In the enthusiasm and excitement of starting up your own construction company, the decision as to what type of corporation you should establish may not seem like a task worth wasting much time on.
And for the first few months it probably won’t make much difference at all whether your business structure is a sole proprietorship, a partnership, a limited liability company, a C-corporation or an S-corporation. But come time to pay the taxman, the difference may cost you a lot of money. And as time goes on, other issues emerge as well, such as financing, employee benefits and stock options. Should your company seek work outside the state where you incorporate, failure to follow the out-of-state licensing and incorporation laws might even cause you to forfeit all the money you receive for a job.
It’s fairly easy to describe the legal differences between the different entity types. But applying these general principles to your specific needs can be tricky. For this article we talked with several lawyers familiar with the construction business and corporate structure, but they all emphasize that there is no one-size-fits-all solution. To get the best arrangement for your company you need to sit down with your lawyer and your accountant and discuss how these choices will affect your business now and in the future.
Admin and paperwork
Of the different ways to organize a business, proprietorships and general partnerships are considered “unincorporated,” in that the owner or owners of the business and the business itself are considered one legal entity. In the remaining types: limited partnerships, limited liability companies, S-corporations and C-corporations, the business and its owners are considered separate legal entities.
The sole proprietorship and the general partnership are the easiest businesses to establish. A sole proprietorship is run by one person, a general partnership by two or more.
“You can run a proprietorship out of your personal checking account, as long as the business bills are clearly identified as such in the checking account records,” says Russell Agosta, national managing partner, construction, real estate and hospitality for the accounting firm Grant Thornton. “You can pay your personal bills and your business bills all on the same account.”
An LLC requires that you file papers to establish your corporation, but beyond that it’s almost as simple as setting up a proprietorship or partnership, says Philip W. Peters, a partner with Thelen Reid, a law firm with an extensive history of clients in the construction business. “Your operating agreement can be three pages. You can create a custom, private entity and not have to strictly follow the corporate formalities you have to follow with a C-corporation or an S-corporation. So a lot of entrepreneurs like that.”
