There are many things to consider before deciding to incorporate your construction business, chief among them being the cost if you do incorporate, and the cost if you don’t. The main reason for including a construction business is to insulate and protect your personal assets from your potential business liabilities. If you don’t have a home or other significant personal assets to protect, the cost of incorporation, corporate formalities and filing corporate tax returns may not be justified. However, if you have personal assets, the cost of not incorporating may be the loss of those assets.
The initial cost of incorporating a new business depends on whether you use a web-based do-it-yourself service or a law firm. Using a web-based service or any service other than a law firm may save you money initially, but it will cost you money in the long run. For example, contractors who incorporate should also make sure that their corporations are properly licensed with the California State Contractors License Board before they do any construction work. If you include but do not comply with contractor licensing laws, you may find that saving money on an outside interface exposes you to significant civil and criminal penalties for contracting without a license.
Contracting without a license is a misdemeanor
Neglecting to apply for and qualify your corporation for a separate contractor’s license with the California State Licensing Board (CSLB) so that your corporation is always properly licensed during a construction project is a misdemeanor punishable by a fine of up to $1,000. and six months in jail. In addition to potential criminal liability, your corporation will not be able to demand payment for construction services performed without a license, and may be forced to refund any money received for construction services performed without a license. For more information on the adverse consequences of contracting without a license, see the article on our website titled Possible Consequences for Unlicensed Contractors in California .
How to estimate the cost of registering your business
To determine if you can afford to incorporate, ask your accountant and your attorney to estimate the costs and tax consequences. In particular, ask your accountant to estimate the minimum annual taxes your corporation will have to pay in local, state and federal taxes. Unlike businesses operating as sole proprietorships, California corporations pay an annual minimum state tax whether they make a profit or not.
In addition, forming a corporation can put you in the unenviable situation of having your income taxed twice because your corporation will pay income tax and you will also pay income tax on the wages and dividends you receive from your corporation. Ask your accountant if you can avoid the possibility of double taxation by registering your corporation as a Subchapter S corporation.
Operating Capital.
Another cost to consider is the amount of money shareholders will have to contribute to the corporation as working capital. By consulting with your accountant and lawyer, you can determine how much money (capital) your corporation will need to cover start-up costs, operating expenses, and meeting minimum capital requirements. For example, the CSLB requires that corporations applying for a contractor’s license have at least $2,500 in capital. The corporation’s initial capital contribution is what shareholders pay to the corporation in exchange for stock. In addition to the minimum amount required by law, you and your accountant should estimate the amount of working capital your corporation will need to reach a level where you expect your corporation to begin generating enough income to cover its expenses (working capital).
Attorney Fees and Expenses
Together with your attorney, you should determine what legal fees and expenses you will incur to set up your corporation. In addition to charging fees for the time it takes to prepare your corporate documents, attorneys will also require that you pay the state filing fee and the cost of your initial corporate materials. State fees include fees for reserving your corporation name, filing your corporation’s articles of incorporation with the Secretary of State, and registering the sale of your corporation stock with the Department of Corporations. Initial corporate supplies usually include a corporate seal, stock certificates, a ledger to keep track of your corporation stock transactions, and a folder to keep all your corporate records together and in an orderly fashion.
In addition to the basic documents that your attorney will prepare to create your corporation (articles of incorporation, bylaws, minutes of initial meetings and corporate resolutions), your attorney may also recommend that your corporation limit the transfer of stock by purchasing shares. sale agreement. Sale and purchase agreements are designed to ensure that shareholders are treated fairly and their rights are protected. It also allows shareholders to decide which third parties may become shareholders in the future and provides safeguards for minority positions by limiting stock sales.
Your attorney may also recommend drafting employment contracts for key employees and securing personal loans you make to your corporation with promissory notes and security agreements. To complete the formation of your corporation, your attorney should help you organize and conduct the initial corporate meeting at which the corporation will sell stock, appoint and elect directors and officers, authorize the corporation to open bank accounts, conduct an election to determine tax status for the state and IRS ( Subchapter S election ), select the principal business location and establish other important functions the corporation will need to begin business operations.
Corporate Formalities
Once your corporation is formed, your attorney should provide you with written instructions on how to comply with corporate registration and record keeping. For example, your corporation will be required to file an annual information report with the California Secretary of State, hold an annual meeting of stockholders and directors, keep minutes of annual meetings, and file tax returns. Please keep in mind that failure to comply with these and other routine corporate formalities can result in the loss of a major benefit of forming a corporation, protection from personal liability for business expenses.
