Wondering how to start a construction business? Starting a business can be a rewarding venture filled with opportunities and challenges. If you’re considering entering this dynamic industry, our comprehensive guide will walk you through the essential steps and key considerations on how to start a construction business in the USA.
Types Of Construction Businesses To Start
This is all about building or renovating homes, including single-family houses, townhouses, condominiums, and apartment buildings. It’s a great option if you enjoy working closely with homeowners and bringing their dream homes to life. Residential construction is also one of the easiest construction businesses to start because it typically requires lower startup costs, fewer regulatory hurdles, and shorter project timelines.
If you’re more interested in non-residential buildings like offices, retail stores, hotels, restaurants, and warehouses, then commercial construction is the way to go. It often involves larger projects and collaboration with architects, engineers, and other professionals.
Learning how to start a construction business starts to get a little more complicated here. Industrial construction focuses on creating facilities for manufacturing, processing, and industrial purposes. Think factories, power plants, refineries, and infrastructure for transportation and utilities. It requires specialized knowledge and compliance with strict safety and regulatory standards.
This type of construction revolves around niche areas that demand specialized skills or expertise. It could be electrical work, plumbing, HVAC systems, roofing, concrete work, or landscaping. If you have expertise in a particular trade, specialty construction can offer great opportunities.
With the growing emphasis on sustainability, green or sustainable construction has gained popularity. It involves creating energy-efficient and eco-friendly buildings, incorporating renewable materials and environmentally-conscious practices.
Contractor Business Structures
When it comes to choosing a business structure for your contractor business, there are two common preferred options: being a sole trader or setting up a limited company. Let’s compare the two types of structures for your contractor business.
You and your business are considered a single entity
Your business is a separate legal entity
You have unlimited personal liability for business debts and legal issues
Limited liability for owners/shareholders, your personal assets are protected
The income generated by your business is treated as personal income
Separate taxation for the company and personal income for owners/shareholders
You have simpler record-keeping requirements
More extensive record-keeping and financial reporting
Ownership & Control
As a business owner, you have full control and ownership over your construction business.
Ownership is divided among shareholders, directors have control
Your business may have lower credibility compared to a registered company
A limited company carries greater credibility and a professional image
Funding & Investment
You may have limited access to external funding sources
Easier access to funding, and the ability to issue shares
You have fewer regulatory requirements
Must comply with legal and reporting obligations
Continuity & Succession
Your business ceases upon your death or retirement
The business can continue beyond individual ownership
How To Register Your Construction Business
Starting a construction business comes with a lot of red tape. Registering your general contractor business is an important step towards establishing your presence and operating legally. While the specific requirements may vary slightly depending on the state you’re in, here’s a general guide to get you started.
Step 1: Choose a contractor business name
Select a unique and catchy contractor business name. Make sure it’s not already in use by another company to avoid any legal issues down the line.
Step 2: Determine the legal structure
Determine the legal structure of your business. Common options for contractor businesses are sole proprietorship and limited liability company (LLC). Consulting with a construction accountant is recommended when choosing the right structure for your unique needs. Our team at EGomezCPA can assist you with selecting the right structure to suit your unique needs.
Step 3: Complete the registration process with the Secretary of State
Visit your state’s Secretary of State website or office to register your construction business. Complete the necessary forms, provide required information (such as your contractor business name, address, and legal structure), and pay any applicable fees. This process establishes your business as a legal entity within the state.
Step 4: Apply for an Employer Identification Number (EIN) for your business
Submit an application to the Internal Revenue Service (IRS) to obtain an Employer Identification Number (EIN) for your business. This unique identification number is used for tax purposes and is required if you plan to hire employees or operate your business as anything other than a sole proprietorship.
Step 5: Ensure you register your business for state and local taxes
Check with your state and local authorities to determine if you need to register for specific taxes related to your construction business, such as sales tax or use tax. Register and obtain any necessary permits or licenses to comply with local regulations. Our team at EGomezCPA are qualified to assist you with this process, our construction accountants have a wealth of experience within this field.
