Starting your own general contracting business can be exciting. You get to be your own boss, and your earning potential is only limited by your effort.
But it can be an intimidating process too. Where do you begin? How do you know if you’re setting your business up the right way?
There are many ways to structure your business. The most common, especially for independent contractors, is a sole proprietorship. In fact, it’s the most widely used form of business in the U.S. In this post, we’ll cover several sole proprietorship pros and cons.
Starting a business is a lot like any building project…you need to start with the right foundation. If that’s not right, nothing else will line up properly. But if the foundation is solid, the rest will fall into place.
The Basic Foundation of a Solid Contracting Business:
- Establish a good business strategy
- Effectively attract customers
- Manage finances wisely
- Organize the paperwork, forms, and licenses necessary to legally perform contracting services
CRS CPA has been helping small business owners just like you for over 40 years. When you’re ready to lay a good foundation for your new company, schedule a call and let us help guide you to success.
Is a Sole Proprietorship Right for Your General Contractor Business?
If all of the things we just mentioned seem intimidating, you might want to consider the advantages of a sole proprietorship. It’s not right for every business, but it can make sense when you are the only employee of your company or you only expect to hire a few other people.
There are several benefits to this simpler style of business ownership for the smaller contractor:
- Less paperwork to start
- Fewer tax regulations
- Fewer registration processes and fees
- Easier banking
One-person operations can really benefit from these advantages of sole proprietorship, especially if their business doesn’t require complicated legal or financial setup. Let’s take a closer look at each one.
1. Less Paperwork
Other forms of business structure (LLC, S Corp, etc.) require quite a bit more paperwork just to get set up. If you’re creating one of those entities, you don’t want to do it yourself. That means paying a legal professional lots of money before you ever make your first dollar. For the sole proprietor, less paperwork generally means lower entry costs.
Also, you typically don’t need to register with your state except for your personal contractor license.
2. Simpler Tax Compliance
Filing taxes for a sole proprietorship is as easy as adding one more form to your personal 1040 (Schedule C) to report all of your business income and expenses…no separate federal income tax filing process needed.
We recommend to our clients that they go ahead and apply for an Employer Identification Number (EIN), even if they have no plans to ever hire employees. It’s good to have in place in case you ever do. However, you can simply use your personal Social Security Number (SSN) when filing tax returns for your sole proprietorship.
For more information on this topic, check out a post we did a while back on “How Sole Proprietorships Are Taxed and Why It Matters to You.”
3. Lower Fees
Money is always tight before you get your business up and running. Anything you can do to keep from spending money before you make money is a good idea.
Most states require registration fees to establish business entities such as LLCs. So you can avoid those costs and save a lot of money by simply creating your contracting business as a sole proprietorship.
(Note: There are times when the liability concerns associated with a particular type of business may justify registering your business as an LLC. If you feel like your line of work has the potential to make you a target for lawsuits, contact one of our business pros to find out which business structure is best for your situation.)
4. Simplified Banking
If your business is structured as anything other than a sole proprietorship, most banks will require copies of all of your legal paperwork and other forms. However, as a sole proprietor, all you need is a checking account to get started.
Be sure to keep good accounting records, though! You’ll need to be able to easily distinguish between your personal and business spending. We recommend creating a separate checking account just for your business and only using that account for business purposes.
Disadvantages of a Sole Proprietorship for General Contractors
Like most things in life, there are both pros and cons of sole proprietorships. It’s important for new small business owners to understand when the benefits we mentioned above may be overshadowed by a couple of important limitations.
1. No Personal Liability Protection
As a sole proprietor, you are solely responsible for any company debts, taxes, or other financial problems. Without the “corporate veil” of an LLC or other type of business structure, you have no protection from personal liability. For example, if you were sued by a client, your personal residence and everything else you own could be at risk.
Also, since you aren’t required to be registered in your state, you’ll miss out on any regulations there that might offer you protection.
2. Difficulty Getting Business Credit
Since there is little distinction between you and your company when you are the sole proprietor, it can be hard to obtain bank financing or credit cards in the name of your business. If your personal credit is bad, your business won’t be able to borrow either
For a deeper dive to learn even more, check out another good article from Entrepreneur on Sole Proprietorship!
Consult With Business Pros Who Know General Contracting
As always, it’s in your best interest to consult with a professional before making decisions like this. (We wrote about that too in a post called “3 Reasons to Check With Your CPA Before Making Big Business Decisions.”)
They’ve been down this road before and have helped many other clients in situations like yours. Their experience and wisdom can save you a lot of time, money, and stress!
To find out if doing business as a sole proprietor makes sense for you and your company, schedule a call with one of our business experts today.