Business Formation

How to Start a Construction Business

What is the best entity for a construction company?

Deborah Sweeney

By Deborah Sweeney

With more than 700,000 businesses and 7 million employees, the construction industry continues to be a massive contributor to the U.S. economy. An estimated $1.3 trillion worth of construction is completed each year. In 2019, non-residential construction also grew by 4% from the previous year. The industry continues to keep growing to meet increasing demands for residential and non-residential construction work.

If you're handy with tools and love to design and build, you may be considering starting your own construction businesses. Starting a construction company is an incredibly rewarding way to pursue your passion while making a great living. However, it's critical that you are fully prepared before you start the business. The construction industry has one of the highest rates of startup failure, with 63% of businesses closing before reaching their five-year anniversary.

Start a Construction Business

How can you ensure your business has the best possible blueprint for success? Due diligence and careful planning are the keys to success when starting any business. Follow our guide to avoid the common pitfalls of starting your construction business and help build a strong foundation for your business's future success.

How to Start a Construction Business in 8 steps.

Bookmark this page and follow along while you learn how to set up a construction company. From setting up a basic structure for your business to creating your website, this guide contains everything you need to get your construction company up in running quickly.

Step 1. Weigh the Pros and Cons of Starting Your Own Construction Business

Starting your own construction company is a great way to leverage your skills and experience. It gives you the freedom to set your own hours and choose the construction projects you want to work on. However, this flexibility comes with added responsibilities. You will need to manage your day to day activities, , and balance your workload, all while maintaining your business's professional reputation

If you are thinking about venturing out on your own, make sure you meet these 5 basic requirements for success before you invest your time and money into starting out on your own:

  • You have the passion and drive required to start a successful business.
  • You have the skills and knowledge to complete projects and build a solid reputation for your new business.
  • You have the necessary equipment you need to operate your business or;
  • You have the necessary equipment you need to operate your business or;
  • You fully understand the risks of starting a construction business.

Proper preparation ensures your business gets started on the right foot and avoids common pitfalls. Now let's take a look at how to draft a business plan for your construction business.

Step 2. Draft a Business Plan

The act of writing a business plan acts as the blueprint for your construction business. Drafting this document helps better understand short- and long-term goals, while serving as a proof of concept for the future success of your business.

How to Create a Construction Business Plan

A business plan is your way of "defining a roadmap" to profitability, and in some cases, can help you uncover any gaps or blind spots in your plans.

A business plan for your construction business should contain the following:

  • The structure/management of your business
  • Business description, concept, and strategy
  • The service you will provide
  • The type of work you plan on completing
  • Details about your target market
  • How many employees you will have starting out
  • Estimated startup costs
  • Financial projections (how much profit do you intend to make year one, year five, etc.)

Identify your target market

Your target audience is essentially the pool of people in the locality where you operate your business who can afford your services and would potentially hire you for a project.

It's important to consider early on what the demand is for the services you offer, as well as the areas you want to serve. Combining these two metrics can help you make an educated estimate of the potential volume of customers looking to hire your construction business.

This will help you make smart choices when it comes to investing money back into your business and give you a general idea about the amount of money you could earn.

What services will your construction business provide?

Some construction businesses offer highly specialized work, or limit services to a narrow scope of work where they have a competitive edge. Others are full service, with contractors that bid on different types of projects.

Knowing ahead of time what services your construction company will offer can help you get a better grasp on the equipment and staff you will need, making it easier to plan your start up costs. It also helps you evaluate your competition by allowing you to find local companies that offer services that overlap with your own.

How much does it cost to start a construction business?

The initial investment required to start a construction company will depend on a number of items. These include the types of projects you intend on completing, the number of employees or contractors you will have, and equipment expenses. It's best to address the essentials and grow your business slowly as projects come in and you begin to earn profits. In order to estimate your startup costs, consider the following:

  1. Equipment: You will need professional quality equipment and tools to complete each assignment. This may include heavy equipment like a front loader, backhoe, crane, or excavator.

    Additionally, you will need your own reliable transportation to transport this equipment to and from each job site. Take inventory of what you already have, and what you may need in the future.

  2. Licenses: Certain business licenses are necessary in order to operate your construction company. The costs for these licenses may vary depending on your state and county requirements. Many states require you to apply for a contractors license as well.

    Check with your state and local government for regulations governing construction businesses to determine the associated costs and what you will need as a construction worker or subcontractor.

  3. Insurance: Workers compensation insurance protects you and your employees and/or contractors in the event of an accident on the job. Additionally, it's important to get general liability insurance for insurance in the event of damage to a client's property or other potentially fatal liabilities.

    Arrange a meeting with an insurance agent who can help you understand the coverage required for your construction business and its line of work.

