How To Start Your Own Contracting Business – Deciding to start your own construction company can be an exciting yet overwhelming experience. With so much research, reporting and paperwork to complete, it’s easy to get lost in the administrative details and forget the passion that inspired you to start your own business.
In fact, 68% of small business owners regret not spending enough time in their first year learning the basics of running a business. Fortunately, the process of starting a construction business is actually quite simple if you know where to start. Construction companies take time to plan and build, so starting early can set you up for success later.
How To Start Your Own Contracting Business
And while COVID-19 has brought manufacturing to a standstill in major cities, there are still 36 states where construction is considered an essential service as of this writing.
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We’ve put together everything you need to know about starting your company, from how to write a solid business plan to what type of insurance is needed and more. Here’s how to start a construction company, broken down into 5 steps. Click on the links below to go to individual sections:
Thanks to the Internet, there is a lot of free data openly available to you if you know where to look. Here are some great sources of information to use in your market research:
Doing your research early is optional, but it will make the rest of the process of starting your construction company easier. In particular, completing your research will make it easier to complete the next stage of the process: writing your business plan.
Every startup needs a business plan that will not only guide you through the process of starting your company, but also help you get investment funds, get approved for loans and more. Here are the steps you should take to write a business plan for your construction company:
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An executive summary is an introduction to your business plan. It should be brief (one or two pages), comprehensive and interesting.
The Small Business Administration recommends that you include your mission statement, basic biographical information about your company, the products and services you offer, financial highlights and funding goals, relevant past accomplishments and your future plans for the business. The rest of your business plan will contain the same elements you touched on in your summary, but in more detail.
After the summary, give an overview of your company: who the founders are, when the company was founded and what it does. You should also write a value proposition statement that states why your company’s offerings are in demand in your particular market.
You should also note here whether your business is structured as an S-Corp, C-Corp or LLC and how ownership is divided if you are not a sole proprietor.
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In this section, you need to provide research that demonstrates the existence of a specific demand in your target market and why your company is uniquely positioned to meet that demand.
In this section, you will know in detail the products and services you offer. Discuss current or past projects that can serve as examples of your company’s offerings, if possible. As the construction industry is also heavily dependent on material sourcing, highlight any existing partnerships you have with building suppliers, subcontractors, etc.
You can also enter the type of contract you plan to use with potential customers. Lump sum, unit price, cost plus, and time and material contracts all handle material sourcing differently, so your supplier requirements will vary depending on the type of contract you plan to use.
Provide a comprehensive overview of your company’s current finances and where you plan to be financially in the future. If you don’t have previous financial data, include a projected version of the same document and attach the market research and analysis you used to create this forecast.
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You should also document all your debt obligations – this includes other investments you have secured, mortgages on any business assets, equipment loans, etc.
Finally, you provide the financial details of the financing you need or want to get. Include the funding you are currently applying for, as well as any other rounds of funding you expect to need in the future. Make sure you allocate each amount for a specific purpose, such as buying equipment, leasing real estate, etc.
Any charts, notes, research or other information that you think is relevant to your business plan but is too long or missing in the document itself can be added as an attachment.
Once your business plan is complete, it’s time to make it official by legally registering your business with federal, state and local governments.
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1. Define a business entity: Choose a business name and decide whether to register as an LLC or as a corporation.
2. Get an Employer Identification Number (EIN): Your EIN is your federal tax identification number, which you need to pay taxes, hire employees, open a bank account and apply for a business license. You can apply for one online through the IRS website.
3. If you register as an S-Corp, file Form 2553 with the IRS: Although LLCs are regulated by states, corporations must file with the federal government.
4. Register with State Authorities: Some states require paper registration, while others allow you to register online. To find out what your state requires, you can use the SBA’s state search database. (Remember that if your company operates in more than one state, you must register with each state’s government.)
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5. Register with the local authority: You should visit your local government website to find out what, if any, registration is required.
One of the biggest stumbling blocks for new business owners is the process of deciding how to structure the company. There are 4 main business structures to choose from, each with their own strengths and weaknesses.
Sole Proprietor: As a sole proprietor, you have full control over your company. You are also fully liable, which means that if your business defaults on debt, the bank can seize your personal assets as a result.
Limited Liability Company (LLC): Limited liability companies are designed to reduce the risks associated with running a business as a sole proprietor. As an LLC, you separate your personal assets and debts from your company’s finances, protecting you as an individual.
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The downside to registering as an LLC is that it can be more difficult to raise investment capital. If you plan to rely heavily on investment capital to start your construction company, you should consider registering as a company.
C Corporation: A traditional corporation is a C Corporation. Like an LLC, a C Corp protects business owners from personal risk but makes it easier to raise capital by allowing ownership of the company to be divided among shareholders.
Of course, shareholder involvement complicates the process, so the disadvantages of filing as a C corp include a lot of paperwork and higher filing fees. C Corps are also subject to double taxation – the corporation will be taxed as an entity and the shareholders will be taxed on the dividends.
S Corporation: Another common type of corporation is the S Corp, which is like a C Corp with a few key differences. S Corps cannot have more than 100 shareholders and all shareholders must be US citizens or residents.
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Registering your company as a legal entity is only half of the administrative process. As a construction company, you also need to research and obtain the necessary permits, licenses and certifications to perform various types of work.
You will need to find the specific licenses and permits required by your state and, in some cases, your municipality. To find out exactly what license you need, check with your state contracting board and/or local labor department. There are several reasons that vary from state to state, such as liability and workers’ compensation laws.
Before starting any work, you really need to make sure your building company is insured to ensure you are covered in the event of an accident or emergency. You also need different specialized insurance to cover different aspects of your business such as property and employees.
Now that you’re fully registered, licensed and insured, you’re ready to start thinking about the most important element of business: money.
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Most construction companies need funds to rent or purchase equipment and supplies needed to begin work. Our guide to renting or buying construction equipment can help clarify the process.
The SBA offers a variety of low-interest loans designed to help small businesses thrive. Generally, SBA loans are only available to business owners with a long credit history and a good credit score.
Some loans can be obtained for very specific purposes, such as working capital loans, which are specifically designed to cover day-to-day operating costs such as salaries or office services. Working capital loans are popular in seasonal industries where most of the company’s annual revenue comes in within a few months. Throughout the year, companies may apply for working capital loans to cover expenses during slow business.