Contractor Business Plan

One of the first steps you will need to take when starting a contracting business is to determine how to structure your business. There are a few choices out relating mostly to taxes and legal considerations. It's good to know the options before choosing one.

Why it is Important to Have a Business Structure
Determining your contractor business's structure comes largely down to set-up, investments, and liability. No matter which way you go, there will be trade-offs. The IRS's website for small businesses is an excellent resource. It can be found at www.irs.gov/business/small. Before establishing a business structure, it is a wise decision to hire a lawyer and an accountant and consult with them. As a rule, any contracting business should be retaining the services of both anyway.

Sole Proprietorship
A sole proprietorship is the easiest business structure to set up. The sole proprietor owns all the assets and profits brought in by the business, and the sole proprietor also "owns" all the debt and liability. For tax and legal purposes, the business and the individual who is sole proprietor are considered the same entity. So, if the business gets sued, you as the sole proprietor are getting sued, and all your personal assets can be at risk. This is one of the most important considerations that needs to be made. If you run a contractor business that involves risky work, your chances of getting sued might be high. So a sole proprietorship might not be the way to go.

Partnership
Many contracting businesses choose to establish as a partnership. When two people start a business together, the benefits of a shared work-load-which includes decision-making-can seem appealing. Getting a business up and running always seems more possible when there's someone else helping out. But a partnership takes serious advanced planning. There needs to be an agreement written up that addresses who makes what decisions, defines roles and commitments, and determines how the business profits will be split up. Since the law sees a partnership just as it does a sole proprietorship, the combined assets of both individuals is on the line-this is asking a lot in the way of trusting one another. A written agreement will help keep the business running smoothly.

Note that there is more than one type of partnership. There are general partnerships, joint ventures, and limited partnerships. A joint venture probably won't apply to a contractor business, as these types of partnerships tend to be for a limited-time or one-time scenario. Limited partnerships are often assumed when one partner is on as an investor with limited liability and decision-making power-also not common with contracting businesses.

Corporation
Establishing as a corporation means the business is an entity separate from those who own and/or run it. As an owner, you are a shareholder, and you assume limited liability. You must have an elected board of directors who meet and oversea policy-making and enforcement. Setting up a corporation is a bit of a chore compared to the sole proprietorship and partnership options, and the tax filing process is more complicated. Corporations do have the benefit of raising capital through stock sales, and ownership in a corporation is easy to transfer to someone else.

Incorporating requires a charter from the state, and a good chunk of change to pay for incorporation fees, legal concerns, and buying stock certificates. From an ownership perspective, the corporation is taxed twice: once for the business, and once for the owner.

The S Corporation option is a subset of the corporation business structure. In this scenario, all profits pass directly to the shareholders and their individual tax returns. By setting up this way, the double taxation is eliminated. This contractor business structure has other limitations, but the tax benefit alone can seem worth it to the contractor business owner.

Limited Liability Company (LLC)
The LLC combines features from both the sole proprietorship and corporation structures. In an LLC, the owner is a member, and receives liability protection similar to a corporation set-up. There are more flexible profit distribution options in an LLC, and earnings are considered "pass-through" profits, only getting taxed on the individual owner's tax form. Set-up is easier than incorporating, though it is still more work than a sole proprietorship or a partnership. There will be fees and paperwork, and certain states have regulations mandating operating agreements similar to a partnership.

Personal Experience
Josh Macmichael is the sole proprietor of a seamless gutter contracting business based in New Hampshire. His business is called New London Seamless Gutters (www.nlseamlessgutters.com). For Macmichael, business structure was a fairly simple decision. "Sole proprietorship is just a heck of a lot easier," says Macmichael. "It's easier to set up, easier to deal with payments, and doesn't cost the money that incorporating costs." Although the nature of his contracting work (installing and working with gutter systems) is inherently risky, Macmichael believes that the conveniences of sole proprietorship far outweigh the liability risks. "From a liability standpoint, sure, I should probably be an LLC, but you can be looking at $3,000 or more to get a lawyer to go to work on all the filing and paperwork. You can see why new businesses would go with a sole proprietorship."

More information on building a successful contracting business can be found at www.contractorblab.com.