  4. Marketing: You may need to advertise your services to potential clients with a basic website, business cards, and other marketing materials.

Overall, you can expect to set aside $15,000 – $20,000 to start your construction business.

You may seek outside investment or consider a small business loan to help fund your startup costs. Each method of raising capital comes with its own caveats, so keep that in mind when outlining your startup's business plan.

If you will be relying on a loan from the bank, make sure you put extra time and care into your business plan. Be prepared to discuss the milestones and goals set in order to make your construction business successful.

Conduct due diligence when comparing loan options, like reviewing interest rates and repayment terms, to get the best deal for your business.

What are the ongoing costs of operating a construction business?

It takes time to build a successful construction business. Most of your early earnings will be reinvested in the business. After all, Rome wasn't built overnight and the same may be said about your construction company!

Once your business is up and running, be sure to budget for operational costs. For example, you may need to purchase materials and equipment upfront to complete a job. Remember to invest in maintaining existing In most cases, you will be paid to start a project, and then paid incrementally along the way until completion. Keep enough capital on hand to ensure you always have enough to pay employees or float any unexpected costs.

Research your competition

Now that you have identified your target audience, it's wise to look at who you will be competing with for their business. Researching your direct competitors can help drive early business decisions by arming you with the knowledge of what seems to be working for customers, and what does not.

It can also help you determine your value proposition. This is the the value a company promises to deliver to customers should they choose to invest in their product or service. Lean into what differentiates your construction company from the competition. Use that unique aspect of your company to help drive your success.

Step 3. Choose a Business Name

Choosing a name for your business is critically important when starting a construction company. Ideally, potential clients should see the name and understand what services you offer, although that may not always be an option.

Some contractors that have been recognized in their industry as leading experts may wish to operate under their own name. Others may take a more traditional approach to naming their company with a business name. Pick a professional name that properly represents the services your construction company provides its market.

How do I know if the business name I want is available?

Searching the web for similarly named local businesses is a quick way to find out if they are already taken, although it is not very reliable. You can also conduct a domain name search to see if your business name's URL is already taken. Again, while this method is prudent, its not foolproof.

Get a Domain Name

Register a domain name and create your online identity.

www.

The best way to find out if your business name is available is to conduct a business name search. You may do this through the name database search provided by MyCorporation.

Not only will we search for any potential business name conflicts, we can also ensure that your intended trademark adheres to any business name rules your state may have.

Once you know that the name is available, you may file a trademark application to federally register the name. This allows you to retain exclusive rights to the mark.

Step 4. Incorporate the Construction Company (Choose a Business Entity)

Now that you have a solid plan for how your construction business will operate, you will need to decide between registering your business with the state or operating as a sole proprietorship.

Whether you choose to form a llc for your construction company, or a corporation, the act of business incorporation establishes your business as a separate legal entity.

This helps you protect your personal assets from business liabilities. Personal assets may not be seized or held personally liable if, for example, your business is sued or accrues any business-related debt.

When you skip the step of business formation, you inadvertently open your personal property as collateral to pay your business's debts. That means that your home, your car, R.V., or any other high value assets in your possession could be identified as assets that could be used to pay business debts.

You may also find that each entity offers various tax advantages, depending on the details of your business.

Another important aspect of forming an LLC or corporation for your construction business is that it contributes to its credibility.

Your business will be viewed as legitimate when you've have taken the extra step of forming a legal entity, as opposed to operating under your own name, and added "LLC" or "Inc." after the name of the business.

It's fairly easy to pick the entity that best suits your construction business. Identify the entity that is right for the business by comparing the specific benefits of each entity type. Below are a few entity formations that are popular with construction companies and contractors as well as the differences between the structures.


Entity Type
Liability
Taxation
Maintenance
Limited Liability Company Combines limited liability protection with a pass-through tax structure. IRS rules allow LLCs to choose between being taxed as partnership or corporation. The easiest entity to maintain with the least amount of formal annual requirements.
Corporation Owners / shareholders have limited personal liability for business related debts. Separate taxable entity, corporate profits among owners and corporation. Meetings are required to maintain corporate status. Stock may be sold to raise capital.
Non-Profit Corporation A corporation formed for a charitable, educational, religious, literary, or scientic purpose. Contributions to charitable corporation are tax-deductible. Can get tax exempt status with the IRS. Annual reports, minutes, meetings are required to maintain nonprofit / tax exempt status.
Tip: Try our free entity choice tool. Answer a few simple multiple-choice questions about your business, and our tool can recommend the entity type that best fits the needs of your business.

Step 5. Open a Bank Account for Your Construction Business

Don't accept your first payment from a client before you open a business bank account. Keeping your personal and business finances separate secures the liability protection gained by forming a legal entity.

