Last Updated: May 10, 2024, 12:29 pm by TRUiC Team

Should I Start an LLC for My Construction Contractor Business?

Starting a limited liability company (LLC) for your construction contractor business can provide several benefits. 

Most importantly, an LLC structure offers limited liability to its owners, which can protect their personal assets from lawsuits and creditors.

For a construction contractor business, lawsuits can arise from things like contract law violations, as well as property damage claims and employee injuries. 

LLCs are also affordable, highly flexible (from a tax point-of-view), and can make your construction contractor business seem more credible. 

Recommended: Use Northwest to form an LLC for $29 (plus state fees).

Do I Need an LLC for a Construction Contractor Business?

LLCs are a simple and inexpensive way to protect your personal assets and save money on taxes.

You should form an LLC when there's any risk involved in your business and/or when your business could benefit from tax options and increased credibility.

LLC Benefits for a Construction Contractor Business

By starting an LLC for your construction contractor business, you can:

  • Protect your savings, car, and house with limited liability protection
  • Have more tax benefits and options
  • Increase your business’s credibility

Limited Liability Protection

LLCs provide limited liability protection. This means your personal assets (e.g., car, house, bank account) are protected in the event your business is sued or if it defaults on a debt.

Construction contractor businesses will benefit from liability protection because of the relatively high risk involved with working in construction. This includes workplace accidents as well as the potential to cause property damage.

Example 1: While doing an office renovation job for a customer, one of your workers accidentally breaks a pipe. Before he can shut off the water, it spills out and destroys some expensive computer equipment. The customer demands you pay for the damage. Limited liability as an LLC protects your personal assets.

Example 2: A client injures themselves while doing a walkthrough of the worksite, and they ask that you pay for their medical bills. Being an LLC, the limited liability ensures your personal assets could not be used to pay for the bill.

Example 3: A job goes on longer than expected, and some nearby homeowners attempt to sue you for devaluing the neighborhood from the unfinished structure and noise violations from long work hours. Should this go to court, as the owner, your personal assets won’t be used to pay for the settlement.

An LLC will also protect your personal assets in the event of commercial bankruptcy or loan default.

To maintain your LLC's limited liability protection, you must maintain your LLC's corporate veil.

LLC Tax Benefits and Options for a Construction Contractor Business

LLCs, by default, are taxed as a pass-through entity, just like a sole proprietorship or partnership. This means that the business's net income passes through to the owner's individual tax return. 

The business’s net income is then subject to income taxes (based on the owner's tax bracket) and self-employment taxes.

Sole proprietorships and partnerships are taxed in a similar way to LLCs, but they do not offer limited liability protection or other tax options.

S Corp Option for LLCs

An S corporation (S corp) is an IRS tax status that an LLC can elect. S corp status allows business owners to be treated as employees of the business (for tax purposes).

S corp tax status can reduce self-employment taxes and will allow business owners to contribute pre-tax dollars to 401k or health insurance premiums.

The S corp status requires that the business pay the employee-owner(s) a reasonable salary for the work they perform. 

In addition, the business might need to spend more on accounting, bookkeeping, and payroll services. To offset these costs, you'd need to be saving about $2,000 a year on taxes.

We estimate that if a construction contractor business owner can pay themselves a reasonable salary and at least $10,000 in distributions each year, they could benefit from S corp status.

You can start an S corp when you form your LLC. Our How to Start an S Corp guide will lead you through the process.

Credibility and Consumer Trust

Construction contractor businesses rely on consumer trust. Credibility plays a key role in creating and maintaining any business.

Businesses gain consumer trust simply by forming an LLC.

A growing business can also benefit from the credibility of an LLC when applying for small business loansgrants, and credit.

Northwest will start an LLC for you for just $29 (plus state fees).

How to Form an LLC

Forming an LLC is easy. There are two options for forming your LLC:

  • You can hire a trusted LLC formation service to set up your LLC for a small fee
  • Or, you can choose your state from the list below to start an LLC yourself

Select Your State

For most new business owners, the best state to form an LLC in is the state where you live and where you plan to conduct your business.

