LLC For General Contractors
Are you looking to form a limited liability company (LLC) as a general contractor? If not, then we highly encourage you to. LLC is a type of business structure that guarantees the legibility of your business and protects you from court harm without the added fees of establishing a corporation.
The process of forming a general contractor LLC can get complicated and confusing, but that is only when you do not know where to start—so don’t worry. We will review the steps to take when forming a general contractor LLC and how it can benefit your business.
What Is An LLC?
An LLC is a business structure that provides its owners with personal liability protection from debts and other obligations arising from the company. This means their personal assets are never at risk when banks ask for collaterals or when the company is brought to court for a legal issue.
An LLC also allows for lower taxes since profits and losses can pass through to the members’ individual tax returns. This can help your business avoid double taxation on corporate profits, making it an attractive option for small and medium-sized businesses looking to remain competitive.
What Are The Advantages Of A General Contractor LLC?
Operating as a general contractor involves managing a variety of projects and risks. One way to protect yourself and your business is to form an LLC. Let us explore the benefits of creating an LLC for your general contractor business.
Limited personal liability
An LLC provides limited personal liability for all its owners. This means that if your general contractor business is sued or incurs debt, you will never be personally liable for those debts or judgments. Owners do not have to risk their personal assets to keep their businesses running. This protection also extends to members of the LLC who are not directly involved in running the business but still own shares in it.
Forming an LLC requires less paperwork than forming other business structures, such as corporations and partnerships. All you need is a Certificate of Formation and Articles of Organization, which can be filed online in most states.
One major benefit of forming an LLC is choosing how you want to be taxed by the IRS. This flexibility allows you to choose which option works best for your business needs and goals without changing its legal structure.
Additionally, because income earned by an LLC is taxed at individual rates rather than corporate rates, this could potentially result in lower taxes overall for your business. After all, individual income tax rates tend to be lower than corporate tax rates (at least when you do not profit in the hundred thousands).
Flexible profit distributions
Another advantage of operating as an LLC is its flexibility of profit distributions among owners/members. With other entities, such as corporations or partnerships, profits must be distributed based on predetermined ownership percentages. However, with an LLC, no such requirements exist, and profits can be divided according to the agreement reached between members/owners.
What Are The Disadvantages Of A General Contractor LLC?
While general contractor LLCs offer numerous advantages in terms of operational simplicity and favorable tax policies, they may not be the most suitable choice for all businesses, particularly those with low capital requirements. Below are things to consider before forming your LLC.
One of the main advantages of an LLC is that it offers flexible ownership terms. This means you can sell shares in your business without going through complex legal procedures. However, this can also be a disadvantage if you don’t want to share ownership with others or if you need to control who owns shares in your company.
Forming an LLC requires filing paperwork with state and federal agencies and paying various fees. The cost can range from a few hundred to thousands of dollars depending on the size and complexity of your business and the laws in your state. This cost may be prohibitive for some general contractors, especially if they have limited resources or are just starting out.
Does not eliminate all risks
Although forming an LLC does offer certain legal protections, it doesn’t eliminate all risks. For example, even though you won’t be held personally liable for any debts or obligations incurred by your business under most circumstances, there are still exceptions where you could be—if you sign a personal guarantee for loans or contracts.
Additionally, you could still get in trouble if someone sues your business for negligence or other issues related to its operations. Forming an LLC isn’t always 100% safe from liability concerns either, so be sure you are running an honest business.
How To Create A General Contractors LLC
While some states may have variations in their specific procedures, they generally follow the same basic steps when it comes to forming an LLC. Here is a quick outline.
- Choose a unique name
- File Article(s) Of Organization
- Choose a Registered Agent
- Create an Operating Agreement
- Get an EIN
Choose a unique name
When coming up with a name for your general contractor LLC, it’s important to come up with something unique and memorable. It should be easy to read and spell, as well as be something that speaks to the purpose of your business. Here are some guidelines for writing a great LLC name:
- Avoid using overly long or complex words and phrases. Instead, opt for something that people can easily pronounce and remember.
- Choose something specific to your business. Make sure it will not be confused with other LLC names in your area.
- Before settling on a name, ensure it is not already taken or used by another business.
- Check with the US Trademark Office to ensure you are not infringing on an existing trademark.
- Incorporate a keyword related to your business into its name. This can help customers and potential clients identify what you do.
- Ensure your LLC name follows all federal, state, and local laws.
Once you have settled on a name for your LLC, consider reserving it with the state. This will prevent someone else from registering the same or similar name. You will have to pay name reservation fees, so it’s important to ensure that your name is final.
File Article(s) Of Organization
The Article(s) of Organization is a legal document that formally establishes the company as an LLC the state of formation. It outlines the LLC’s official organizational structure, management process, and ownership responsibility.
