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LLC For Construction Businesses
Whether it’s renovating and designing homes, building commercial buildings, or installing essential infrastructure, construction services help create spaces that inspire, connect, and improve our daily lives. As a result, the demand for these services continues to rise. In this landscape, starting a construction business can be an enticing prospect for people like you looking to capitalize on these opportunities.
However, navigating the construction industry requires careful planning, strategic decision-making, and, most importantly, a solid business foundation. While corporations, sole proprietorships, and partnerships are all viable business structures for a budding construction business, more and more new owners are turning to LLC instead. In this guide, we will explore the advantages of forming an LLC for your construction business and how you can get started.
Definition
What Is An LLC?
A Limited Liability Company or LLC is a type of business structure that provides its owners with personal liability protection from debts and other obligations. It also provides a unique blend of benefits from various business models (such as sole proprietorships and corporations), a simple formation process, and flexible management during operations.
An LLC also allows for lower taxes since profits and losses can pass through to the members’ individual tax returns. This means you can avoid the hassle of double taxation on corporate profits, which is especially advantageous for SMBs striving to stay competitive.
Advantages
What Are The Advantages Of A Construction LLC?
An LLC business structure can provide a couple of advantages for construction businesses. Below are some of the important ones.
Asset protection
Perhaps the biggest advantage of forming an LLC is the increased asset protection that comes with it. This is especially crucial in the sector you operate in, where accidents can happen at any time. Whether it’s a contractual dispute, a contractor lawsuit, or any financial obligations incurred by your construction LLC, your personal assets remain safeguarded and off-limits.
Credibility
In the construction industry, credibility is crucial. Clients always seek to do business with trustworthy companies that have relevant experience, positive reviews, and a track record of delivering quality work. By setting up an LLC, you demonstrate professionalism and a commitment to your craft, which can instill confidence in your market and differentiate your business from competitors.
LLCs can also get approved for loans faster, granting you the capital that you need whenever you’re ready to build or expand your business.
Tax benefits
Another notable advantage of forming a construction LLC is the flexibility it offers in terms of taxation. Unlike other business structures, an LLC allows owners to choose how they want to handle their taxes. For example, if you opt to be taxed as a disregarded entity, the LLC’s income and expenses are reported on your personal tax return. This simplicity can be beneficial for small construction businesses, as it eliminates the need for separate tax filings, reducing administrative burdens.
Disadvantages
What Are The Disadvantages Of A Construction LLC?
By forming a construction LLC, you can enjoy many advantages, such as personal asset protection and enhanced credibility. The formation process itself is also very simple, as you will see below.
However, like any business venture, there are a couple of things to consider. For example, you may find the paperwork involved in LLC formation and compliance with tax and annual fee requirements slightly difficult and time-consuming. You will also have to think about employee wages, capital, and where you are going to get your materials from. Nevertheless, with careful planning and assistance from the right professionals, these challenges can be effectively addressed. The key takeaway is to hire help where you need it—we at StartGlobal can provide the LLC formation assistance that you need.
LLC Formation
How To Create A Construction LLC
As mentioned, creating an LLC is easy. There is only one to two documents you will have to file, and the rest is all planned.
- Choose your state
- Decide on a name
- Appoint a Registered Agent
- File your Certificate of Organization
- Write an Operating Agreement
- Obtain an EIN and other permits
Choose your state
The first step while forming a construction LLC is to decide the registration state. Keep in mind that even though some states allow you to operate the LLC out-of-state, it is recommended that owners of new businesses set up their LLCs in their home state.
Choose a name
After this, decide on a business name. The only hard requirement is that it should not be used by any other business registered in the state. Some states also mandate that you include terms like “LLC” or “L.L.C.” in your name to indicate that it’s one. Check your local requirements to be sure.
Appoint a Registered Agent
Around this time, you must appoint a Registered Agent for your construction LLC. This person is usually a business entity, hired third party, or an individual with a permanent address in the state. The Registered Agent is mainly responsible for collecting legal documents on behalf of the company. It’s important that you choose someone who is knowledgeable about local LLC laws.
