How to Start a Construction Company: A Practical Checklist

To start a construction company, decide on your trade and market, form a business entity, get the licenses your state and city require, buy insurance (and bonds if your work calls for them), get an EIN, open a business bank account and set up bookkeeping. Then price your work to cover overhead and profit, put written contracts in place and line up your first clients. Here’s the checklist, with official sources for each step.

This is general information, not legal, tax or insurance advice. Rules vary by state and city. Check with your state’s licensing agency, an accountant and a local attorney before you decide. If you’re starting a remodeling company, see our remodeling business checklist too.

Step 1: Pick your trade, market and business model

“Construction company” covers a lot of ground. Get specific before you file anything, because your answers drive licensing, insurance and pricing:

• What work will you do? General contracting, remodeling, roofing, concrete, or one trade like electrical or plumbing.
• Who will you work for? Homeowners, builders, property managers, businesses or public agencies.
• Will you be the general contractor or a subcontractor? A GC signs with the owner and manages the subs. A sub signs with the GC and does one scope.
• Where will you work? Licensing can change at a state line, and sometimes at a city line.
• Will you have employees from day one? Employees change your insurance, tax and payroll setup.

Then write a one-page plan: your services, service area, target clients, startup costs and how many jobs a month you need to cover your costs and pay yourself.

Step 2: How to set up the business

Choose a business structure

The U.S. Small Business Administration describes the main options:

• Sole proprietorship: the simplest, but there’s no separate entity, and you can be held personally liable for the business’s debts and obligations.
• Partnership: two or more owners, with liability depending on the type of partnership.
• LLC: protects owners from personal liability in most instances, and by default passes profits through to the owners’ personal tax returns.
• Corporation (C corp or S corp): the strongest protection from personal liability, with more cost and record-keeping. An S corp passes profits through to its owners and has eligibility limits.

The right choice depends on your taxes, your state and your plans. The SBA itself suggests talking with business counselors, attorneys and accountants.

Register and get an EIN

Register the business with your state, and with your city or county if required. Then apply for an Employer Identification Number. The IRS issues EINs for free, and if your online application is approved, you get the number right away. The IRS also warns you to beware of websites that charge for an EIN. You need one to hire employees or to run a partnership or corporation, among other reasons.

Step 3: How to get licensed

Licensing is the step that varies most. Some states license general contractors and remodelers, some license only certain trades, and cities and counties can add their own rules. A few examples:

• California requires a license when a project’s total cost for labor and materials is $1,000 or more, or when it needs a building permit or uses employees.
• Maryland requires a Maryland Home Improvement Commission license to contract with homeowners for home improvement work, with no dollar threshold.
• Texas has no statewide license for general contractors or remodelers (the commission that once regulated home builders was abolished in 2009), but it licenses electrical, HVAC and plumbing work. An electrical contractor license, for example, requires employing a licensed master electrician.

Two federal rules also apply to many contractors. If you’re paid to do work that disturbs paint in housing or child-occupied facilities built before 1978, your firm must be certified under the EPA’s Renovation, Repair and Painting rule, even if you’re a sole proprietor. And if you have employees, OSHA’s construction standards (29 CFR Part 1926) set the safety rules on your jobsites.

Start with our state license guides and our post Do you need a contractor license? Then confirm with your state agency, and check city or county rules before you pull your first permit.

Step 4: Get insured and bonded

Insurance

The SBA lists workers’ compensation, unemployment and disability insurance as required for businesses with employees, and notes that some states require more. For a construction company, also ask an agent about:

• General liability: covers claims for bodily injury and property damage. Some licenses require it (Texas electrical contractors, for example, must carry business liability insurance), and many clients and GCs ask for a certificate before you start.
• Commercial auto: for the trucks and vans you use for the business.
• Tools and equipment coverage: for gear that moves from site to site.
• Builder’s risk: covers a structure while it’s being built or renovated, often bought per project.

The SBA suggests assessing your risks, working with a licensed agent and comparing offers from more than one.

Bonds

Surety bonds protect the people you work for: a performance bond guarantees the work gets completed, and a payment bond guarantees subs and suppliers get paid. You may run into three kinds:

• License bonds: some states and cities require one to get or keep a license. Check your state’s rules.
• Bid, performance and payment bonds: common on public work. Federal construction contracts over $150,000 require performance and payment bonds under the Miller Act.
• SBA-backed bonds: if you can’t get bonded on your own yet, the SBA’s Surety Bond Guarantee program backs bid, performance, payment and ancillary bonds for small businesses, on contracts up to $9 million (non-federal) or $14 million (federal).