It contains the following:
- The name of the LLC
- The purpose of the LLC
- Management Structure
- LLC Members
- LLC Address
Filing an article of organization costs between $50-$300 depending on the state of formation, and you must submit it to the Secretary of State online or in person.
It is important to ensure that all information provided on the filing is accurate and complete to guarantee that the registration process goes smoothly. If any changes or modifications are made to any of the details regarding the LLC after filing, a Certificate of Amendment must be submitted for approval by the governing state authority, adding more fees into the mix.
Choose a Registered Agent
Choosing a registered agent for your construction industry is crucial for any LLC, as the registered agent serves as a point of contact between your business and state government entities. As such, it’s wise to research to ensure you choose the best agent with a license for you and your business.
For starters, ensure that the registered agent is located in the same state where your LLC is based. Also, look into what services they offer and how reliable they are. Make sure to factor in qualifications such as any past experience acting as a registered agent and customer reviews that illustrate customer satisfaction levels.
Last but not least, consider looking at their pricing structure to ensure it fits within your budget. After all, you don’t want to be hit with excessive payment later. Doing this due diligence before committing will set you up for success and provide peace of mind knowing that you’ve chosen the right professionals for your industrial LLC.
Create an Operating Agreement
Creating an operating agreement is an important step in protecting your rights while streamlining the process of running a successful business. The agreement should cover key issues such as indicating how contributions, profits, losses, and distributions will work.
Operating agreement helps protect all employees’ interests in the project and must be kept up to date as the business grows and evolves.
Your operating agreement should also include provisions for how to handle the dissolution of the companies in case the members decide to end their business relationship. Developing an agreement addressing all these points is essential to ensure full partnership protection moving forward.
Get an EIN
Getting an Employer Identification Number (EIN) is crucial to forming an LLC for general contractors. The Internal Revenue Service (IRS) issues this nine-digit number that identifies a business for taxation. It is also commonly used for opening a business bank account and other business needs such as filing for business licenses.
You can apply online or submit Form SS-4 to the IRS to apply for an EIN. You will need to provide specific information about your business, such as its name, address, and type of legal structure. In addition, you will need to provide the names and Social Security numbers of any owners or officers in your LLC.
Once you have submitted your application, the IRS will issue you an EIN within five business days. It is important to keep this number secure and readily available, as you will need it for all your business transactions, such as filing taxes and obtaining business licenses.
How Are General Contractors LLCs Taxed?
When you form an LLC, the taxation process can be one of the most intimidating parts of business ownership. As a general contractor, you must understand which taxes apply to your LLC and how to file them properly. Here we will discuss the franchise, corporate, sales, and self-employment tax that all general contractor LLCs need to know.
All business owners in the United States must pay franchise taxes. This type of tax is paid on the net income a business generates after considering expenses. It is based on a percentage of total profits and varies from state to state. For example, some states impose minimum franchise taxes regardless of net income, while others base their franchise taxes solely on net income. The franchise tax you will owe will depend largely on where your LLC is located and its registered business type.
Sales taxes are collected by construction projects 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. Sales tax can also vary from state to state, so it is important for general contractors working with multiple states to understand each of the local tax laws and regulations before conducting business there.
Self-employment tax is assessed on people who conduct self-employed activities within their LLCs, such as general contractors. You must pay federal and state self-employment taxes to remain compliant with IRS regulations. It is important to consult with a professional staff accountant before filing forms related to self-employment taxes so that you do not end up paying more than necessary or failing to meet compliance requirements set forth by the IRS.
Corporate taxes are imposed on corporations or any other legal entity engaged in business activities in the US or abroad. Corporate taxes are higher than individual taxes because corporations can access more resources than individuals. If you own an LLC registered as a corporation, you will be responsible for paying corporate and other applicable taxes, such as franchise or sales tax.
What Are The Costs Of Starting A General Contractors LLC?
Forming an LLC can be much more cost-effective than forming a corporation. A key expense is the filing fee, which varies from state to state. Depending on your state, the initial filing fee can range from just $50 to around $300. Additionally, you will typically have to pay what is known as “ongoing fees,” such as state taxes, franchise taxes, and annual report filings, which will vary by company and where it’s based.
State filing fee
Registered agent service
LLC formation service
Business license and permits
Employer Identification Number (EIN)
Initial legal and accounting fees
Equipment and supplies
Marketing and advertising
You should also consider professional service fees for legal help and accounting services. Forming an LLC generally may not be too costly, but ensuring all associated fees are accounted for should be considered before deciding whether this business structure suits your needs.
For a more detailed overview of forming LLCs in various states, check one of our guides below:
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