Taking the leap from a skilled craftsman or journeyman to operating your own contracting business is both exciting and daunting. Operating your own contracting or sub-contracting business requires more than just your professional skills – but also a good head for business and the determination to wade through a sea of legal requirements.
Things to Know Before Starting a Contractor Business
Not to worry – you can make it through the maze. Here are some of the key things to know before starting your contractor business.
1. Investigate necessary business licenses and permits.
You’ll need different licenses and permits in order to legally conduct business.
In general, licensing requirements vary greatly at the state, county and city levels. States like New York and Texas have very minimal licensing requirements at the state level, while cities and counties often have much tighter regulations. California is the opposite, with exhaustive state-licensing procedures and minimal city/county oversight.
Some states allow license reciprocity. For example, Mississippi and Louisiana each recognize the other’s contractors’ licenses, allowing contractors from one state to be licensed in the other, and vice versa, without requiring a full set of licensing exams.
2. Determine if you need tradesmen licenses.
In addition to licenses for your business, you may also need specific tradesmen licenses. Requirements for these vary by state, but some common ones include plumber, electrician, and HVAC technician licenses.
For example, California has very specific licenses for different types of tradesmen, including tree trimmers and landscapers. Minnesota, on the other hand, has very minimal licensing, typically for highly technical categories like plumbing and electricity, while leaving other specialists unlicensed.
3. Make sure you have the education and experience.
In most cases, in order to even apply for any of these licenses, you must have significant experience in your desired field. The average amount of experience is at least five years in construction or your specific trade. In some states, Formal education in construction or engineering may substitute.
Additionally, some states like Florida and California and cities like New York require that contractors take and pass an exam on building codes and regulations before receiving their licenses.
4. Secure surety bonds
Surety bonds are arranged through a third party and basically ensure that the client will still be paid by the bond company if you do not fulfill your work as outlined in your contract. Surety bond regulations vary by state, so you’ll need to review their requirements before moving forward. In many cases, you’ll need to keep a record of your bond on file with your state government. Insurance or bond carriers within your state must issue the bonds.
If you’re having trouble securing a bond through commercial channels, the Small Business Administration (SBA) offers a surety bond program from which you might benefit.
5. Obtain Liability Insurance
In most cases, any state or city that is issuing a contracting license will require you to have a specific amount of minimum liability insurance coverage. This insurance safeguards you against liability for any accident or injury that might have occurred due to negligence or oversight.
As a contractor, you will probably need primary general liability coverage as well as lead umbrella liability. The latter protects you if you are the lead contractor on a job and hire subcontractors to complete other aspects of the project. Similar to car insurance, you must pay a fee in order to secure this type of coverage. Most major insurance companies offer some type of liability insurance, including Travelers, Progressive and Liberty Mutual Group. Just make sure that, as you’re collecting quotes, you’re not sacrificing coverage for the price; paying more for the right coverage now might save you hundreds or thousands of dollars later.
6. Obtain Worker’s Compensation Insurance
If you employ any workers, you will also need workers’ compensation insurance. Again, this is typically mandated by the state, and each state has a different requirement for how much coverage you need.
These are some of the key things you’ll need to start your contractor business. In most cases, you won’t be able to hang a shingle without one or all of the above already in hand. While it may seem like a lot of legwork up front, the protection each of these offers will be monumental in the continuing success of your contractor business.