Best Business Structure for a Construction Company

The best business structure for your construction company will depend on many factors. The answer will also vary from business to business. That’s why it’s essential to get professional advice on the different business structures and which might be more suitable for you.

As a business owner, taking the time to define a business model for your construction business will be an essential first step. An expert CPA firm can then help you compare business structures, keeping tax efficiency as a top priority.

How to Choose a Business Entity

Knowing where to start isn’t always easy when making important business decisions. If, having read up on the topic, you’re still unsure about which business structure would work best for you, consider business entity structuring services from a respected CPA. An expert can help you choose an entity type, taking all the potential tax benefits into account.

Sole Proprietorship

Some new business owners opt for a sole proprietorship as their business structure. However, for companies in the construction industry, sole proprietorships can cause headaches because of the huge liabilities associated with setting up a construction company.

A sole proprietorship works under the principle of merging the company’s and the business owner’s assets. As a result, the owner has very little legal protection from business debts or lawsuits that could occur while doing business.

To avoid personal liability if things go wrong in your construction company, new construction business owners may wish to consider selecting another business structure such as an LLC.

Advantages of Sole Proprietorships:

• It is easier and cheaper to get started.
• It is a simplified approach to business ownership.
• There are fewer formal requirements and you won’t need to fill out a separate business tax return.
• The owner keeps all the profits made by the business (minus taxes).

Disadvantages of Sole Proprietorships:

• The owner’s personal assets are at risk in the case of a business liability.
• It is harder to get credit or financing than it is in other models.
• It could be more challenging to sell the business.

Though sole proprietorships may not be the best long-term option for most construction companies, starting as a sole proprietorship could be a good choice in some circumstances, with a view to changing the status of your business further down the line.

Partnership

If you enter into business with at least one other person, a partnership is a possible option. A partnership is a relatively easy model to set up but doesn’t offer any personal liability protection.

If you choose this option, you must define the terms of your partnership in writing from the beginning. All partners should draw up a written contract stating terms such as the structure of the business and details regarding how the business will be run and the division of responsibilities.

Because a partnership is a pass-through entity, all the profits and losses from your business flow through as a tax liability to the partners. Each partner will then pay their share of taxes on their individual tax returns.

This is one of the main drawbacks of a partnership; if the business makes a profit but you choose to leave this profit within the business as operational capital, you’ll still pay income and self-employment taxes on the full amount.

Advantages of a Partnership:

• Tax preparation may be simpler than it would be for a company or corporation.
• Working with a partner could mean more expertise and funding.

Disadvantages of a Partnership:

• Taxes owed on profits are passed through to partners even if they didn’t pocket the full amount.
• Partners are taxed on an individual level with a potential maximum rate of 37%.
• There is no protection from liability unless you’re operating a limited liability partnership (LLP).
• The IRS considers each partner as self-employed. They must pay self-employment taxes including Social Security and Medicare.

LLC

A limited liability company (LLC) could be a good option for a new construction company because, as a separate legal entity, it provides the business with a significant amount of protection and other benefits including a flexible tax status.

Whether you choose an LLC structure or another business structure, keep in mind that your company will need construction CPA services. A CPA can help with accounting and taxation compliance as well as creating a development and investment plan for the future.

Advantages of an LLC:

• Flexible ownership: There are no restrictions on who can own an LLC (depending on the tax structure chosen).
• Tax flexibility: You can choose between a sole proprietor, partnership, or corporation tax structure.
• Avoids double taxation for shareholders: If you choose to be taxed as a sole proprietor, partnership, or S corporation, your profits will only be taxed once at the individual level.

Disadvantages of an LLC:

• You will pay self-employment taxes on all of your revenue unless you elect to be taxed as an S corporation.
• Not all states recognize LLCs.

S Corporation

An S corporation is similar to a C corporation but receives a special tax status from the IRS. S corporations are pass-through entities; this means that profits and losses incurred by the business are passed through to shareholders’ personal tax returns. This prevents shareholders from paying taxes once at the company level and a second time at the individual level.

Filing as an S corp could be a good option if you fulfill the qualifying criteria:

• You have fewer than 100 shareholders.
• You are a U.S. corporation.
• All of your shareholders are U.S. residents, U.S. citizens, eligible trusts, or eligible estates.

Advantages of an S Corp:

• This business structure provides personal asset protection for business owners.
• There is no double taxation for shareholders.
• There is more prestige associated with being an S corp than a sole proprietorship or partnership.

Disadvantages of an S Corp:

• The business is more likely to be audited by the IRS.
• This business structure requires a more complicated process to set up than other business structures.
• The business must comply with all of the regulations surrounding S-corp status or risk losing it.

People who already know they want to form a separate business entity will need to weigh up the pros and cons of forming an S corp vs LLC. An experienced CPA can explain the tax implications of each option and help you choose the most appropriate entity type for your construction business.

Key Takeaways: Which Business Structure Is Right for You?

Choosing your business structure is an important decision that can have short and long-term implications. Take the following into account when discussing the options with your CPA:

	SOLE PROPRIETORSHIP	PARTNERSHIP	LLC	S CORP
DESCRIPTION	A one-person business that can use a business name without registering as a formal entity	Two or more partners go into business without creating a formal entity.	The owners enjoy limited liability.	Similar structure to a corporation but the profits flow through to the owners
PROS	No government filing necessary	No government filing necessary	Personal assets are protected.   Pass-through taxation   Fewer formalities than an S corp	Profits and losses are split between the shareholders.   Considered a pass-through entity
CONS	No separation between the business and owners. Owners will be liable for business debts.	Tax liabilities are passed on to individuals.	You can expect to pay more in fees for filing taxes than you would for an individual tax return.	It’s necessary to comply with formalities like holding board meetings.
SIGNIFICANCE	Personal assets are available to creditors when settling unpaid debts.	Personal assets are available to creditors when settling unpaid debts.	Personal assets are at low risk but individuals’ roles may be less well-defined than in other structures.	S corps can be subject to more scrutiny from the IRS as they look for wages being misclassified as dividends.

Seek Third-Party Advice

Choosing to work with an experienced CPA can be a defining step for new businesses when determining their business structure. Apart from helping businesses make the right choice for their company, a CPA can help you file the right paperwork so that your business can take off from day one.

Outsourcing the entity structuring process can save you time and money that you can invest in growing your business. Set up your business correctly from the start and you will reap the benefits as your business grows.