How to Start a General Contracting Business
Do Business the Right Way
If you’re starting a general contracting business, you’re ready to capitalize on the years you’ve spent perfecting your trade and building relationships in the construction industry. General contracting is a demanding and competitive field and being good requires a lot of different skills. But those willing to commit the time, energy, and patience enjoy the potential for high earnings and a great deal of personal freedom.
Below, we’ve done the legwork for you to provide a free guide to starting a home-based general contracting business today.
Not interested in starting a general contracting business? Visit our generic Start A Business Guide.
What Does a General Contracting Business Do?
Almost anyone can call themselves a general contractor (something you can probably attest to). Being a general contractor just means that you sign the primary contract with a property owner and bear the primary responsibility for fulfilling the construction, improvement or remodel of that property as agreed upon with the property owner. The legal requirements to fill this roll are minimal, but to actually deliver quality work inline with regulatory requirements on time and on budget in a way that makes customers happy and leads to long-term success takes years of experience and skill.
Being a general contractor can mean anything from replacing a shower curtain to constructing a high-rise office building. For the purposes of this page, let’s assume you are somewhere in between. You might specialize in remodeling homes or in building new homes, or you might do a little of both. You probably have been working in the industry for years, accumulating relationships with concrete companies, carpenters, plumbers, electricians, finish carpenters, painters, HVAC specialists, roofers, and more. Perhaps you are involved in the labor, and perhaps not. These factors vary greatly from business to business.
Steps to Starting a General Contracting Business
Create a Business Plan for Your General Contracting Business
Before you get started, you’ll need an idea of what resources you’ll need—and how to monetize your business in a practical way. We’ve answered the biggest questions about clients, costs, and profits below.
Who is the target audience?
You’ll want to decide what you want to specialize in. Will you be focused on handyman services, residential remodels, commercial renovations, or building high-end custom homes in rural areas? This will be a goal you’ll work toward. When you’re starting out, you’ll likely need to take what you can get, and when times are lean you may have to step back and do a little of everything.
How do I get clients?
To get clients you will need to network with other general contractors, subs, architects, property managers, real estate agents, suppliers, HOAs, social media contacts, friends and family. You’ll need to ask for referrals from previous clients, and you may need to enlist a lead generation service such as Home Advisor or Construct Connect. These services can be expensive and are controversial, but if used correctly, they can provide leads in real time.
If you are ready to start a general contracting business, chances are you have a couple of projects lined up. But you need to know that part of your life as a general contractor from now on is going to be building a pipeline and keeping it full. When times are good, this might not seem important. You may not have to do much at all to keep that pipeline full. But when a downturn comes (and one will), it will be those who have a plan to keep their pipeline full who will survive.
How does a general contractor business make money?
General contractors charge for their services in one of two ways: fixed bids or time and material.
Fixed bids: Using this method, a contractor will evaluate a given project and estimate its total cost then add their own markup (typically 10-20%). A good contractor gets very detailed with this process, estimating the cost of each sub and all of the materials to come up with a profitable bid that will also be competitive with any other bids the property owner might receive.
Typically this bid will be a fixed price barring any changes to the project made by the property owner or any unforeseeable obstacles that may arise. These changes are known as “change orders.” They are typically dealt with as sub contracts to the original contract. Change orders are very common but need to be handled with care, and the reasons and costs should be explained thoroughly before the change order is presented to the property owner for approval. If not handled carefully, they can lead to a loss of trust on the part of the property owner and non payment.
Time and Material: Using this method, the contractor and the homeowner agree upon a fixed hourly rate and mark up for materials. This method is less common and is best suited for small projects where the property owner will not be collecting multiple bids.
How much money will it take to get started?
Depending on the market you have decided to focus on, this could vary greatly. Aside from vehicles, trailers, and job site tools, a new contractor will want to invest in Quickbooks and bidding software such as Stack, Proest, or Clear Estimates.
