Contractors & Construction

The entity that works best for a licensed professional depends on many factors. Such factors may include the profession involved, the number of employees, and tax considerations.

Although both an LLC and a corporation can help protect an owner from liability, we find that most business owners choose an LLC to operate their business. An LLC can offer more freedom in the management of the business. For example, in the LLC operating agreement, the owners can expressly set forth and/or limit the rights, powers and obligations of the manager and the members.

An LLC also may not require some of the formalities of a corporation, such as annual meetings. In addition, an LLC may have tax advantages over a corporation. For example, an LLC with only one owner may not have to file a separate tax return, and its profit or loss can be included on the owner's tax filing. In contrast, a corporation must file a separate return.

If there is a claim or lawsuit relating to the business, then generally only the assets owned by the LLC or corporation, and not the business owner's other personal assets, will be subject to the claim or lawsuit, provided the entity is formed and managed correctly.

Different states may treat licensing differently. For instance, some states may require tests for some trade specialties or even general categories that other states do not.

Many of our customers who are engaged in professions that do not require special training or approval of a regulatory agency, such as general contractors, demolition contractors, or drywall installers (again, this may vary from state to state), find it necessary to apply for a new license for the new corporation or LLC, and cancel or let the old licenses lapse. This information primarily applies to a general business license.

However, in cases where an individual is engaged in a profession where the license for the trade can only be obtained by taking a test, such as plumbers or electricians, then, in general, those licenses are personal to the holder and cannot be transferred to a company.

For instance, in the case of an electrician operating as Joe Smith and incorporated as ABC Inc., the operating license may have to still be held by Joe Smith the individual, and ABC Inc. may have to get a business license. Generally, the license holder (i.e., Joe Smith) would supervise the non-trade-licensed employees. How many employees can be supervised will depend upon the law of the state in which Joe Smith and ABC Inc. are operating.

Our website has links to each state and its licensing requirements. Learn about obtaining a Business License in your area.

Depending upon the laws or requirements of the particular state or municipality that issued the license, generally our customers' old business licenses lapse or are cancelled, and a new business license in the name of the company is obtained.

Our Web site has links to each state and its licensing requirements. Learn about obtaining a Business License in your area.

Generally, our customers obtain a business license from the state, city or township offices in the location where the work is taking place and they sometimes need more than one license.

Many of our customers, who are electricians or plumbers, or engaged in another specialty trade, often have to go to the regulatory body that oversees the specific trade. Not all states have the same requirements for licensure and the requirements vary from state to state.

Our Web site has links to each state and its licensing requirements. Learn about obtaining a Business License in your area.

As a general matter, there are numerous factors that may be relevant in determining whether a person is deemed an outside contractor, rather than an employee of the company. For example, it may be helpful to demonstrate that the contractor: (i ) works at his or her own facilities; (ii) does not require training from the company to perform the required services; (iii) maintains the authority to control how the work is performed; and (iv) has been retained for a specific project rather than on a long-term basis. It may also be helpful to establish that the contractor provides services to entities other than the company, and is paid a flat fee, rather than an hourly wage, for the services performed for the company.

We find that many of our construction industry customers enter into agreements with contractors that explicitly state that the contractor is an independent, outside contractor, and that the contractor (and not the company) shall be obligated to pay all payroll and related taxes relating to services provided to the company by the contractor.

In addition, we understand that some of our customers attempt to ensure that their contractors will be considered independent contractors, and not employees of the company, by requiring the contractors to be incorporated or organized as a limited liability company, and also requiring that the contractors actually employ the individuals performing the services. If a contractor is a corporation or a limited liability company with its own employees, it may be more likely that its workers will be considered the contractor's employees and not the company's employees.

Even after taking the above steps, if a company too closely supervises or controls the work done by its contractor, the contractor (or the contractor's employees) may be deemed to be the company's employees.

If contractors that you are using are not incorporated, you may refer the contractor to incorporate.com to help them incorporate or form a limited liability.

A company typically will need to be concerned with payroll tax implications when it has employees. Generally, employers are required to withhold income, social security and state and federal unemployment taxes on the wages it pays to its employees. Due to the numerous rules and required filings with regard to payroll and related taxes, and the state and federal penalties that may be imposed for failure to comply, we find that many of our construction industry customers hire tax professionals to provide tax advice and prepare the necessary tax filings on behalf of the company.

Sole proprietors generally must pay periodic taxes on net self-employment earnings.

Many of our customers who conduct business as a limited liability company, and who are also a member or owner of the company, are subject to self-employment taxes, generally based on the entire share of the profits of the company even if only a portion of the profits is taken as salary.

We find that most of our contractor customers who conduct business as a corporation typically hire the owners or members as employees and the corporation then pays such employees a reasonable salary. The corporation is responsible for withholding from the employees' salaries certain required income and employment taxes and, also, paying the employer's share of the employment taxes. The withholdings and payments, however, are based only on the reasonable salary and not on the profits of the corporation. Some customers find that this is one factor that may favor choosing a corporation over a limited liability company in certain circumstances.

