May 8, 2007 8:35 AM CDT
Starting Out on the Right Foot
Timothy R. Hughes, Esq.
There are certain basic steps you need to make if you are starting a new construction business. Despite specific wrinkles from place to place, you need to evaluate the basic issues below before you jump into business. Responding to these areas can help ensure a prompt and clean take-off for your new business.
All in a Name
Your business needs a name. A name that provides some business advantage is a plus. From the lawyer's view, however, your name or marketing literature should not be something that creates liability out of the gate. For fans of the movie "Coming to America," calling your fast food restaurant "McDowall's" and hoping you do not get sued by McDonald's does not bode well for the future success of your business. Where appropriate, it pays to properly research and analyze trademark issues before you start.
Evaluate What Formation Make Sense for You
You should consider the question of whether a sole proprietorship, corporation, general or limited partnership, or limited liability company make sense for you. There are legal, economic and tax consequences that flow from this initial decision. It is always better to think things through at the start as opposed to jumping into business and then having to restructure in mid-stream to fit future circumstances. A little planning on the front end regarding entity formation can help avoid a lot of headaches and legal expenses down the line.
If you are planning on performing work across multiple jurisdictions, you need to investigate and understand the requirements for establishing proper status in each place. For example, if you are a corporation from one state, you may be legally required to obtain authority to transact business in another state. Failing to do so may compromise your ability to enforce payment obligations or create other hazards or liabilities. It is definitely worth the time, money and effort to investigate getting started properly.
Laws vary wildly from state to state regarding what triggers the requirement to obtain construction licenses. Some states require licensing for home contractors, some for all contractors. In some states, you need a license merely to advertise to do business; in other states, you do not need a license until you contract to do work.
Similarly, laws vary from state to state regarding individual versus corporate licenses — some require one, some require the other. While some states require both individual and corporate licensing depending on the work or professional service performed. The penalties can be particularly harsh for lack of proper contractor licensing, so this must be an area of particular emphasis.
Not Just the States
In addition to establishing your business on the state level, you may have certain local requirements to meet. For example, local businesses in my area must obtain an occupancy permit to operate. In order to do so, they must estimate annual earnings and pay a local licensing fee — in essence a local tax, based on gross revenues. You may also face specific regulations that limit your ability to do the type of work you intend to do in the location you propose.
Contractors also must take the added step of analyzing local license and regulation requirements where their projects are located. Some jurisdictions require that contractors obtain local business licenses where the project is located.
Also, you may need to evaluate federal requirements. The most basic federal requirement is to obtain an Employer Identification Number (also known as a tax ID number or EIN). If you are intending on engaging in government contracting or security work, you may naturally face additional regulatory or preparatory work at the federal level.
The appropriate level of comprehensive general liability, property and other coverage is best determined in consultation with both your broker and your attorney. However, you should immediately apprise yourself of worker's compensation requirements in all the jurisdictions in which you perform work. Different states apply varying thresholds for when such insurance is required and for the applicable minimum amounts. You should also be careful to review all contracts and leases, including business equipment leases, to make sure that you obtain all required insurance.
You need to research the laws and regulations that apply to your business, your locality and your state before you plan to start your business. If you properly evaluate these questions and set your business up correctly from the start, you can avoid many of the potential starting traps that cause businesses to fail before they even begin.
About the Author
Tim Hughes is Of Counsel to the law firm of Bean, Kinney & Korman in Arlington, Va. He can be reached by email at firstname.lastname@example.org or by phone at 703-671-8200.
This article is not intended to provide legal advice, but to raise issues on legal matters. You should consult with an attorney regarding your legal issues, as the advice you may receive will depend upon your facts and the laws of your jurisdiction.
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