Being a good contractor means paying people on time, keeping flawless records, and having the means of presenting property owners with professional appearing bids and bills. Investing the money and time in these tools and skills is often what makes the difference between a successful contractor and a failed one.
How much do general contractor businesses make each year?
Nationally, the average annual income for a contractor at the lower 25th percentile is $34,500 and $61,000 for the upper 75th percentile. Of course, the earnings potential for a general contractor is very high. The difference is often between those with solid business and growth plans and those without. Additionally, the more you are able to focus your efforts on the marketing and finances of your business, the higher your earning potential will be. This can be a difficult step as working on the job site is the most comfortable role for most new contractors. Transitioning yourself into the role of an office person, a marketing person, and a business owner can be difficult.
How much should I charge?
General contractors typically charge between 10 and 20 percent above the total costs to them for a project. Depending on the competitiveness of the project and the relative strength of the market, a contractor might lean toward the low end of that scale or the high end. To get business, a new contractor may need to take a lower margin in order to win bids.
Select a Name for Your General Contracting Business
Have a great name idea? Before you start marketing and branding your business, you’ll need to ensure your name is available. Most states prohibit or restrict businesses from adopting names that are already in use. Even if it’s legally allowed, a copycat name puts your business at risk of a lawsuit.
See if your business name is available in your state with our Free Business Name Search.
Trademarks and Domain Names
Plan to trademark your business name? You can see if the trademark is available on a website like Trademarkia. It’s also a good idea to see if the domain name is available, which you can do on websites like Network Solutions and GoDaddy. Even if you don’t plan on putting together a website right away, you can buy the domain name to make sure no one takes it in the meantime.
Choose a Business Structure
Should you form an LLC? A sole proprietorship? Your choice of business structure will affect many aspects of your business, from liability to taxes.
Sole Proprietorships & General Partnerships
If you don’t file any paperwork to legally form a different kind of business—you have a sole proprietorship or general partnership. Essentially, these are “default” business structures. A sole proprietorship has one owner, and a partnership has multiple owners.
These structures have a few initial benefits. They’re easy, fast and cheap to start and maintain. However, the limitations and risks of these business structures quickly become more apparent as your business grows. In both of these business types, you are your business, legally speaking. Your company’s legal business name is YOUR name—so you’ll need a DBA to operate under any other name. Any business debt is YOUR personal debt. If anyone sues your business, they are suing YOU personally.
LLCs & Corporations
Limited liability companies (LLCs) and corporations are business entities formed at the state level. The entity is legally separate from its owners, meaning the owners are not personally liable for the debts and obligations of the business. As a separate entity, the business also has multiple tax election options. For example, both LLCs and corporations can choose to be taxed as S-corps if they meet the requirements.
LLCs and corporations are not quite as simple and inexpensive as default structures. LLCs and corporations come with formal requirements like state reports. They also have more fees than default structures, such as formation and annual report fees. However, the benefits of an LLC or corporation—especially liability protection and tax flexibility—are significant.
Legally Form Your General Contracting Business
If you opt for a sole proprietorship or general partnership, there’s no formal paperwork to file to legally create your entity—you just start selling your product or service. However, you will not have any liability protections or tax flexibility.
LLCs and corporations are formed by filing paperwork with a state agency, typically the Secretary of State. To start an LLC, you file articles of organization. To start a corporation, you file articles of incorporation. In most states, you can file these forms online or download a paper form from the state’s website.
Whether you’re forming an LLC or corporation, your articles will require certain basic information about your business, such as your company’s:
- business address
- registered agent and office
- business purpose
- members/managers or directors/officers’ names and addresses
- number and type of authorized shares (for stock corporations)
You’ll also need the signature of someone authorized to sign on behalf of the business, along with the state’s filing fee. Fees vary by state but are typically between $100 and $200. If you hire Northwest to form your LLC or corporation, we complete and submit your formation paperwork on your behalf for just $100 plus state fees.
