Contractors State License Board
When you fill out an application to the CSLB, for a contractor license in California, you must choose an entity through which you want to operate.
Do you want to be a licensed individual?
Are you partnering with someone?
Or are you starting a business?
The answer to that question depends on your current situation and your plans for the future. Understanding the positives and negatives of each business entity is critical.
This is not legal or tax advice.
This article is to give you a clear explanation of each option so you can make an informed decision when you are ready to take the leap.
Sole Ownership:
- Holding a contractor license as a sole owner means that you are licensed as an individual. There is no separation of your contractor business and your personal assets.
- The sole proprietor option is the simplest way to hold a license. Entering into a construction contract as a sole proprietor can present some financial risks. If things go wrong, you are 100% responsible.
- That means that if you are sued and found liable in court, the damaged party would have access to your personal assets.
- You should speak with a lawyer or tax accountant to make sure this is the best option for you going forward
Partnership:
- Applying as a partnership means that two individuals are associated with the contractor license. Either person may contract over $500 as long as all contractual documents are in the name of the partnership.
- The person qualifying the partnership (the test taker) can bid on other projects as a sole owner as they also hold the license as an individual. If the qualifying partner leaves the partnership, the license must be canceled.
- It is the responsibility of both members to notify the CSLB of the cancellation.
Corporate Entity:
- Applying for the license through a corporate entity means that you are setting up a business through which your license will be held.
- If i look up your license number, the name of your business will appear instead of your own.
- A corporation can have multiple members.
- Whoever passes the exam will be the qualifier for the business. If that person leaves, they must notify the CSLB.
- If a corporation dissolves, it must be terminated officially through the Secretary of State, the license then reverts back to the individual who passed the exam.
Advantages to a Construction LLC, S-Corp or C-Corp
The answer to that question depends on your current situation and your plans for the future. Understanding the positives and negatives of each business entity is critical.
This is not legal or tax advice.
This article is to give you a clear explanation of each option so you can make an informed decision when you are ready to take the leap.
Separation of personal and business assets
- By having a corporation, you are able to separate your personal assets from the assets of the business.
- A corporation has its own Bank Accounts, Social Security # (EIN), and Credit History.
- It is basically a separate person that only exists on paper. Meaning that if you lose in court, only the assets of the business could cover damages.
Tax Advantages
- There are several tax advantages available to corporate business entities. To learn more, you should speak with a tax attorney.
Creation of a sellable asset
- By forming a corporation, you have created a sellable asset if you one day decide to retire or get out of the business.
- Clients, property, accounts, websites, etc. are all considered assets and can be included in the sale of a construction corporation.
The appearance of Credibility and Professionalism
- As you grow and contracts become lucrative, your clients have more on the line. Having a separate corporate bank account, registered entity, and name creates a sense of professionalism in the eyes of potential clients.
- In some cases, the insurance policies of your clients will require that you have a business entity set up.
- If you have millions of dollars on the line would you feel more comfortable signing contracts that say: Fred the electrician or Fred’s electrical company Inc.? Think about it.
Corporate Structures for Contractors
The answer to that question depends on your current situation and your plans for the future.
Understanding the positives and negatives of each business entity is critical.
This is not legal or tax advice. This article is to give you a clear explanation of each option so you can make an informed decision when you are ready to take the leap.
Small Business Corporation (S-Corp)
- In my experience S-Corporations are generally the most common corporate entities that are issued licenses in the state of California. They hold many of the tax benefits associated with having a corporation, but less stringent bonding and insurance requirements from the CSLB.
- Again, to be sure this is the best option for you its best to consult a lawyer and tax accountant.
Corporation (C-Corp)
- C-Corporations share many similarities with S-Corp and LLC; however, they differ in a few key ways.
- Generally, a C Corporation is for large companies that plan to generate high-income levels.
- C-Corporations experience double taxation (consult a tax attorney) and can have an unlimited amount of members. C-Corporations are also heavily regulated compared to the S-Corp and LLC structures.
- If you are just getting started this may not be the best option for you, but as always, it is best to consult a tax accountant or lawyer.
Limited Liability Company (LLC)
- In California, Construction companies doing business through an LLC structure are heavily regulated.
- The interests of the public come first. Someone has to be held liable if a construction LLC causes damages.
- As far as the Contractor’s State License Board is concerned, a Construction LLC typically has a tougher time getting issued a license. LLC status requires certain insurance and bond limit amounts.
- In addition, there are specific contract and member status requirements. Below are the conditions for licensing a construction LLC stipulated by the CSLB:
$100,000 LLC Employee/Worker Bond
To have an active or inactive license issued to an LLC, you will have to have a $100,000 surety bond (in addition to the standard $15,000 construction bond). This is put in place to protect employees, subcontractors or workers in the event of the LLC's failure to pay agreed upon wages or benefits. For more information on Construction Bonds click here.
(B&P Code section 7071.6.5)
$1 Million Liability Insurance Minimum
Liability insurance with the cumulative limit of at least $1 million for licensees with five or fewer persons listed as members of the personnel of record is required. Also, an additional $100,000 is required for each additional member of the personnel of record, not required to exceed $5 million total.
(B&P Code section 7071.19)
Personnel of Record
All members including officers, members, RMO or directors have to be listed as personal of record on any document or application involving the LLC.
(B&P Code section 7065)
Qualifying Individual
Construction LLC licenses, similar to licenses issued to other corporations must at all times be qualified by an RMO, RME, or managing member. For a deeper look at an RMO License, check out this article.
(B&P Code section 7065)
$1 Million Personal Liability during Secretary of State Suspension
In the event that an LLC license is suspended for failing to remain in good standing or registered with the secretary of state, members of the LLC can be held personally liable up to $1 million during the duration of the LLC's suspension.
(B&P Code section 7076.2)
Liability Insurance Information on Contracts
Information on general liability insurance has to be included in any home improvement, service or repair contract issued by the LLC.
(B&P Code sections 7159 and 7159.10)
Setting up a Construction Company
The construction business has a lot of moving parts.
Going from being an employee or independent contractor to establishing yourself as a business can be complicated.
- Understanding how you should be accounting and paying your taxes is an essential piece to this puzzle. Like any successful business, it all comes down to a team.
- Finding a tax accountant and a lawyer you can consult throughout this process is critical.
- Your employees, bookkeeper, suppliers, accountant, and attorney are all a part of your team.
Getting Started!
A successful business can give you wealth and freedom beyond your wildest dreams, but it can also become a nightmare very quickly.
- Be honest with yourself about where you are with your career and true ambitions in the construction industry. Use this article as a reference going forward.
- Check out some of our other content on the licensing process, certifications, business, and construction accounting. Please feel free to drop us a comment if you have any questions!