Here's why having a separate bank account for your construction company is of critical importance.

  1. You may accept payments under the name of the business. It could be a bit jarring for a client using your company's services to make a payment to an individual/personal account as opposed to a business account.

    Setting up a bank account for your business allows you to accept checks and payment under the business name. This conveys a high level of professionalism and credibility.

  2. Protect your personal assets. When you combine your personal and business assets, you blur the line of separation between you and your business. This lack of a defined separation puts your home, car, or other valuables at risk in the event of a lawsuit involving your business.

    This is known as piercing the corporate veil. Keeping your finances separate also reduces your chance of audit and makes filing your taxes easier.

    Keeping your finances separate also reduces your chance of a potential audit and makes filing your taxes easier.

  3. Establish credit. Setting up a business bank account allows you to build a credit history for your business. This is especially helpful in the event that you need to seek outside investment or demonstrate buying power for your business.

    Most financial institutions will require you to obtain an employer identification number (EIN) for your business before you can create a business account. An EIN, also referred to as a tax ID, is a nine-digit number that is issued by the IRS. It is used to uniquely identify your business for tax purposes. Think of an EIN as a social security number (SSN) for your business only slightly less sensitive.

    As the owner of a construction company, you may also find it's useful to have an EIN when you need to accept payments from clients that generate Form 1099 for tax purposes. If you plan on hiring employees, you will also need to obtain an EIN.

    MyCorporation can help you complete the necessary paperwork to file an EIN application for your construction business.

Step 6. Obtain Required Business Licenses or Permits

Most construction businesses will be required to obtain some form of licenses or permits to operate. Those requirements vary depending on the business activities well as the city and state.

Research the requirements with your local Secretary of State to determine the licensing you will need before you hammer your first nail.

Failing to obtain the required business licenses can lead to severe consequences, such as expensive fees or fines. It may even lead to the involuntary dissolution of your business by the state.

You may purchase MyCorporation's business license compliance package. This helps simplify the process of meeting your business license requirements while eliminating the chance of missing a requirement. We conduct all research on your behalf, considering your business type and location, and provide you with the necessary paperwork to get the required licenses.

Step 7. Develop and Define Your Brand

Creating a strong brand helps distinguish your construction business from your competitors. It's also a representation of what your company stands for, its values, and its goals for client and business success. Depending on the kind of construction business you plan on opening, developing, and defining your brand will involve a few steps.

Create Your Logo

Your logo is not only an important part of your company's advertising and marketing efforts, but it is also your first impression to potential customers.

Make sure your logo design clearly represents your company and who you are as a business.

Utilize free logo maker tools available online. These tools can help you design your own logo with no previous design experience necessary.

You may also hire a professional logo design team with a proven track record and large portfolio of successful designs. This is a great option if you have a bit of budget to spare and really want a unique, professional design that grabs attention.

  • Promotional/informational products an be great way to drum up interest in your business and get your name out there. Printing high quality brochures and fliers outlining your services and distributing them to local businesses is a solid method for building local brand awareness.

  • Professional business cards are a tried and true way of creating brand awareness and are an absolute must for any serious business owner. Business cards are easy to carry everywhere you go; you never know when a marketing opportunity may arise. A savvy business owner is always on the lookout for a new source of potential clients.

  • Email Marketing is a simple but effective way to provide a huge return on a small budget. Email marketing is a great way to put your business in front of thousands of new potential customers all at once or promote a new service or offer.

  • Networking is critical for growing your client base and getting referrals. Joining in-person networking events allows you to establish word of mouth about your business. You may connect with and pitch potential new clients during networking nights and using professional connection platforms like LinkedIn.

Looking for more ideas? Check out 6 ways to make your business idea stand out from the rest.

Step 8. Establish your web presence

A professional website is an incredibly valuable asset for any construction company. Not only is it a great way for customers to find you and learn about your services, but it can be a valuable method for collecting contact information from potential clients, sharing more information about your offerings, and more.

For many new construction business owners, the prospect of building a website can seem overwhelming and time-consuming. However, this is not true! There are several affordable ways to make a custom website for your business without hiring an expensive web design firm or freelance web developers. You can use one of many website builder tools that provide you everything you need to build a website out of the box with no coding skills necessary.

If your construction business relies heavily on your website for its services, it's recommended that you work with a team of web design experts that can often help you create a professional and functional website for your business.

Summary

From discovering your niche to incorporating your company, your construction business now has everything it needs to ensure success and thrive with its audience. Keep that momentum going!

As you continue to build your client base, focus on additional services you can offer. Invest in equipment, tools, and expanding your staff. Over time, you may even make revisions to your business plan once you've hit certain goals and milestones.

Resources

Starting a Business in the Construction Industry

What Happens If You Don't Incorporate A Business?