Does Your Contracting Business Need a Corporation?

Once you pass your exam and can finally start your business, you need to determine how you will do that. Many people go into business without actually starting a business, but that doesn’t mean it’s a wise idea. Starting a business takes a fair bit of investment, including making a decision about whether or not to start a corporation. Here are a few factors to consider as you make a decision.

Benefits and Disadvantages of Sole Proprietorship
The default business arrangement for many people is a sole proprietorship. You can be doing business as your name without filing officially as a business, depending on the field and the work you do. In this way, a sole proprietorship is extremely convenient. You don’t have to go through the work of setting up the business or filing with your city or state. On the other hand, a sole proprietorship also gives you very little protection from things that happen during the course of your business. For example, if something goes wrong, you can be held financially liable along with your business. For that reason alone, most construction businesses create some kind of formal business structure.

Limited Liability Companies
One of the most basic business structures you can take as the owner of a contracting business is a limited liability company, also known as an LLC. If you form an LLC, you don’t have an official corporation. You are still in business for yourself, paying taxes on your income directly. LLCs also work as partnerships, if you are going into business with someone else. The chief difference between an LLC and a sole proprietorship is liability. With an LLC, you can keep your personal life and your business life separate to a greater degree.

Types of Corporations
When compared to an LLC, a corporation is a more official separation between yourself and your business. In this case, you file as a corporation and become one of the corporation’s employees. There are two types of corporations. A C corporation is the most typical. With this type of corporation, you file to incorporate with the state. Unlike a sole proprietorship or LLC, you’ll file separate taxes for the corporation than you do for yourself. Tax experts argue that this may mean that you pay taxes twice on your profits. An S corporation is different. With an S corporation, you file directly with the IRS. Not all companies can create an S corporation. This corporation may allow you to pass through some of your business income directly to you, which changes the way you calculate tax liability.

Tax Concerns
Before you decide on your business structure, it may help to seek the services of an accountant that specializes in business taxes. Accountants can help you outline what you can expect to pay in taxes and when you’ll need to make those payments, depending on the type of business structure. All businesses are required to file taxes, but their complexity and the amount of taxes you pay depends on that structure. If you’re thinking about incorporating, you’ll probably want to hire an accountant anyway.

When to Incorporate
It’s hard to know which business structure is going to be best for you. As a general rule, you may want to form an LLC at the least to help protect your personal interests and keep your business separate. A corporation may be more appropriate once you have a few employees. This is also true if your business has several stakeholders who make decisions about how the business is run. In any case, you should have a plan for how you want to begin your business. Once you get started, you may be too busy to make a change. In fact, failing to file a business in the first place is a common reason that people end up with a sole proprietorship when they really should have something more.

Starting your own business begins with the right preparation for the contractor licensing exam. To get going on your career path, visit CSLS today!