What Documents Are Required To Start A Contractor Business?
To start a contractor business, there are several documents you’ll need to gather. It’s important to note that specific requirements can vary by state and locality.
What licenses are needed to start a construction business? Depending on your state and the type of contracting work you plan to do, you may need to obtain a contractor license. Check with your state’s licensing board or local authorities to determine the specific requirements and qualifications needed for obtaining a contractor license.
It’s important to have the right contractor business insurance to protect your business and manage potential risks. General liability insurance is typically recommended for contractors, and you may also need additional coverage such as workers’ compensation insurance. Speak with an insurance provider to understand the specific insurance requirements for your contractor business.
When applying for a contractor license, you’ll likely need to complete an application form provided by your state’s licensing board or local authorities. The application form will typically require information about your business, qualifications, experience, and other relevant details. Be prepared to provide accurate and complete information in the application.
Bank Accounts For Your Construction Business
If you’re looking at how to start a construction business, one of the first things to get right is your banking. Ensure that you keep your personal and business finances separate.
Opening a dedicated bank account for your construction business helps maintain clear financial records, simplifies accounting, and ensures you comply with tax regulations.
These are some of the steps involved.
Your Construction Business
Choose a bank
Research different banks and financial institutions to find the one that best suits your business needs. Consider factors such as fees, services offered, branch locations, and online banking options.
Gather necessary documents
– Business identification: Provide the legal identification of your construction business, such as the Articles of Incorporation, Certificate of Formation, or a Doing Business As (DBA) certificate if you’re operating as a sole proprietorship.
– Employer Identification Number (EIN)
– Personal identification: Bring your personal identification documents.
Schedule an appointment
Contact the bank you’ve chosen to open a business account and schedule an appointment with a representative to discuss your specific needs, ask questions, and gather information about their account options and requirements.
Complete the application
During your appointment, fill out the necessary application forms provided by the bank. Provide the required information and submit the supporting documents mentioned earlier, such as business identification, EIN, personal identification, business licenses and permits, and business address verification.
Be prepared to make an initial deposit into the new business account. The amount required may vary depending on the bank and account type you choose.
Business Finance Essentials For Contractors
As a contractor, there are several business finance essentials that you should keep in mind to ensure the success and stability of your business. Here are some key considerations.
When thinking through how to start a contractor business, one of the key items to get right is your bookkeeping. You need accurate and organized financial records.
Implement a bookkeeping system to track your income, expenses, job costs, invoices, and receipts. This will help you monitor your financial health, make informed decisions, and simplify tax filing. Consider using accounting software or consulting with a bookkeeper to streamline this process. At EGomezCPA we specialize in bookkeeping services in Miami for contractors and construction businesses.
Budgeting And Planning
Creating a budget upfront and planning your finances is essential. Estimate your expected income and expenses for the year, considering factors such as labor costs, materials, equipment, insurance, permits, and overhead expenses. A well-planned budget allows you to set financial goals, allocate resources effectively, and make adjustments as needed.
Cash Flow Management
Cash flow is the lifeblood of your contractor business. It’s important to monitor your cash flow regularly to ensure you have enough funds to cover expenses and maintain a positive cash flow. Promptly invoice clients, follow up on payments, and negotiate favorable payment terms when possible. Consider establishing relationships with reliable suppliers who offer favorable credit terms to manage your cash flow effectively.
Accurate Costing of Time and Materials
It’s crucial to accurately estimate and cost time and materials for your construction jobs. This includes assessing labor costs, factoring in overhead expenses, and accurately estimating the quantity and cost of materials required for each project. Accurate costing helps you price your services competitively, maintain profitability, and avoid underestimating or overestimating project costs. There are affordable accounting packages that can be of great benefit to your contractor business.
Project Profitability Analysis
Regularly analyze the profitability of your projects. Assess if the revenue generated from a project exceeds the costs incurred, including labor, materials, and overhead. Identifying profitable projects helps you focus on the most financially rewarding opportunities and make informed decisions about which projects to pursue in the future.
