Sole proprietorship? LLC? Partnership? S-Corporation? When it comes to structuring your construction company, there are multiple options with various tax and liability implications. Don’t rely on an internet search or what you heard from a friend or relative to decide what will work best for you.
This week we’re talking about the options you have when structuring your business. We cover:
- How the structure you choose can affect the way you’re taxed
- How the type of business entity you choose affects liability and asset protection
- How what’s right for you may vary by industry, location and other factors
- Why it’s important to work with a professional to make these decisions and how to get started
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Watch a video of the episode and read the transcript below.
Rob Williams: [00:00:05] Welcome to the Contractor Success Forum. Today, we are discussing choosing the right business structure for a construction company. At the Contractor Success Forum, we discuss financial strategies for running a more profitable, successful construction business. And you know what Wade? Stephen and I were just talking about this. A new episode came out this morning so I was looking at it, and I noticed that we had a review and it was a five star review and there was only one.
And who reviewed it? I did.
Stephen Brown: [00:00:38] Hey, Thanks.
Rob Williams: [00:00:40] You’re welcome. So, what I realized is nobody knows how to do these reviews, and I didn’t know how, but if you’re at the main show, you scroll down to the bottom of all of our episodes and at the very bottom, they make it really hard to find– that’s where you can go and write these wonderful reviews and read these wonderful reviews about our show.
Just thought, I’d let you know that. So go review our show. If you like it, if you don’t like it, don’t review it. So. So, biased reviews right here, right now!
So our three long-term construction industry professionals are Stephen Brown, a construction bond agent with McDaniel-Whitley bonding and insurance agency for over 30 years, experienced in underwriting and placing bonds for you as contractors. And Wade Carpenter with Carpenter and Company, CPAs helping contractors nationwide to become permanently profitable for over 30 years. And me, Rob Williams, your profit strategist with IronGate Entrepreneurial Support Systems, driving profit in your business with decades of vertical integration as a contractor, a manufacturer, an aviator, and a financial strategist in the construction industry.
So today, man, we are trying to figure out how to choose the right business structure for a construction company. Stephen, have you ever wondered that? Have you ever wondered how to do this?
Stephen Brown: [00:02:17] I have. I have, and I imagine a lot of our listeners don’t know all the facts about this. There’s a lot to learn about it.
Rob Williams: [00:02:26] I don’t think anybody knows all the facts about this, but we have Wade on here today as a CPA. Man, what, where do we start? What are all the possibilities of forming a structure?
Wade Carpenter: [00:02:39] I can talk in general about, the main forms of, I mean, a lot of people just jump right out in business as a sole proprietor and they don’t set up any kind of asset protection. And, if anything, they go get a business license and get going.
Rob Williams: [00:02:52] Yeah. So, so what is a business structure actually? What does that even mean? We may have some listeners that don’t even know what we’re talking about.
Wade Carpenter: [00:03:00] Well, the form of entity can affect a lot of things. How you’re taxed, whether you can be sued personally, there are a lot of different things that can affect how you’re structured and, it could depend on the state that you’re in, how they tax things. It can depend on the industry you’re in, it can and on your strategy, like if you have real estate, if you were buying and selling, buying and flipping, versus buying to hold and rent. The answer can be a very different thing. And unfortunately, a lot of people go out on the internet and just Google that and they come to the wrong answer all the time without getting any advice.
Rob Williams: [00:03:41] Yeah. I’ve definitely spent time on the internet learning this, even though I’ve had a lot of classes and gone to a lot of different things, it’s just an endless supply of information. So I go to
Wade Carpenter: [00:03:51] I got to say, Rob, a lot of it is actually wrong out there.
Rob Williams: [00:03:55] Ah, yeah.
Wade Carpenter: [00:03:56] Unfortunately you can Google it all day long, but a lot of things that are being said out there, it could be state specific, but you know, a lot of people that just do– say, I hate to refer to like, but H and R block, all they know is sole proprietorships or something like that.
So they don’t know the ins and outs or construction, number one.
Rob Williams: [00:04:16] Right. Yeah. So I’ve had sole proprietorships. I’ve had LLCs as a single member. I’ve had LLCs with partners. I’ve had sub chapter S, I’ve had corporations. I think I’ve had so many of these structures and I consider myself a fairly knowledgeable person. But I know when I get into these conversations with lawyers and CPAs, I realize how much I don’t know.
