Business Setup Considerations for
New Construction Companies
Take the necessary time to understand how to properly set up your new construction company. That will pay dividends for you in the future and better protect the assets of your new company.
By: Kit Werremeyer
President, Southernstar Consultants LLC
Counselor, SCORE Chapter 203, Tampa, Florida.
- Organize: Determine a name for your company and then strongly consider organizing as a Limited Liability Company (an LLC) or a Subchapter S Corp (a Sub S). Organizing in this way will better protect your personal assets in the event of a claim or lawsuit against your company. There is also a tax advantage to using an LLC or a Sub S. The profit or loss from your business in each case is passed through to you and any co-owners to report as normal income. You report this income on your year end IRS personal tax returns. Since a LLC or a Sub S do not pay any state or federal income tax (as separate business entities), there is no double taxation. If you are going to have partners or shareholders in your new company, make sure you have some kind of written members (LLC) or shareholders (Sub S) agreement as a part of your organizing documents; this agreement outlines all the rights, duties, responsibilities and obligations of all members or shareholders. You can download example copies of these agreements for a nominal fee from the internet. Find a Certified Public Accountant (a CPA)near you to do all the organization paperwork. The CPA can explain the personal tax considerations of organizing as a LLC or a Sub S. The CPA will also apply for an Employer Identification Number (an EIN) for your company, a DUNS number (for business credit reporting) and, if necessary, a Fictitious Name or Doing Business As (DBA) registration. An EIN is the federal number your company needs to use when your company reports business income or receives revenues (payments) from commercial clients. If you resell construction materials you will likely need a state tax certificate and sales tax number to collect and remit sales taxes to the state. Check with your county for any zoning requirements that may affect your business location.
- Bank Account: Set up a bank account in the name of your company. All revenues received and expenses paid out by your company must go through this account. Do not co-mingle your personal funds with the funds in this account. Pay all of your company's bills through this account.Do not use the business account for any personal purposes. If you start this account with your own personal funds, lend this money to your new company through a written loan agreement that pays interest; this is a legitimate business expense for which you can reimburse yourself.
- Insurance: Insurance is an important asset of your construction company. Secure General Liability and Auto/rental equipment insurance in the name of your company. This will better protect you and your company against claims for personal injury and property damage, and will provide you with legal defense of those claims, which may arise out of your company's operations. Talk to a business insurance agent near you about your insurance needs. You will also want to strongly consider securing Workers Compensation insurance for you and any of your employees. Most clients will not allow you to work at their jobsite unless you have proper insurance and can provide certificates of insurance for the required policies, including Workers Compensation. If your company will do architectural designs, engineering designs and calculations, or similar, then you will also need to consider securing Professional Liability (Errors and Omissions) insurance to better protect you and your company from claims arising out of mistakes made in designs and calculations.
- Licenses: Go your local county courthouse, contractors section, and find out what types of professional and/or business licenses you will need to secure for your new company and the type of work you intend to perform. Secure all required licenses. You may have to take a test, or tests, to secure certain types of contracting licenses. You can also find out about state licensing requirements for contractors at www.contractors-license.org.
- Performance Bonds: If you intend to do work in the public sector, it’s likely your company will be required to provide a performance bond to ensure that you complete the work in accordance with terms of the contract. Bonds, guarantees actually, are provided by surety companies. Start early on getting your company qualified to provide bonds as the surety company will go through a due diligence process on your company to determine the dollar value of work they will write bonds for. You can find bonding companies in your area on the US Government’s Circular Number 570 at: www.ustreas.gov. Also see: www.alphasurety.com
- Business Plan: Write a business plan. This is a roadmap for your business. It doesn't have to be fancy or long. Best bet is to take a course or attend a seminar on how to write one. Check with your local SCORE chapter to see if they offer such a course. Local universities and colleges often offer these courses as well. Your business plan is a “living document”. Change it as often as necessary to meet the changing needs and aspirations of your company. If you want to borrow money from a bank for your business, one of the first things they will want to see is your business plan.
- Start-Up Money: For a newly established business without two
to three years of success, borrowing money to get the business going
will likely be difficult.
Talk to several banks in your area about loans and see what their requirements are and how much they would be willing to lend you and under what terms and conditions. There is no grant (free) money available. Despite what you may hear or read, little if any grant money from the Government is available to for-profit business. The majority-perhaps 95%-of grant money goes to not for profit businesses. Do not waste your valuable time or money by taking a course in how to apply for grants; use that same money to invest in your new business. Who lends money? Banks lend money. The US Small Business Administration (SBA) and SCORE do not lend money or give out grants, despite what your friends or the rumor mill may tell you. The SBA does provide guaranties for loans made by banks to small businesses. You can find out more about the SBA guaranty process for small business loans at: www.sba.gov/financing.
