What’s the best business entity for a general contractor?

The choice of a business entity involves consideration of your immediate and long-term goals. Choosing to operate as a sole proprietorship, a general partnership, a limited liability company (LLC), a corporation or some other entity has legal, risk and tax consequences.

If you do not choose an entity type, you will default to either a sole proprietorship or a general partnership, depending on whether there are partners. These entities may not be ideal.

That’s because sole proprietorships and general partnerships can leave you personally liable for the business’s debts and losses, including lawsuit damages and taxes. Anytime you get into a dispute, your own money is at risk.

On the other hand, sole proprietorships and general partnerships are easy to run and require few legal formalities. Meanwhile, running an LLC or a corporation requires that you keep up with certain formalities, such as holding annual meetings of the members or shareholders and issuing a legally compliant annual report.

Tax-wise, sole proprietorships and general partnerships are simply taxed as if the income or losses from the business were your own income or losses. That’s easy. Operating an LLC requires you to file separate taxes for the business.

Industry-specific issues

The state of Texas does not require a general contractor license, but there are various licensing requirements at the city level. Texas does require a general business license for most types of companies.

General contractors may need specific licenses based on the type of work they do. For example, there are various types of licenses required for electricians, plumbers and HVAC contractors. General contractors, builders and handymen do not need statewide licenses in Texas, although local requirements vary.

You may also wish to be bonded and insured. Insurance is one way to reduce your personal liability for business disputes. Insured basically means you have a general liability policy, although you may also have an errors and omissions (E&O) policy.

Bonded means you have engaged with a bond company to back you up in the event of professional negligence. Unlike with insurance, the bond company will expect reimbursement for any claims.

Be aware that you may pay less favorable insurance rates as a sole proprietor or general partnership than you would as an LLC or corporation. And, the required bond amount for an LLC may be higher than it would be for a corporation.

Get started now

There are many considerations for choosing the best business entity for your particular business. Talk with a business attorney today to learn how to limit your personal liability, tax and compliance issues, or licensing questions.