What do you see most of your guys when they come to you? Are they sole proprietorships? Are they LLCs?
Wade Carpenter: [00:04:47] I mean, I don’t know where you guys are, but here in Georgia they’ve made it so easy for people to go form an LLC. I hate to generalize. There’s a lot of great lawyers out there, but almost universally, a lot of them will– at least here in Georgia, will put people in an LLC all day long, with the thought of, you should be going to talk to your CPA about how the tax structure should be.
With an LLC, you can pretty much turn it into anything you want.
Rob Williams: [00:05:14] Yeah. I think when most people talk to me, their first thought is not taxes. It’s liability, I guess, because they talk to the lawyer primarily, and they’re wanting some limited liability. And sometimes they have it and there’s different levels of that, but I think that’s where people start off, but they don’t usually ask their accountant what their special situation may be. So I guess all of these have different levels of asset protection when you get into them. If you have a sole proprietorship, you really don’t have any. But once you start putting your assets in the LLCs, you’re somewhat protected if something happens.
I know my LLC is when the lawyers came in, they said, well, the way you’ve done this, this was decades ago. And they were like, really, you don’t have any protection because you’ve messed it up. You’re putting money in and taking it out and you’ve broken the veil of protection. And so it really didn’t have a lot of asset protection anyway, because I was not doing things correctly.
Wade Carpenter: [00:06:17] Well, I think that’s a great point. Number one, because a lot of people, their friend tells them they should be an LLC and they don’t know anything else. So they, here in Georgia, they can just file a form on Secretary of State’s–
Rob Williams: [00:06:29] It’s same thing here.
Wade Carpenter: [00:06:30] And become an LLC and there’s tax implications to that.
But from a liability standpoint, if you’re just a one person, one man band, that, you’re treating it the same way, you can do the same thing as a sole proprietorship and file it on your personal tax return. And so many people probably exactly what you’re saying. The intermingling of funds, your personal funds versus your business funds are just all mixed together. And that definitely will pierce the corporate veil. But you know, I’ve heard of lawyers arguing when you have a single member LLC that is filed on a schedule C, which is the sole proprietor form–
Rob Williams: [00:07:10] The way I usually did it.
Wade Carpenter: [00:07:12] My understanding is you do not have the same level of protection.
Rob Williams: [00:07:15] That’s what I’ve heard too.
Wade Carpenter: [00:07:16] And, and we’ve heard of things where people have gotten that corporate veil busted because.
Rob Williams: [00:07:23] Yeah. So, so let’s talk about, so what are there? There’s sole proprietorships. There’s an LLC.
Stephen Brown: [00:07:29] There’s partnerships.
Rob Williams: [00:07:31] Partnerships. Yeah. There you go. Can you list, I hate to list them myself, cause I may say I’m wrong.
Wade Carpenter: [00:07:36] Well, the main forms we can say, sole proprietorship, we have exactly what, Stephen said a partnership. You have a corporation which by default is a C corporation, which is taxed one way. And then there’s S corporations, which, are taxed a very different way. When you sign up for an LLC, and you’re one man band, you’re automatically going to be a sole proprietorship and taxed that way. If you’re to two or more people, you’re going to automatically be put into a partnership unless you make an election to do that. And there are other forms of entities, and there are some other… I’m talking about the main things. There are times a lawyer will put things in a trust or a family limited partnership.
Let’s kind of stick with the main talking points here.
Rob Williams: [00:08:27] Yeah, let’s say, yeah, because there are definitely trusts, that goes down a whole other road, but yeah, the sticking down with the regular partnerships. You said you could do a partnership, or you do something else. Is that a subchapter S?
Wade Carpenter: [00:08:39] Well, by default, if you set up that LLC and you do nothing, you’re either going to be a sole proprietorship or you’re going to be a partnership. And so you have to make an election. And one of the things that a lot of people do not know is that the self-employment tax can kill you And just to briefly explain that, if you work for Coca-Cola or somebody with a W2, they take out social security and Medicare. Social security is 6.2% Medicare, 1.45%.
They take that out of your check, but what they didn’t know was Coca-Cola was matching that 6.2 and 1.45. So that’s together 7.65. If you’re the employer as well, you’ve got to pay both sides of that. So that’s 15.3%. So say this sole proprietor, single member LLC, or a partnership is basically taxed the same way, they go out and business and say they make a hundred thousand dollars.
