Are You Ready to Incorporate?

Building contractors have many reasons to incorporate. The most important one is to protect your personal assets from the debts and liabilities generated by your business.

Limited Liability
A construction business exposes you to a high risk of lawsuits, from all sides. Accidents happen frequently, and customers, employees and strangers may all sue. People get injured; walls collapse, and building projects go awry. “There are so many perils—from wrongful termination suits to pre-1978 lead paint disclosures,” says Jack Philbin of Philbin Construction & Remodeling Co. in Crestwood, Ill. But, if your business is incorporated, creditors and other claimants cannot pursue your personal assets, such as your house, car or retirement fund.

“However, many banks and creditors may require you to provide a personal guarantee in any case, especially when you are starting up,” warns James Ziegler, an attorney with Stone, Pogrund & Korey in Chicago. After you incorporate, you may have to reapply to trade creditors, who now will do business with a different entity.

Tax Considerations
Various incorporation structures provide different tax treatments, so you must consult an attorney or accountant before deciding which is optimal for you. It isn’t a one-time decision, either. “You should discuss your status annually, especially for tax purposes,” Ziegler says.

Being incorporated may enable you to deduct benefits, like health and life insurance, and offers greater flexibility for retirement and medical plans. You also may carry business losses forward. In general, be aware that profits from a C Corporation are subject to double taxation, at both corporate and shareholder levels, while those of S Corporations and LLCs are not.

Happy Employees
A corporate vehicle is useful for attracting and retaining good employees, by allowing you to offer fringe benefits like insurance, deferred compensation and retirement plans. You may even wish to motivate people with some ownership interest, consisting of voting or non-voting stock.

Succession
It is easy to transfer ownership in a corporation, but you should plan well ahead. Stock usually can be sold, given away or pledged. For example, if a co-shareowner dies, would you want that person’s surviving spouse to inherit rights in the business?

Management and Operation
Bear in mind future day-to-day management. If you are the sole owner, you need not worry. If others are involved, you may have to put in place protection for minority rights.

In a typical corporation, shareholders elect a board of directors with authority to manage the business. In an LLC, the members elect one or more managers, who are governed by an operating agreement.

Remember, when drafting Articles of Incorporation, to restrict competition. You would not want one of the stockholders to run a competing contracting business across the street; in a partnership, fiduciary obligations would prevent a partner from doing so.

Incorporation involves some extra expenses and chores, such as fees, paperwork and additional tax returns to file. It’s worth it, Zeigler insists. “In fact, every contractor should incorporate as soon as possible.”