- Accounting: Start early and get into the routine of collecting and recording all of your company’s revenues and expenses. Establish a detailed chart of accounts for expense categories. Alternatively, develop a working relationship with a CPA who will do all your books, prepare your monthly (or other time frame) cash flow statement, profit and loss statement, balance sheet, and prepare your required annual tax returns. You can do this accounting work yourself if you are so inclined, but your time is more valuable being used to manage your business and making it grow and be successful. Strongly consider hiring someone to take proper care of your accounting process.
- Estimating and Pricing Process: Develop an estimating and pricing process for the work you intend to perform. Most clients are going to want a firm lump sum price for the work they want done, so make sure you fully understand all your direct labor, materials and equipment costs, your overhead (home office) costs, and your profit expectations for the work you quote. The sum of all these is your price to the client. You can find lot of excellent construction estimating guides through the publisher RSMeans at: www.rsmeans.com.
- Contracts: Develop a simple contact form to use for your work with clients. Make sure all your contracts have at least a well defined scope of work, good terms of payment, an achievable schedule and a good extras/claims clause. Do not do any work on verbal orders; get everything in writing, always, no exceptions! You may want to engage a lawyer who specializes in construction contracts or a contracts professional experienced in engineering/construction contracts to assist you in writing a contract to use for your projects. Take a course in engineering/construction contracts so you understand such contract issues as: various types of terms of payment, indemnity, additional insured status, warranties, guarantees, types of damages, claims and dispute resolution.
- Learn how to understand, evaluate and then mitigate the commercial risk you may be exposed to in a contract; the assets of your company may be at stake.
- Marketing: Develop some marketing materials about your company and the work it does and get it out to potential clients. Join local contractors groups and your local chamber of commerce. Advertise in regional and local community newspapers. These are all excellent venues to network and advertise for new jobs. Marketing is simply client education. An educated client is a buying client. In your marketing materials note the work you do, successful projects, licenses, insurance provided and that you are a safe contractor who completes his work on time and has respect for his clients. If applicable note that you are Veteran Owned, a Women Owned, or a Minority Owned small business. If you intend to market your engineering/construction services to the government you will have to first register your company at: www.ccr.gov.
- Sales: Develop a sales process. Selling is simply convincing the client to buy your engineering and/or construction services. This process begins after you have done your marketing with the client. Learn how to write a proper proposal to respond to a client’s inquiry or request for proposal (RFQ). What makes your company better than the competition? What are your strengths? What are your weaknesses? Improve your strengths and work on changing your weaknesses into strengths. Always go see you clients face-to-face when selling. When you see them, make sure you are always cleaned-up, well-dressed and presentable. Learn from your competition. Never bad-mouth your competition; it’s temping but unprofessional and they might actually do a better job than you do. Slaging the competition will turn off your client to doing business with you.
- Labor: Labor necessary to complete your operations comes generally from three sources: subcontracts, direct hire, and broker labor. With subcontracts, you hire a specialty contractor for certain portions of the work you intend to perform. Make sure the subcontractors you use have appropriate experience, are properly licensed and insured, and, if necessary, bonded. Pay your subcontractors on time and treat them as equal partners in the successful completion of your work. With direct hire, you now have employees. As such you will be responsible for their wages, certain insurance, and any applicable state and federal withholding taxes related to their wages, such as Social Security, income tax withholding, Workers Compensation and unemployment insurance. You may also be responsible for other employee benefits such as vacation pay, health insurance, and contributions to a retirement program. With broker labor, you engage a broker to furnish the workers you require to meet the skill needs of your project. You pay the broker a fixed amount (per day, per hour, etc) for the workers he provides. The broker pays all required taxes, withholdings, and insurance from the fees he charges you for the labor provided.
- The labor provided by a broker will not typically be considered to be your employees, but check with your legal representative on this issue to make sure. Also check to make sure your general liability insurance covers claims that may arise out of your use of brokered labor.
- Safety: Develop a safety program in accordance with the US Occupational Health and Safety Administration (OHSA) guidelines for your construction activities. Publish it and give it to all employees. Prominently post it on all jobsites. Continually enforce the program with all your employees, subcontractors, any brokered labor you hire, and all others who may be on your jobsite. Have your management’s and supervisor’s compensation packages, and even employee pay, linked to safe work practices. The best insurance policy and way to reduce or eliminate claims for personal injury or property damage is to always work safely. Zero OHSA recordables and zero OHSA lost time accidents ought to be your goal. Unsafe employees should be requested to find employment elsewhere.
- Where to Get Some Help: There is no better place to get some help than your local SCORE chapter. The SCORE motto is: “Counselors to America’s Small Businesses.” There are approximately 400 SCORE chapters in the US and approximately 13,000 counselor volunteers ready to help with new and existing businesses. SCORE counselors typically have many years of corporate or small business ownership experience, or both. SCORE counseling is free. Business related courses offered by the various SCORE chapters are typically provided for a nominal fee or may be free of charge. You can a find a SCORE chapter near you at: wwww.score.org
Revised Sept, 2011