Managing Business Debts
If your business requires financing or loans, manage your debts responsibly. Keep track of repayment schedules, interest rates, and fees associated with your loans. Maintain a good credit history and make timely payments to ensure a positive financial standing.
How Much Should I Charge Clients?
When deciding how much to charge your clients as a contractor, keep these tips in mind:
- Calculate all costs: Add up both the obvious and hidden expenses, like materials, labor, equipment, overhead, taxes, and potential losses.
- Consider time and effort: Estimate how much time and effort the project will require, including travel time, project management, and other tasks.
- Research market rates: Look into what other contractors in your area charge for similar services, taking your expertise and unique value into account.
- Make room for profit: Set your prices with a profit margin that allows your business to grow and handle unexpected expenses.
- Understand client budget and expectations: Find a balance between fair pricing and meeting your client’s budget and expectations.
- Provide clear quotes: Break down costs, timelines, payment terms, and any potential changes, so your clients know exactly what they’re getting.
- Regularly review and adjust: Keep an eye on your profitability and make adjustments to your rates as needed to stay competitive and financially sound.
Surety Bonding & Financing For Contractors
Surety bonding provides financial protection and guarantees to clients and project owners, assuring them that you will fulfill your contractual obligations. Different types of surety bonds, such as bid bonds, performance bonds, and payment bonds, serve various purposes in construction projects.
To secure financing for your contracting business, you have several options:
You can apply for loans from banks or lending institutions to cover upfront costs, equipment purchases, working capital, or project funding when starting a construction business
Line of Credit
A line of credit provides flexible access to funds when needed, helping you manage cash flow and meet short-term financing needs.
If you need equipment, financing options are available to spread the cost over time while using the equipment for your projects.
Factoring involves selling your accounts receivable to a third-party at a discount, providing immediate cash flow while waiting for client payments.
Some suppliers or equipment manufacturers offer financing options, allowing you to purchase materials or equipment on credit or through installment payments.
Choosing The Right Construction CPA
What licenses are needed to start a construction business?
The licenses needed to start a construction business in the USA can vary depending on the state, locality, and the specific type of construction work you plan to undertake. Here are a few licenses and permits that are commonly required:
Contractor License: Most states require a general contractor license to operate legally. This license demonstrates your competency and knowledge in overseeing construction projects. The specific requirements and classifications for contractor licenses vary by state. Some states may also have separate licenses for residential and commercial contractors.
Trade-Specific Licenses: These licenses are typically required for specialized trades such as plumbing, electrical work, HVAC installation, roofing, or other specific areas. Trade licenses ensure that you meet the standards and regulations set for that particular trade.
Business License: This license allows you to operate a business within your jurisdiction and may be obtained from the city or county where your construction business is located.
Building Permits: When undertaking construction projects, you will generally need to obtain building permits from the local building department. Building permits ensure that your construction work complies with local building codes, zoning regulations, and safety standards.
Environmental Permits: Depending on the type of construction you engage in, you may need environmental permits to comply with environmental regulations. These permits are necessary when working on projects that may impact natural resources, wetlands, or require hazardous material handling.
Specialty Certifications: Some construction projects or clients may require specialty certifications. These certifications demonstrate your expertise in specific areas such as LEED (Leadership in Energy and Environmental Design) certification for sustainable construction practices or certifications for working on government-funded projects.
Is a contractor business license required when starting a construction business?
Yes, a contractor business license is required when starting a construction business to ensure that contractors have met certain qualifications, standards, and regulations set by the licensing authority. It serves as a means of protecting the public and ensuring that construction work is carried out by competent and reputable professionals.
How to start your own construction business?
To start your own construction business, follow these steps:
- Research and plan your business.
- Choose a legal structure.
- Obtain the required licenses and permits.
- Secure insurance coverage for protection.
- Establish separate business finances.
- Acquire necessary equipment and tools.
- Build a network of industry contacts.
- Develop a marketing strategy to attract clients.
- Bid on projects and secure contracts.
- Ensure compliance with regulations.