Well, let’s just say they’re in a 22% federal bracket and here in Georgia, maybe 6%, 28, but then you’re going to tack on this self-employment tax, 15.3%.
Well, then you’re quickly approaching, 50% of your money going out in taxes and, and people do not know that. They jump out and think that this LLC is doing something tax-wise, and it’s done nothing. Hopefully it’s given you some liability protection, but that’s, it’s, it’s a common problem. And people are really surprised at first year when they get huge tax bill, because of it.
Rob Williams: [00:10:11] So we’re taxed the same way as a sole proprietorship as we are in an LLC like that because it’s a ridership we’re paying both of those too. Right?
Wade Carpenter: [00:10:19] Yeah. Taxed as an LLC or a partnership, a general partnership. C corporation or an S corporation is taxed very differently.
Rob Williams: [00:10:27] Yeah. So tell us a little bit about that. You don’t have to go into detail.
Wade Carpenter: [00:10:31] Well, okay.
Rob Williams: [00:10:32] And then you have to pay yourself an income tax.
Wade Carpenter: [00:10:35] You can elect to be a C corporation and that’s kind of come back into play a lot more in the last couple of years, once they kinda capped the corporate taxes. Not to get into a political discussion, but I know they’re looking to raise the corporate taxes, but they’ve also done this S Corporation thing back in I think 1986 when they set that up. And basically all the income will pass through to the shareholders.
Rob Williams: [00:11:04] Yeah. So
Wade Carpenter: [00:11:04] And–
Rob Williams: [00:11:04] Avoiding the double taxation that way, right?
Wade Carpenter: [00:11:07] Yes, you’re avoiding the double taxation. I don’t want to get into specifics, but with an S-corporation you have to take a reasonable salary and I’m not going to go into the definition of that right now, but just say you did, you made a hundred thousand that first year–
Rob Williams: [00:11:21] That’s what you have to pay that extra 15%, that’s that self-employment tax on.
Wade Carpenter: [00:11:26] Well, in a sole proprietorship or a partnership. Yes, you do.
With an S-corporation, say you make a hundred thousand, but we take, I don’t know, $40,000 in W-2, the other 60 and distributions, dividends. That 60,000 is not going to be taxed for that self-employment.
Rob Williams: [00:11:45] Yeah, the right there, boy, that’s right there. That was the money card right there. So you,
Wade Carpenter: [00:11:49] Well, that’s 60,000 at 15%. That’s a $9,000 tax aid.
Rob Williams: [00:11:54] So that’s a big deal. So.
Wade Carpenter: [00:11:57] And again, We haven’t already said this, but we probably should put disclaimers all over this. I- please, please do not make any decisions based on what you hear today. Please go talk to your CPA about the structure because there’s a lot of things that could come into play that could backfire on you, just because you pick up on one particular thing.
Rob Williams: [00:12:19] Yeah. So what I’m hearing here is this is not an easy discussion at all. So we just had a very basic primer. You need to talk to, not only the lawyer, you need to talk to your CPA as well. And what’s the right answer in one state is not the right answer in another state and you just can’t listen to a 12 minute show and get any good decision about that. And Stephen, I want to include you in a little bit on this, do you see multiple different structures as you’re doing this underwriting? And any feedback on whether you think these guys are in the right?
Stephen Brown: [00:12:55] I do. All different types of structures. And, what’s interesting is you were talking about the whole reason to set up a structure is just simply, you’ve got assets to protect. You want to protect your personal assets. You want to protect your business assets, but also you you want to minimize your tax implications.
It’s a juggling act. It’s another reason I always say, try to get a construction-oriented CPA, if you’re a contractor to do your books, because they understand what you can do better than anyone else. And also they understand that, you have to keep some working capital and net worth in your company to get bonds.
So it’s a little bit of both.
Rob Williams: [00:13:36] Yeah. So talking to your buddy about it and what was great for him is not a good way to decide what you’re supposed to do. That’s what I’m hearing here, because it’s a complex situation, and just a little bit of difference in one guy can make a big difference in the right situation.
And what you just said about looking at the taxes. I know most guys do not consider that, whether they’re paying themselves in two different ways. I think most people are just paying themselves in one way and not getting those tax savings. I’m not going to go into specifically what they are because I might sway somebody to do something and then they don’t get it.