File your Certificate of Organization
The next—and most important step—is to file for the Certificate of Organization, called the Articles of Organization in other areas, with your local Secretary of State to seal the registration of your LLC. This process may be completed online or by mail. Either way, the fee varies from state to state, but it is generally the most expensive part of the filing process.
Write an Operating Agreement
After filing your Certificate of Organization, you also have the option to write an Operating Agreement. While not always required, an Operating Agreement will help you a lot, especially if your construction business has more than one owner. This is a document that outlines the rights, responsibilities, and relationships among the members, allowing you to establish rules and procedures for decision-making, profit distribution, and management roles within the company. By clearly defining all these aspects, this document can help prevent internal conflict before they happen.
Obtain an EIN and other permits
Beyond this step, all you have to do is obtain any state-required licenses and permits. Other licenses you may need to look into are general business licenses, specialty trade licenses (such as plumbing or electrical), and home improvement licenses. It really depends on what your state mandates you have before you can legally operate.
Additionally, you will need to obtain an Employer Identification Number (EIN) from the Internal Revenue Service. An EIN is a unique identifier for your business that is necessary for tax purposes and hiring employees.
LLC Taxes
How Are Construction LLCs Taxed?
The taxation process can be one of the most intimidating parts of business ownership—or so you think. One great thing about forming a construction LLC is the lack of taxes you need to file. Depending on your area, you might see yourself filing one to two things annually.
Below are the taxes you might need to pay:
Franchise tax
Franchise tax is a type of tax that is based on a percentage of total profit and heavily varies from state to state. For instance, some states have a minimum franchise tax that must be paid regardless of the company’s net income, while others determine the tax amount based on the net income. The franchise tax you will owe will depend on where your LLC is located and its registered business type. Some states might not even have franchise taxes at all.
Sales tax
Sales taxes are collected by construction businesses when they sell goods or services within their state’s borders. Depending on where your LLC operates its activities, different rates may be applied to different types of products or services sold within the state’s boundaries. It’s important to understand local tax laws, so you know how much sales tax you should be charging your clients.
Self-employment tax
This is the type of tax most LLCs pay for. Self-employment taxes are computed based on your “personal” income (or the income of your construction LLC). For LLCs with multiple owners, self-employment taxes are filed by each member separately. You also split profit and taxes.
Corporate tax
You can also choose to register your LLC as a corporation and enjoy most of the benefits of becoming one. For taxes, a thing you can do is give yourself a more reasonable salary in the company, allowing them to file lower self-employment/personal income taxes. You will still be able to earn dividends as the company’s owner.
However, all corporation-taxed LLCs are subject to corporate tax. This is a separate tax paid by the company to your local IRS.
Costs
What Are The Costs Of Starting A Construction LLC?
LLCs do not cost a lot to form or maintain. In fact, you’ll find that most of your expenses will go to your business operations. But if you need a quick breakdown, here you go:
LLC Costs
State filing fee
$50+
Registered agent service
$100+
LLC formation service
$50+
Operating agreement
$200+
Business license and permits
$50+
Employer Identification Number (EIN)
Varies
Initial legal and accounting fees
$200+
Equipment and supplies
$1,500+
Marketing and advertising
$500+
When starting a construction LLC, it is important to consider all the fees associated with forming the company. If you don’t feel confident tackling all the legalities on your own, seek the help of a professional.
Starting a construction LLC offers numerous benefits and safeguards against the inherent risks and liabilities in the industry. It can protect your personal assets from potential claims and lawsuits, ensuring the security of your financial well-being. Additionally, an LLC structure allows for easier growth and scalability, providing you with all the flexibility you need to expand your construction business.
By choosing to structure your construction business as an LLC, you can effectively address the challenges that arise within the industry while capitalizing on the unique advantages it offers.
For a more detailed overview of forming LLCs in various states, check one of our guides below:
Comparisons
Is LLC The Best Entity For Me?
Maybe, LLC isn’t the right entity for you. Maybe it is a C-Corp. Only way to find out is to directly compare them all.
LLC vs Corporation (C-Corp)
Sole proprietorships and Limited Liability Companies (LLCs) are two of the most common business entities for individuals and small businesses. Learn what differentiates the two today.
LLC vs S-Corp
Not sure what business structure to choose? Learn about the key differences between LLC and S-Corp today.