Obtaining a contractor’s license for your corporation
Another cost item to estimate for setting up your corporation is the cost of your corporation to obtain a California contractor’s license. You can usually get this information from your attorney or contractor licensing office. Also, ask how long it takes the licensing board to process license applications, because until your corporation gets a contractor’s license, it can’t legally do contracting business.
Once you have an estimate for professional legal and accounting services, state registration fees, licensing costs, and initial business capital, you should have a good estimate of how much it will cost to register your business.
The benefits of incorporation
In all likelihood, the total cost estimate to incorporate your construction business and cover the increased taxes and associated corporate expenses will be significant. It can easily take six months to prepare a business plan, obtain estimates for professional services, retain professionals, and complete the formation and license for your corporation. So why bother? What are the benefits of incorporation that justify the expense and additional business complexities of maintaining a corporation?
Some of the major benefits of incorporating your business are (1) being able to separate and protect your personal assets from potential liabilities and financial losses of your business, (2) creating a more professional business image, (3) being able to raise capital by selling stock in the corporation, (4) creating a legal entity that can continue to exist after its founders die, (5) facilitating the business’ ability to attract and retain key employees, (6) increasing your ability to sell your business and (7) creating the ability
Construction is a risky business
Construction businesses have a high failure rate. Even the construction of a relatively small structure usually requires coordination and cooperation between property owners, lenders, architects, engineers, municipal building departments, building inspectors, general contractors, subcontractors, tradesmen, insurance companies, equipment suppliers and building material suppliers.
From start to finish, the typical construction project is under tremendous economic pressure because of the common practice in the construction industry of awarding contracts to the lowest bidder. Unfortunately, sometimes the lowest price is offered by a company that overlooked costs and offered a low price as a result of a bidding error.
Other times, there will be one or more bidders who win the project because they cut corners to lower the price of their bid. As a result, progress is often interrupted because one or more participants in the construction process are not working properly, or because of unexpectedly long periods of bad weather.
Whatever the reason, construction delays can have a negative impact on the financial situation of everyone involved in the project. Thus, given the risky nature of the construction business, a wise business owner will take steps to separate and protect their personal assets from exposure to these risks. Registering your construction business, along with the right insurance coverage, can protect your personal assets and more than justify the cost and time required to register your business.
Creating a professional image
The inclusion of your business indicates a certain degree of financial capability and business sophistication. Anyone who has gone through the process of starting their own business knows what it takes to create and successfully run a corporation. Thus, your clients and potential clients may believe that incorporated businesses have more credibility, reliability and professionalism than unincorporated businesses. To improve your corporate image and comply with CSLB regulations, make sure that all contracts, invoices, letterhead, promotional materials, business cards, etc. of your corporation contain your corporation name and license number exactly as they appear on the Contractors License Board. Using a company name other than the one listed on the CSLB may result in a charge of contracting without a license.
Raising money by selling stock
If your corporation is not registered as a publicly traded company, such as General Motors, you may not advertise the sale of your corporation’s stock to the public and the number of shareholders of your corporation will be limited. Check with your attorney for the actual number of shareholders and restrictions on selling stock in your corporation. Generally speaking, you may only sell stock in your corporation to people you know personally or with whom you already have a business relationship, such as family, friends, business associates and employees.
You should only sell stock in your corporation on the advice of an attorney to make sure that your investors are properly informed of the restrictions associated with your corporation’s stock and to ensure that all transactions in your corporation’s stock are properly recorded. Keep in mind that shareholders appoint and elect corporate directors. The corporate directors then appoint and elect corporate officers who manage the day-to-day operations of the corporation in accordance with the articles of incorporation and the guidelines established by the board of directors of the corporation. The election of directors is determined by a majority vote. Consequently, the person or persons who control a majority of the stock of the corporation controls the corporation.
A corporation has an unlimited life span.
Unlike you or me, a corporation does not have an unlimited life span. In theory, a corporation can exist forever. This means that you can transfer ownership of your corporation by leaving your corporate stock to your heirs or by selling your stock. Either way, your corporation can exist long after you do.
This also gives you the opportunity to improve your corporation’s chances of retaining key employees by making attractive offers to buy corporate stock or by including corporate stock in their benefits package. Be sure to consult with your accountants and lawyers before proceeding with the transfer or sale of stock to your employees. For example, when you sell or transfer corporate stock, your shareholders should be bound by a share purchase agreement that restricts the sale of corporate stock so that you and/or other shareholders and the corporation can control the transfer or sale of corporate stock.
Board of Directors
Once your business is incorporated, you can hire other successful professionals as members of your corporation’s board of directors. These individuals can bring prestige, knowledge, business connections and skills that can enhance your corporation’s profitability and allow you to retire with dignity.