In order for your company to succeed, you’ll need to navigate a wide range of potential obstacles: Lawsuits, a complex regulatory environment, ebb and flow in customer demand. While these challenges are significant, there are a few simple steps you can take to ensure you’re on firm footing.
For instance, it’s important for contractors to choose the right legal structure for their business. There’s not necessarily one “right” answer here, but for a majority of contractors, the best bet is the LLC format.
By registering your business as an LLC, you can minimize regulatory burdens, shield yourself against lawsuits, and more.
What is an LLC?
The best place to start is with a quick definition.
Consider this: When you start making money on the basis of self-employment, the government automatically considers you to be a Sole Proprietor. Under this legal designation, there’s basically no legal distinction between yourself and the business—your construction company is not its own legal entity. For all intents and purposes, including taxation and legal liability, you are your company.
Sole Proprietorships are fine, but they definitely limit your business growth. And, in a litigious environment like construction, they don’t offer much in the way of protection. That’s why many contractors opt to form LLCs.
An LLC, or Limited Liability Company, provides you with a way to establish your business as its own legal entity. Crucially, this allows you to keep your personal assets separate from your business assets. Likewise, it lets you keep your personal and business liabilities distinct.
That’s the LLC format in a nutshell, but what advantages does it offer to construction companies?
What are the Advantages of Registering an LLC?
LLCs benefit contractors in more ways than one. Consider:
Construction is a famously litigious sector. You’ll need all the protection you can get, and thankfully, this is where LLCs really shine.
Because LLCs allow you to separate your business and personal assets, you can keep things like your home, your family nest egg, and your retirement accounts safe and secure, off the table to potential lawsuits and creditors.
This allows you to invest in your company while feeling confident that your personal wealth is adequately safeguarded.
Another benefit to the LLC format is enhanced professional credibility.
Going through the process of LLC formation proves that your company is serious, not some kind of hobby or side hustle. And that level of credibility makes it much easier to secure the funding you need from traditional lenders, along with potential investment partners.
There are a couple of ways in which the LLC structure provides your construction business with some much-needed flexibility, allowing you to run the company however you see fit.
First, there’s administrative flexibility. You can determine the leadership structure that’s best for your business, without having to worry about the regulatory burdens that saddle incorporations.
Second, there’s tax flexibility. LLCs can report to the IRS on a pass-through basis or on a corporate basis, depending on what makes the most sense financially.
Given the fluid, ever-evolving world of construction, it’s useful to have as much flexibility as you can get. Registering as an LLC provides it.
How to Register an LLC
There are just a few steps involved with registering your company.
Crucially, these steps can vary a little bit from one state to the next. Forming an LLC in California may be a little different from forming one in Florida or Wyoming. It’s wise to double-check state-specific requirements, but generally, the process looks like this:
● Choose a name for your LLC. Every LLC needs an original name, which is to say, one that isn’t already in use by another LLC in the same state. You can likely find a searchable online database for your state, making it easy to confirm that the name you want is still up for grabs.
● Name someone to be your Registered Agent. LLCs are required to have a person or an organization who will receive legal correspondence on their behalf. Some states will let you serve as your own Agent, but it’s much more common to hire a third-party service. This is usually quite affordable, often less than $100 annually.
● Create an Operating Agreement. This document functions as a charter for your LLC. It may denote things like how you’ll split profits with your business partners, if any, and how you’ll allocate day-to-day authority. Having an Operating Agreement is an important way to avoid legal disputes later on.
● File Articles of Organization. This is the document that you file with your state, officially establishing your LLC as its own legal entity. When you file, you’ll also need to pay a small filing fee. The amount varies by state.
● Claim an Employer Identification Number. You can get an EIN for free, simply by visiting the IRS website. You’ll need it before you can file your taxes or administer payroll.
● Create a bank account. Be sure your business bank account is unique, not connected to a personal checking or savings account.
With these basic steps, you’re ready to formally launch your LLC, and start actively promoting the long-term welfare of your construction company. Again, registering as an LLC is one of the best ways for you to position your business for ongoing success, and to safeguard it against common hazards, including lawsuits.
Amanda E. Clark is a contributing writer to LLC University. She has appeared as a subject matter expert on panels about business ownership, plus content and social media marketing.