Why should you, a construction business owner, consider incorporation? Oftentimes, people believe the default to be sole proprietorship. So, why should a construction professional look into incorporation? What are the benefits?
Anyone who goes into business should incorporate, but this is especially the case for those in the construction business. Because of the many ways contracts can loop in your assets, you need to have a barrier built between your personal assets, such as your car, home, and household bank account, and your business assets. Your business needs to operate independently, incur its debts, be liable for its responsibilities, and commit only its assets when signing a contract. Incorporation puts up that safety barrier.
The Main Advantage
Think of a company as its very own person. Although it is not your individual self, it is your corporate self. A corporation signs construction project contracts gets bank accounts, creates debts, and then if something goes awry, those collection efforts will be against the company itself, not your personal assets. For example, if there is a judgment against you personally in California, they can garner your wages. So, before you get your paycheck, the person who has a judgment against you will take out a percentage toward what they are owed. It works similarly to child support. That being the case, you do not want to be personally liable for your construction company’s debts. Picture this, you are incorporated, and you sign a contract you can’t afford, and suddenly, you’re in debt, and you get sued. Yes, it will be painful and challenging to put your business into bankruptcy, but it would be even more painful for your house, car, and other family finances and assets to be on the table to satisfy those debts. Incorporation protects your personal goods.
Despite the benefits, I still frequently hear excuses for not being incorporated from contractors. A common argument for this with construction contractors early on in their careers is that they have no assets to lose. It is important to understand that, yes, you may not currently have any assets to lose, but a judgment can stay alive for ten whole years. It can attach to your future assets at any point during its valid term. So, if you get a new job, a new house, or a new car, it can retroactively use those assets to satisfy the debt.
Choose Reward Over Risk
The whole point of going into business is to make a profit, be successful, and support yourself. You don’t want to risk it all by being personally liable. Incorporation helps protect you and your family. It is a safety net. LLC, S-Corp, C-Corp, and Inc. are all the same from a legal perspective. They are all protecting you as an individual. What really matters on that side is the tax perspective, which is a question for a qualified CPA and not an attorney. Legally, we want you to have the entity, so you are legally protected and have that safety net in place. It doesn’t matter how you incorporate. It only matters that you do it.
The process of becoming incorporated is not particularly hard, either. It is probably simplest to hire it out and have a construction attorney take care of filing the documentation with your state’s secretary of state, after which it becomes its own company. You must also treat your construction company as its own entity and ensure you have a bank account that you do not use personally, but only for business transactions. Usually, it only takes about a week and a couple of hundred dollars to accomplish if it is just a one-person corporation. If you want to go into business with somebody else, the process will be more elevated. If you decide to use an attorney, you can likely expect a flat fee of somewhere between $1000 and $1500.
Suppose you start a construction with someone else. In that case, there first needs to be a written agreement about how the company will operate, who is in charge of what elements, and other such responsibilities. This is known as an Operating Agreement, which can then be a part of the incorporation papers. If you neglect to create an Operating Agreement, the papers will default to preset rules, so make sure you have the proper terms in place that you like. You have some control here, so use it to your advantage.
Protect what matters most and incorporate your business. Incorporating your business is the best decision you can make to protect your personal assets and separate your family’s well-being from your business’s well-being. Ultimately, incorporation is a straightforward, hugely beneficial asset that construction professionals should be utilizing. To learn more about incorporation or to get some assistance in starting your incorporation process, contact a full-service construction law firm, such as The Cromeens Law Firm, and connect with a team of highly qualified construction lawyers today.
For more details on the advantages of incorporating your business as a California Contractor, check out our short video on ContractorTV at CLICK HERE
About the Author:
Published author, award-winning lawyer, devoted wife and mother to three girls, and Owner and seasoned Managing Partner of The Cromeens Law Firm (TCLF), Karalynn Cromeens is a true jack of all trades. Karalynn is the Co-Founder of Morrell Masonry Supply and Owner of The Subcontractor Institute, an easy-access online educational platform for contractors. In addition to TCLF, and The Subcontractor Institute, she is also the Host of the rapidly growing educational construction podcast, Quit Getting Screwed – making cost-free industry insight available to contractors across the country. In 2021, Karalynn published two Amazon Best-Selling books – Quit Getting Screwed: Understanding and Negotiating the Subcontract and Quit Getting Stiffed: A Texas Contractor’s Guide to Liens & Collections.
In the seventeen years, she has practiced construction, real estate, and business law, Karalynn has reviewed and explained thousands of subcontracts. For years, she has tried saving companies that have signed problematic subcontracts and lost out on being paid for their work. Unfortunately, it was too late by the time they came to her; she could do nothing to help. She hated seeing clients lose money—sometimes their entire business—over the language they did not understand and laws they did not know about. Watching these situations play out day after day was the driving force behind her two books, The Subcontractor Institute, and the firm’s accessibility efforts. Providing education to contractors on a national level has become Karalynn’s personal mission, and she is always doing what she can to help make it a reality.