10 Steps to Open a Construction Business

October 2017
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Once you’ve mastered your trade and spent years honing your craft, it’s only natural to start thinking about becoming your own boss. The construction industry has seen robust growth over the past few years with no signs of slowing down. If you’re interested in going from employee to employer here are ten steps that you can take to start your own small construction business.

#1: Create a Business Plan

Business plans don’t just benefit large corporations. As a contractor looking to start a construction business of your own, a business plan can be an invaluable road map towards success. When you create a business plan, you’re essentially mapping out what you plan to do and how you plan to do it.

The business plan for your construction business should include information such as:

  • Your Business Concept: Information about the construction industry in general, your specific trade, and an overview on how you plan to succeed.
  • Your Marketplace: An analysis of your competition and information about your potential local customers.
  • Financial Information: Projections about your start-up costs, projected cash flow, a break-even analysis (when you expect to turn a profit) and other financial information.

Don’t skip this step. Running a business is less about how well you know your trade and more about how well you can manage financials, marketing, and operations. Consider it your first lesson in owning a business.

#2: Determine Your Legal Structure

The way you structure your business can have a big impact on your taxes, liability, and even your personal assets.

When you start your business, your business structure defaults to “sole proprietor,” which means you are personally responsible for any debts and liabilities that your business accrues. As a sole proprietor, you are also personally taxed for any income that your business makes.

Partnerships are formed when a company has more than one owner. In a partnership, both parties personally share the profits and liabilities of the company.

Many small construction businesses prefer to operate as LLCs (Limited Liability Company). LLCs offer some liability protection; as a member of the company, you typically can’t be held personally responsible for the company debts and liabilities. Taxation with an LLC is relatively simple and straightforward, as well. LLCs can be formed with one owner (member) or multiple owner/ members.

Your legal structure is an important consideration. Be sure you fully understand the advantages and disadvantages to each business structure before you start your construction company.

#3: Location, Location, Location

Where will you set up shop? Will you be a home-based business or will you find a commercial location for your business?

Many small construction businesses start out as home-based businesses. If you have a home office for administrative work, a secured storage space (like a garage or shed) for tools and equipment, and a reliable vehicle, you may have everything you need to get started.

If you’re going to run your business from home, be sure to talk to your insurance agent about what sort of coverage you’ll need. Your homeowners insurance may not cover incidents that arise from your business operations and your valuable tools and equipment may not be fully covered against fires, theft, or other disasters.

If you’ll need to rent or buy a commercial space for your business operations make sure you’re looking at the costs from every angle. For instance, it may sound like a good idea to get the smallest, most cost effective warehouse space available. But does that space provide enough room for you to buy (and store) materials at bulk? If you can purchase materials in bulk you can often get them at a lower price which can increase your overall profit margin -- making up for the increased rent on a larger space.

Your operation costs will likely include some sort of commercial property insurance. Even if you’re renting your space, commercial property insurance protects your tools, equipment, materials, and investments from unforeseen circumstances like fires, vandalism, and break ins.

#4: Finance Your Small Business

Since you’ve successfully completed your business plan and made some decisions about where to set up shop, you should have a pretty clear picture of what’s required financially to get out on your own.

Do you have enough tucked away to cover:

  • Start up costs
  • Operation costs (3 - 6 months of overhead)
  • Safety net (3 - 6 months for your personal expenses)

Many small business owners start off with a combination of savings, credit, and some additional financing.

There are plenty of creative ways to finance your business, like peer-to-peer loans, angel investors, and lines of credit. If you’re going to need financing, be sure your business plan financials are accurate. That’s why your business plan is always the first step of this process.

#5: Choose and Register Your Business Name

What will you name your business -- and has someone already staked a claim to that name?

When you’re choosing a name for your business, here are some things to consider:

  • Is it easy to pronounce, spell, and remember?
  • How will it look as a website name and URL?
  • What emotions or connotations does it evoke?
  • Is it available?

Once you’ve selected a name for your construction company and verified that it’s available (check to see if the URL is available and that the name isn’t being trademarked), you will want to register and claim that name for yourself.

  • File a DBA (Doing Business As) with your state.
  • Consider filing a trademark to protect your business name.
  • Purchase your website address/ URL.
  • Claim your social media profiles.

#6: Register for Federal, State, and Local Taxes

It’s time to get your business its own social security number, otherwise known as an an Employer Identification Number (EIN). Your business EIN may be required to open a bank account or get a line of credit for your business and you will definitely need it when it comes time to pay taxes.

Get familiar with your state’s tax requirements, too. Check out this SBA guide to help you determine your state regulations to register and open a business.

#7: Get All Necessary Licenses, Permits, and Bonds

Every small business will have a certain amount of business licence and/ or permit requirements, based on the location of the business. But as a construction professional you may have additional license, permit, or bond requirements that the local coffee shop owner next door doesn’t have.

The SBA has this tool to help you determine the licenses and permits you will have to obtain based on your location.

#8: Obtain Business Insurance

Earlier we mentioned some of the insurance considerations that come along with your business location. But commercial insurance is just one of the insurance policies that you may need when you start a small construction company.

Common insurance coverages for small business owners in the construction industry include:

  • General liability
  • Commercial auto
  • Commercial property
  • Inland marine
  • Course of construction
  • Workers compensation

Talk to your insurance professional to find out what other coverages you’ll need to protect yourself against loss and liability once you become a business owner.

#9: Get Hiring

Do your research before you bring on your first hire. Before you hire your first employee, be sure you understand regulatory requirements such as employment and labor laws. In most states, you’ll also be required to carry workers compensation insurance if you hire employees.

You may consider making background checks and drug testing part of your hiring process. Many insurance companies will give lower your rates on commercial auto insurance, for example, if the employee who will be using your company truck has a clean driving record. And insurance rates will raise if you start to have too many claims, accidents, or incidents -- so carefully vetting potential hires can pay off big in the long run.

An alternative to hiring employees is contracting with subs to complete some of the work. Just be sure that your subcontractors are actually independent contractors and not employees working under the label of “subcontractor”.

#10: Market Your Business

Word of mouth referrals are fine but they most likely won’t make up the backbone of your marketing efforts. Today’s marketing tactics include digital efforts such as putting up a website, utilizing social media, listing your business in online directories, and using paid advertisements on Google, Bing, and Facebook to specifically target your intended audience. Many contractors find that a good balance of local SEO (search engine optimization) and PPC (pay-per-click) digital ad buys is the right formula for bringing in new leads in today’s market.

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