Create Internal Policies and Procedures
It’s important to put your company’s internal policies and procedures in a written document, especially if you’re starting your business with others. Partnerships have partnership agreements. LLCs have operating agreements. Corporations have bylaws.
These documents look a bit different for each kind of business, but they serve the same general purpose. They ensure there’s a clear path forward for any major issue that may arise, from changes in ownership to closing the business. LLCs and corporations also typically need an operating agreement or bylaws in order to open a bank account.
Get an EIN and Register for Taxes
Nearly all LLCs and corporations will need to request a federal employer identification number (EIN) from the IRS. If you file corporate income taxes, have employees, or file certain franchise taxes, you must have an EIN. An EIN is also a common requirement for opening a business bank account. Most businesses can request an EIN by filling out the IRS’s online form.
Your EIN is for federal taxes—but you’ll likely have state and local tax obligations as well. You will most likely need to set up an account with the state’s Department of Revenue, and you may need to apply for a state tax ID or a sales tax license as well.
Learn more about how to Get an EIN for your business.
Open a Bank Account
A business bank account keeps your personal finances separate from your business finances. For LLCs and corporations, keeping separate finances is essential for maintaining liability protection. To open an account, LLCs and corporations typically need to bring to the bank a copy of their articles, their operating agreement or bylaws, and their EIN.
Obtain Required Licenses and Permits
Many businesses will need a business license to operate. Licensing information—as well as any zoning requirements or other permits—can usually be found on the city or county website.
You’re probably aware that as a general contractor you are required to carry general liability insurance. The specific amount varies state to state. But there are lots of other types of insurance that might be a good idea, depending on your specific situation. You may need third-party liability insurance, and if you have employees you’ll need workman’s compensation. Other types of insurance to consider are:
- Specific coverage extension: Expands the coverage of your liability insurance for things like faulty plans and poor workmanship.
- Flood insurance: This covers you against… you guessed it.
- Property insurance: Covers all of your physical assets like office space and tools.
Luckily, insurance agents are well-versed in all of this, so find a good one and start a relationship with them. As you grow, your insurance needs will change, and you will want someone familiar with your business who will advise you wisely.
Next Steps for Your General Contractor Business
After your business is up and running, there are a few additional steps you may want to take as you grow:
- Get online: With your domain name, you can create a business website. You can hire a professional or use a website-builder like Wix or WordPress. You may also want to invest in online ads through a program like Google Ads.
- Hire employees: Hiring employees requires quite a few steps. You’ll need to collect W-4s and I-9s from employees, report the new hires to the state, set up withholding, pay for unemployment insurance, distribute any required documents and notices to employees, and display wage and safety info in the workplace. Employer.gov is a good place to start, followed by your state’s tax or labor office.
- Get business insurance: While LLCs and corporations protect you from personal liability, you don’t want your business to go bankrupt in the face of an accident, injury or other disaster. At minimum, it’s a good idea to look into general liability insurance.
How Do I Know If General Contracting is Right for Me?
What’s it really like to work in a general contractor business?
Nights spent around the dining room table sorting the books, completing billing, preparing taxes—these are the things that most people are not prepared for. As a tradesman, it is possible to leave your work on the jobsite, but as a general contractor, you will rarely have this luxury. But as a general contractor you are building autonomy and, if you focus on growth, you will eventually create financial freedom.
What does it take to succeed in the world of general contractor business?
Most people starting a general contractor business are prepared for the demands of the jobsite, managing projects, scheduling and organizing subs, and even dealing with clients. But to be successful in the long run, you must create for your business a strong foundation (sorry for the pun). This means choosing the structure for your business wisely, understanding your book keeping and record keeping requirements before you are too busy to do so, and carving out time and space in your budget to commit to marketing. You must have in place a system that will allow you to grow.
Ready to Form an LLC or Corporation?
Northwest Registered Agent is here to help with all your small business ideas and needs. Answer a few simple questions about your business, and we’ll prepare and submit your formation paperwork to the state. We also provide your new business registered agent service, free business forms and guides, and much more.