But this very interesting.
Wade Carpenter: [00:14:18] It doesn’t just have to be about liability protection, or taxes. There could be other factors like, you’ve got partners in the business, or if you want to split profits a certain way. Say you’ve got a joint venture. You may have a number of shareholder limits on say, an S-corporation, there’s a lot of factors that go into it. It could be your intent, whether like, if it had to do with real estate, is your intent to buy it and hold it? Or is it your intent to flip it? So maybe we can go down this road a little more depth than another show.
I know we, didn’t want to get too deep on this one. But, I think the message today is don’t go by what you find on the internet. Talk to somebody. It’s well worth the money to talk to somebody, get it right.
Rob Williams: [00:15:06] I got two messages today. One is, go explore this because you can have a huge financial impact and liability impact by what you do, but don’t just go file something. Thinking that that’s going to solve your problems.
Those are the two things. It makes a huge difference, not only on asset protection, but on your taxation. So you may be able to more than pay for those attorney and CPA fees, maybe even in the first year. I’m not saying you can, but you may be able to, so that would be a big difference. So it may not even be costing you anything if you’re looking at the right tax implications.
But go down that road for asset protection, protecting your asses– I mean, assets. The, and, also maximizing your taxation. So save yourself some money. So you need to explore it. It’s not simple. You can’t just go on the internet and do it because I know a lot of people that, like you just said, there’s, there’s a local government page here that just directs you how to go form this LLC really easily.
So there’s no thought in that. And people usually don’t have the right documentation and agreements and they don’t have everything that it takes to make it actually have the asset protection if they don’t use a professional to help.
Wade Carpenter: [00:16:25] Yeah. One other thought that I just want to make sure I throw in there as well, and I know we need to keep this short, but people form an LLC and if they’re going to make an election to, say, be an S corporation, there’s like a 75 day window that they can form that to make that election for that year.
Otherwise you have to wait until the following year. And sometimes there are ways to fix that, but, by and large, it, it’s not designed to go beyond that 75 day window. So if somebody just goes and sets up an LLC, talk to somebody quickly, if you’ve done it.
Rob Williams: [00:16:56] Okay. Yeah, because I’ve definitely seen that. It’s just like you people doing their own legal work. Yeah. And it’s, they may not have anything by that piece of paper, so.
Stephen Brown: [00:17:07] That’s a good point because like we were talking about, you have assets to protect. Maybe that’s a lawyer you should talk to about how to best protect your assets. And then you’ve got tax implications. And the different types of companies. What type of contractor are you?
Are you heavy equipment contractor? That might affect the decision, but either way, both professionals will ask you the right questions to help you come up with the answer. And like any professional, a CPA, an attorney, has years and years and years of experience. They have an opinion on it. You can form the opinion yourself, but I think this is a situation where you need to go to the pros.
Rob Williams: [00:17:47] Yeah. And one other small point here, which maybe is a big point. Share the information with the lawyers and the CPAs and whatever advisors you have. I’m really surprised sometimes some of the clients that keep things so close to their vest and they want some advice on something, but they don’t tell us about anything. They get in there and they hardly share anything.
I’m not sure why they want to keep things so secretive. If you’re not sharing this information with the people, why are you paying the people to help you? I run into that quite a bit, actually.
Well, we need to wrap up. We said we’re going to be really short, but we’ve already gone to our regular time length.
Wade Carpenter: [00:18:29] I think we’ve just scratched the surface of it. And
Rob Williams: [00:18:32] I think that’s the point.
Stephen Brown: [00:18:33] Scratching the surface.
Rob Williams: [00:18:35] Yeah, you cannot make your decision from a 21-minute podcast. That’s the message for today. But I guess on that, I appreciate you guys coming out to the Contractor Success Forum, where we learned one, how to rate a show today, and two how to start going down the path of what business structure you should have.
So thanks a lot. We have Stephen Brown with McDaniel-Whitley bonding and insurance company, Wade Carpenter, Carpenter, and Company, CPAs. And Rob Williams with IronGate Entrepreneurial Support Systems. Go see us at ContractorSuccessForum.Com where we actually have had a lot of people listen to the show on the website.
I’m actually surprised, but that’s our second, most popular, to Apple, source of people listening to the show. So lots of good information there. Have a great day. And thank you for listening to the Contractor Success Forum. See you next episode.