself if you want to be your own boss. Entrepreneurship is not for everyone. Small business owners are responsible for every aspect of the business and its operations. You may have to learn new skills in order to run a successful business. As the business grows, you may have to supervise and manage others, rather than doing the hands-on work.
Using a small business launch checklist can give you a comprehensive rundown of how to start a new business. Taking the following steps can help you get started:
- Write a Business Plan.
- Choose a business name.
- Make a marketing plan.
- Decide how to structure your business.
- Start planning for changes to how you pay taxes.
What legal issues are important to consider when starting a new construction business?
There are many legal issues to consider when getting any new business off the ground. Mostly, when forming a business, owners want to make sure they are set up to operate legally, and have some protection in case something goes wrong. The following issues can be helpful to address at the very start:
- Business structure: If you plan to work as a contractor for consumers, operating as a sole proprietorship can have risks. A formal business structure, such as a limited liability company (LLC) or corporation, can provide crucial personal legal protection.
- Business name: Forming a business entity, such as a corporation or LLC, prevents others from using your business name for their business. Registering a trademark with the state or federal government provides even more legal protection.
- Employer ID number: Once you have chosen how to structure your business, you can get an employer identification number (EIN) from the IRS. This number serves as a unique identifier for your business for a variety of purposes. For example, an EIN is required to open a business bank account.
- Tax planning: Depending on your business structure, how you pay taxes may change. It can be helpful to be prepared for those changes from the outset.
- Business licenses: You may need one or more licenses from your county, city, or state to practice your trade as a business. Your local Building Department can provide the most up-to-date information on what a new construction company or contracting business needs to get started.
- Insurance: Businesses often need insurance. At a minimum, general liability insurance can protect you against many forms of legal liability. You might also need workers’ compensation insurance if you hire employees.
- Construction regulations: If you hire employees or subcontractors, workplace safety regulations likely apply to you. Familiarize yourself with the both local and federal rules and regulations from agencies like the Occupational Safety and Health Administration (OSHA).
- Contracts: Proper contracts are critical when doing business with customers, vendors, other contractors, and anyone you work with.
What are the benefits and drawbacks of incorporation?
While you do not have to incorporate to start a construction business, doing so provides two major benefits:
- It gives you protection against personal liability for worksite injuries, construction defects, and other common risks in the construction business.
- Income can pass to shareholders, which can help the business to grow.
Operating as a corporation also has some drawbacks. For example, most states require corporations to keep a substantial number of records. In addition, you may have to hold regular shareholder meetings and document them, even if you are the only shareholder in the company. Corporations are required to file their own tax returns, separate from the shareholders’ individual returns.
Organizing your construction business as an LLC also provides liability protection. It also requires recordkeeping and reporting, however, to a lesser extent than corporations.
How might your tax filing change if you start your own business?
Generally, your tax filing requirements depend on the structure you choose for your business. If you operate as an independent contractor with no formal business structure, you can probably file Schedule SE (Form 1040 or 1040-SR) for your business. This requires you to pay self-employment tax and file quarterly estimated taxes to avoid penalties.
When you form a small business with its own business structure and separate cash flow, you may file taxes differently:
- LLCs: LLC owners, known as members, pay taxes directly on business profits on their personal tax returns. The LLC is still required to file a return (either Form 1065 or 1120), but it does not pay income tax itself. If you are the only member of an LLC, the IRS considers it a disregarded entity for tax purposes. You do not have to file a separate return for the company. Instead, you may account for the LLC’s income on your own return.
- Corporations: Corporations are required to file separate tax returns using Form 1120. Most corporations pay their own income tax, and shareholders pay tax on income they receive from the business. If you choose to be an S-corporation, however, income passes through to the shareholders. The corporation is required to file Form 1120-S, but the shareholders pay tax on their proportionate share of the profit.
Small businesses are also required to file tax statements for employees and independent contractors. If you withhold income tax and payroll tax from employee paychecks, you are required to file Form 941 every quarter. You are also required to send a W-2 to each employee every year. In addition, you may be required to send Form 1099-NEC to any independent contractors.
If you need tax help, Rocket Lawyer can now match you with a tax pro for affordable and convenient tax filing services. Don't do your taxes™ – Let us do them for you. If you have more questions about starting your own construction business, reach out to a Rocket Lawyer network attorney for affordable legal advice.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.