Do LLCs Need Insurance?

Yes, all businesses need insurance because being an LLC only affords you limited liability protection, which protects the owner’s assets, not the business’s. Construction contractor businesses need insurance because of the risks involved with construction. Whether it be injuries to employees, clients, or property damage, insurance can help keep the costs down and get you back to work sooner.

Common Situations Business Insurance May Cover for a Construction Contractor Business

Example 1: An employee uses the wrong chemical while cleaning up, causing extensive damage to the newly completed building. A general liability insurance policy will help to cover the costs of replacing the damaged materials up to your policy limits.

Example 2:  A visitor to the construction site trips and falls over the vacuum cleaner power cord while your employee is vacuuming a room. The visitor sustains injuries and requires medical care. Your general liability coverage will cover the costs of medical treatment for the injured party.

Example 3: One of your competitors decides to sue your company for libel based on your recent advertising campaign. Your general liability policy should help cover the costs of defending yourself from the legal action of your competitor and paying a settlement if necessary.

Other Types of Coverage Construction Contractor Businesses Need

While general liability is the most important type of insurance to have, there are several other forms of coverage you should be aware of. Below are some other types of insurance all construction contractor businesses should obtain.

Commercial Auto Insurance

Getting your employees, equipment, and supplies to the work site requires one or more company vehicles. Any vehicle used primarily for your business needs to be covered by commercial auto insurance. With this coverage, you have protection in the event of an auto accident. Your coverage will help pay for the repair or replacement of the vehicle, as well as medical care for injured employees and third parties.

Workers’ Compensation Insurance

The laws in your state most likely require you to carry workers’ compensation coverage if you have employees working for you. There are several benefits of carrying workers’ compensation insurance, including covering medical bills for treating work-related injuries for your employees and helping to cover lost wages for injured workers. It can also help pay for the medical care of workers who become ill due to their job.

Commercial Property Insurance

In the event of an accident, such as a fire, you could lose a large majority of your construction equipment and supplies. The cost of replacing these could be significant. Commercial property insurance will help cover these costs so you can get back to work as soon as possible.

Commercial Umbrella Insurance

Sometimes the limits of your general liability insurance may be exceeded, such as in an event where your company loses a lawsuit and is required to pay extensive damages. Commercial umbrella insurance is designed to start paying when the limits of your general liability policy are reached. It covers the extra expenses up to the limit of your umbrella policy.

Should I Start an LLC FAQ

Choosing the right business structure depends on your business’s unique circumstances and needs. However, unless your business is very low risk (like a hobby), an LLC is likely the better option.

Visit our LLC vs. Sole Proprietorship guide to learn more.

At a minimum, you’ll need general liability insurance, commercial auto insurance, and workers' compensation insurance.

Read our Small Business Insurance article for more info.

Starting your own contractor business won’t be cheap. A beginning figure in the $10,000-$15,000 range will get you started, but be careful not to overspend without work to support your bottom line. As your business grows, you may want to add additional workers or hire subcontractors to handle specific tasks, such as painting or HVAC installations.

Visit our How to Start a Construction Contractor Business guide to learn more about the costs of starting and maintaining this business.

Some of the operating expenses for a construction contractor business are insurance, equipment maintenance, payroll, fuel, and possibly rent.

Learn more about running a construction contractor business.

Construction contractor businesses make money by charging residential and/or commercial clients for construction projects.

Learn more about starting a construction contractor business.

Between new construction, renovations, and repairs, there is always a strong demand for construction contractors. While there is also a lot of competition, trustworthy contractors can quickly build a name for themselves by word of mouth.

One advantage of a construction contractor business is that you can keep startup costs lower by starting with a small crew. Then, over time, you can grow your business as it becomes steadily profitable.

Learn more about starting a construction contractor business.

Related Articles

Article Sources

IRS: Limited Liability Company

IRS: S Corporations


SBA: Small Business Guide

SBA: Choose a Business Structure Guide

US Census Bureau: Small Business Statistics

SBA Office of Advocacy: Data on Small Business

FRED: SBA Data for Small Business