Do I need to provide Worker's Compensation coverage for contractors or sub-contractors involved with my company?

Workers' Compensation is a system created by each of the states to provide benefits to workers who are injured while working. The benefits may include medical care, temporary disability payments, and compensation for permanent impairments.

Workers' Compensation laws vary significantly by state, and whether a company is required to obtain Workers' Compensation insurance will depend upon the statutory law of the state where the work is being performed. Generally, if a company has one or more employees, it will be required to obtain and maintain Workers' Compensation insurance for its employees.

A company's contractors or subcontractors are not generally covered by a company's Workers' Compensation insurance.

For your convenience and reference, our Web site lists each state and its Workers' Compensation rules.

If required by state law, an employer must have Workers' Compensation insurance.

The general rule would be: if a company has one or more employees, then the company may need the insurance whatever tier it is on the project (i.e., contractor, subcontractor, sub-subcontractor or supplier).

As a general rule, if a company hires subcontractors, that company will likely want those subcontractors to be incorporated or under a limited liability company. If a subcontractor is incorporated or a limited liability company, it may be more likely that its workers will be considered the subcontractor's employees, and not the company's employees, and therefore such employees may only need to be covered by the subcontractor's Workers' Compensation insurance.

For your convenience and reference, our Web site lists each state and its Workers' Compensation rules.

We find that many of our construction industry customers purchase and carry business insurance to provide liability and other protection for their business. Customers often conclude that personal or homeowners insurance will not provide sufficient protection for even a small, home-based construction business. Issues such as whether it is beneficial for the company to obtain business insurance, the type of insurance to obtain, and the appropriate amount of insurance coverage will vary significantly based on the activities of the construction company.

There are many types of insurance that are available for a construction business. Also, a construction company, especially if it has offices and employees, typically will obtain general business insurance to provide protection with regard to the types of claims common to all businesses, including property, workers' compensation, and liability claims. In addition, some of our customers acquire business interruption insurance, which provides coverage if the event that the company is forced to cease operations for a period of time due to certain events.

Whether or not the business insurance protects the company from claims made by clients in connection with advice or services that the company renders will depend on a number of factors, including the type of services rendered, the nature of the claim, and the terms and limits of the insurance coverage that the company has purchased. An insurance policy will provide protection only against certain claims, and may not cover all of the losses incurred by the company. In addition, the policyholder may be liable for any judgment that exceeds the coverage included in the insurance policy.

In light of the variety of risks that a construction company may face and the many types of insurance available, we find that many of our customers seek the advice of a knowledgeable risk management professional or insurance agent in order to determine what types of insurance and amounts of coverage are appropriate for their construction business. Sole proprietors and partnerships may be held fully liable for bad debt and legal claims. Certain types of insurance can protect a sole proprietor or partnership against claims, however, incorporating or forming a limited liability may better serve to protect against certain claims.

Generally, in order for a company to do business in a state other than the one in which the company is incorporated, it must be qualified to do business in that state. incorporate.com can help a company qualify to do business in a state other than the one in which it is incorporated.

If a company does business in a state other that the state in which it was formed, it will likely have to register or "qualify" to do business in that state. The LLC or corporation is often referred to as a "foreign" LLC or corporation in states other than the state in which it was formed. Whether or not the company must qualify in a particular state depends upon the laws of that state, which may vary from state to state. Also, a company may have to obtain a separate business license to conduct business in certain states or municipalities. Once again, the laws of the state or municipality involved will determine whether or not the company will be required to obtain a separate business license.

Generally, qualifying a company to do business in a state other than its state of formation is similar to the formation process, and the LLC or corporation may be required to pay filing fees and provide certain information and documentation to the state. Also, if a company is required to qualify to do business in a state but fails to do so, it may be subject to penalties.

For your convenience and use, our Web site has links to each state and its licensing requirements. Learn about obtaining a Business License in your area.

It is important to note that whether or not a company must file a tax return in a specific state is not necessarily determined by whether that company is required to register or qualify to do business in that state. For example, a company may not be required to qualify to do business in a state, but could nonetheless be required to file a tax return.

The amount of income that must be reported, permissible deductions, tax rates, required tax forms, and tax-filing dates may differ significantly by state. In light of the differences in the tax laws between the states, we find that many of our construction industry customers hire qualified tax professionals to provide tax advice and prepare the company's tax filings in each of the states where required.

Whether or not a company must file separate tax returns in a state where it performs services, and/or pay taxes directly to that state, depends on the state tax laws and the company's operations in that particular state. Many states require companies that perform services in the state to file a separate tax return and pay taxes directly to that state based upon the services that the company provides to clients in that state. Additionally, states may allow a credit for taxes paid to other states with regard to income from services performed in those other states.

Generally, in determining whether or not a construction company must file tax returns or pay taxes to a particular state, the state may consider the connection or "nexus" that the company has to the state. In making such a determination, states typically consider factors such as the frequency and magnitude of services the company provides in a particular state or for clients in a particular state, or whether the company has a physical presence in a particular state, such as employees who conduct business activities or an office located in that state.