Let us say you started your construction company five years ago. You have managed the business as a sole proprietor doing mostly residential and commercial remodeling jobs.
Your workload keeps increasing, the projects are getting bigger and it is time to rethink your business structure.
A corporate structure
The main problem from the standpoint of being a sole proprietor is that there is no difference between your business and you, personally. Assets such as your bank account, your savings and your home are always at risk. To date, you have been fortunate, but the fact remains that you have no protection from creditors or people who may decide to sue you. If you form a C Corporation and follow the rules properly under this structure, you will have the protection you currently lack. However, the downside is double taxation. You will pay corporate tax based on income and personal tax based on your pay.
A tax solution
You can solve the issue of double taxation if you form a Sub-chapter S Corporation. In this structure, the members or shareholders are taxed for the corporation’s profit or loss, but the corporation itself pays no taxes.
One of the most popular structures among building contractors is the Limited Liability Company. The LLC offers the same pass-through profit-and-loss benefit as the Sub-chapter S with the protection of the C Corporation. One drawback is that the LLC usually has a limited lifespan, but you can work with your attorney to alter that.
Points to consider
While deciding which kind of entity you prefer, here are a few points to consider:
- Your management style, how you make your decisions
- The amount of structure you want
- The amount of liability you will be comfortable in assuming
- The amount of professional support you need
When it is time to go to the next level of business structure, explore your legal options. Learn more about corporations and LLCs and how well they mesh with the needs of your growing construction business.