Choosing a Legal Structure: LLC vs. S Corp vs. Sole Proprietorship for Construction Companies

Planning is the first step in starting a successful business. Anyone interested in starting a construction company should consider their legal structure preferences, as this will change ongoing factors like their tax bills and liability risks. Learning about the three structural options helps entrepreneurs avoid legal complications as their businesses grow.

Why Creating a Legal Business Structure Matters

Helping out a friend with construction work is not the same thing as starting a business. Entrepreneurs must choose a legal business structure to get recognition by state and federal authorities. The Internal Revenue Service (IRS) files businesses under specific structures to assign tax responsibilities:

• Sole proprietorships are a common initial business structure, but they remain unincorporated by the IRS because they are not a legal entity. People do not have to file any state or federal paperwork to start a sole proprietorship.
• Limited liability companies (LLCs) are the next step for growing businesses. Owners file paperwork with their state and register with the IRS to get an employer identification number if they are going to hire people.
• The IRS allows larger businesses to file as an S corporation or a C corporation. Both require shareholders and differing paperwork. 

Applicable licensing bodies and an entrepreneur’s accountant will also need to know which structure the business uses to ensure it is following the law. Understanding more about how each option differs will help construction entrepreneurs choose the best structure for them.

Benefits of a Sole Proprietorship

Individuals with unincorporated businesses can have sole proprietorships. The legal terminology means that the entity does not have a separate entity filing, so the owner is automatically a sole proprietor.

They Start Right Away

Sole proprietorships are easy to start. There are minimal ongoing administration requirements because the enterprises are typically one-person teams. Entrepreneurs also don’t have to file any state fees or complete registration paperwork like they would with an LLC. Sole proprietorships do not register with state governments.

Owners Do Not Change Their Taxes

Taxes also change with a sole proprietorship. The owner can report the profits on their personal income tax return. They do not have to file separate tax returns for their business because the taxes apply to their personal return.

Banking May Be Easier

Accessing funding in bank accounts is also easier with a sole proprietorship. They do not require a business checking account, so all construction financing can pass through the owner’s personal account. If they already have the funding to start a tiny house — which typically costs around $50,000 — they do not have to wait for a bank’s approval to use their own money.

However, entrepreneurs should remember that sole proprietorships have no liability protection. If a customer sues, creditors can obtain the owner’s personal assets for business charges.

Why People Start an LLC

LLCs are smaller, state-recognized structures that give people liability protection. They require some paperwork, but are excellent for entrepreneurs who have newly growing companies.

The Structure Provides Legal Protections

Legal liability protections are the primary benefit of an LLC. Entrepreneurs get the same protections as a corporate structure, but the requirements are much easier to achieve as a one-person team. If someone sues the entrepreneur, the LLC protects the owner’s personal assets from covering accidents or business debts. 

LLCs Have Tax Advantages

People also enjoy LLCs because they give tax advantages. The specifics change from state to state. The IRS allows LLC owners to pay taxes under their Social Security number, which reduces the paperwork to file quarterly or annual payments. However, they will also have to pay the federal self-employment tax because the entrepreneur is not receiving income from an employer.

People Give LLCs More Credibility

Adding an LLC title to a professional website or business card gives people more faith in a brand. Clients may feel safer spending larger amounts of money with someone who owns a legal entity. Financial institutions might give business loans to LLC owners more readily, too.

The liability protections and state registration reduce their risks. Both could help entrepreneurs experience more growth in their first few years.

Reasons Construction Experts Choose an S Corp

An S corporation is a federally recognized business structure. There are numerous advantages for growing S corps once they have some revenue and customers.

Everyone Follows Detailed Guidelines

People running an S corp prefer to follow a traditional business structure. It must have shareholders who meet administrative requirements like maintaining bylaws and filing annual reports. They also have to hold shareholder meetings to keep everyone updated on how the business is doing.

Owners Pay Less in Taxes

There are opportunities for significant tax savings with an S corp. The shareholders do not have to pay corporate income tax, so they avoid double taxation on individual income withdrawals in corporate income tax.

They can also reduce their taxes by changing from an LLC to an S corporation because it shifts the pay structure. You will act as an employee of your brand, meaning you pay employment taxes on your salary, which eliminates the 15.3% self-employment tax on it to save money via distributions.

S Corps Retain Liability Protections

Liability and loss protections remain in place for S corps, as well. The structure protects personal assets from lawsuits. If a construction entity experiences significant losses, shareholders can offset their personal income to minimize financial challenges.

Create a Strong Business Structure

Talking with an accountant helps entrepreneurs choose the best legal structure for their construction companies. Existing potential revenue and the business plan will help guide the decision. The final choice depends on applicable tax benefits to an enterprise’s existing structure and the owner’s desired liability protections.