Why Every Contractor Should Consider Forming an LLC in Today’s Market

Lots of contractors are stuck in the rut of sole proprietorship without realizing that they’re in this unhelpful position – and even if they have an inkling that their business structure isn’t fit for purpose, they might not appreciate that better alternatives are out there.

Establishing your operations under the umbrella of a limited liability company (LLC) is the antidote to this ailment, so here’s an overview of why it’s worth weighing up as an option regardless of the scale of your contracting business.

The Legal Side of the Equation

The legal framework surrounding businesses can be complex, so to simplify things, here’s a breakdown of the core benefits that LLC formation brings in this context:

Personal Asset Protection

One of the fundamental advantages of an LLC is that it separates your personal assets from your business liabilities.

In a field like contracting where workplace accidents or damages are possible – encompassing over 21,000 incidents in 2022 alone – this separation acts as a safeguard for your personal finances and property.

Credibility with Clients

Forming an LLC enhances your professional image and thus builds trust with clients. A business structure that includes ‘LLC’ in its name often carries more weight and appears more established than a sole proprietorship. And since this trust could help you outdo less respected rivals by up to 400%, it’s definitely valuable.

Tax Flexibility

LLCs benefit from pass-through taxation by default, which means profits and losses pass through to your personal tax return, avoiding double taxation. However, you could also opt to be taxed as an S corporation to potentially reduce self-employment taxes.

There are also differences in how LLCs are taxed depending on where you operate. So for instance, following all the necessary steps to launch an LLC in Wisconsin will leave you without any need to pay franchise tax, while in California there’s an $800 annual charge for this – making careful research important.

Simplified Compliance and Paperwork

An LLC requires less formal administrative work compared to corporations but still provides a structured approach to manage your business efficiently. So if admin isn’t your strong suit, this change won’t leave you drowning in complex paperwork – particularly if you partner with an expert to register your business as an LLC.

According to the NSBA, 35% of small businesses are structured as LLCs, and their popularity across various industries including construction reinforces the relevance of the benefits we’ve just covered.

Growth Opportunities for LLCs

Real estate is ripe with opportunities, especially for well-structured businesses. Here’s how forming an LLC can position contractors to seize growth opportunities more effectively:

Increased Access to More Bids and Contracts

Many government and large corporate contracts require bidders to operate as a formal business entity. This requirement opens doors to lucrative projects that were previously out of reach for sole proprietors.

Read more: How to become a government contractor?

Enhanced Borrowing Capacity

It may be easy to get a personal loan, but banks and financial institutions often perceive sole proprietorships as risky propositions. This perception can lead to better financing options for expansion or large-scale projects, under more favorable terms, if you form an LLC instead.

Attracting Investments

An LLC structure is typically more attractive to investors looking for opportunities in the burgeoning construction market. Investors prefer entities where there is clear legal separation between personal and business liabilities.

Streamlined Expansion into New Markets

Whether you’re planning geographic expansion or diversifying your services, an LLC’s flexible management structure makes it easier to adapt and grow without extensive bureaucratic red tape.

Wrapping Up

All of this should convince even the least business-savvy contractor to look a little further into the opportunities offered by forming an LLC. Strike soon, strike quickly, and see that the benefits are real – or sit back, procrastinate, and get overtaken by rivals.

Read more: What is a personal real estate corporation

Written by Billy Guteng. May 6, 2024

Billy is a content writer for Kukun. He was born in France, and has lived in multiple cities around the world ever since. He loves art, design and architecture as well as construction and real estate.