Step 5: Set up your bank account, books and taxes

• Open a business bank account. The SBA notes that keeping business funds separate from personal funds helps protect you. It lists an EIN (or your Social Security number, for a sole proprietorship), formation documents, ownership agreements and a business license as what banks typically ask for.
• Pick a bookkeeping system on day one. Track income and costs by job, not just by month, so you can see which jobs make money.
• Keep your records. The IRS says to keep records for 3 years in most cases, longer in some situations, and to keep employment tax records for at least 4 years.
• Plan for self-employment tax. The self-employment tax rate is 15.3% (12.4% for Social Security and 2.9% for Medicare), and it applies once your net earnings from self-employment reach $400.
• Pay estimated taxes. The IRS says you generally have to make estimated tax payments if you expect to owe $1,000 or more when you file, and the year is split into four payment periods.

An accountant who works with contractors can help you choose your structure, set up payroll and plan for taxes before your first big check arrives.

Step 6: Price your work and set up contracts

Pricing

Don’t price by guessing what competitors charge. Build every price from your own costs:

1. Work out your fully loaded labor rate, including taxes, insurance and unbilled time, with the labor rate calculator.
2. Add up your yearly overhead: truck, insurance, phone, software, office and marketing.
3. Set a profit target on top.
4. Convert the margin you need into a markup. A 25% markup is only a 20% margin; see markup vs. margin.

Contracts

Don’t start work on a handshake. Use a written contract on every job, with the scope, price, payment schedule, change order process, warranty and any notices your state requires. Some states regulate home improvement contracts closely, down to how big a deposit you can take. Our free contractor templates include a contract, estimate, change order, lien waiver and invoice to start from, but have a local attorney review your contract before you use it.

Step 7: Win your first clients and run jobs well

• Get found. A simple website with a contact form, a Google Business Profile and photos of your work.
• Work your network. Past employers, suppliers, real estate agents, property managers and other trades all hear about jobs.
• Respond fast. Call new leads back within minutes, not days, and follow up more than once.
• Ask for reviews. After each finished job, ask happy clients for a review while the work is fresh.
• Run a safe site. OSHA’s On-Site Consultation Program offers no-cost, confidential safety help, mainly for smaller businesses, and it’s separate from OSHA enforcement.
• Pick your software early. It’s easier to start on one system for leads, estimates, jobs and invoices than to move off spreadsheets later.

FAQ

How much does it cost to start a construction company?

It depends on your trade, your state and what you already own. The main costs are business registration and license fees, insurance, any bonds, tools, a vehicle, marketing, software and enough cash to cover payroll and materials until clients pay. Get real quotes for each before you launch.

Do I need a license to start a construction company?

It depends on your state, your city and your trade. California requires a license for jobs of $1,000 or more, Maryland requires a state license to contract with homeowners for home improvement work, and Texas licenses electrical, HVAC and plumbing work but not general contracting statewide. Check with your state’s agency before you take a job.

Should my construction company be an LLC?

According to the SBA, an LLC protects owners from personal liability in most instances, while a corporation offers the strongest protection but costs more and needs more record-keeping. Which is right for you depends on your taxes and plans, so talk with an accountant and an attorney.

Do I need an EIN as a sole proprietor?

You need one if you hire employees, and in some other cases. The IRS issues EINs for free online. Banks may ask for one when you open a business account, though a sole proprietor may be able to use a Social Security number instead.

What insurance does a new construction company need?

If you have employees, the SBA lists workers’ compensation, unemployment and disability insurance as required. Also talk to your agent about general liability and commercial auto; some licenses require liability coverage. Rules vary by state, so work with a licensed agent.

What should a construction business plan include?

Keep it to one page. List your services, your service area, your target clients, your startup costs and how many jobs a month you need to cover your costs and pay yourself. Before you write it, decide what work you’ll do, who you’ll work for, whether you’ll be the general contractor or a sub, where you’ll work and whether you’ll have employees from day one.

How is starting a contracting business as a subcontractor different?

A general contractor signs with the owner and manages the subs; a subcontractor signs with the GC and does one scope. That choice drives your licensing, insurance and pricing, so make it before you file anything. Many clients and GCs ask for a certificate of insurance before you start. Licensing rules vary by state, and this isn’t legal advice. The free subcontractor agreement template is a starting point for your attorney.

How should a new construction company price its work?

Build every price from your own costs, not from what competitors charge. Work out your fully loaded labor rate, including taxes, insurance and unbilled time, add up your yearly overhead, set a profit target, and convert the margin you need into a markup. A 25% markup is only a 20% margin, the mistake explained in markup vs. margin.

How ECHOPS helps

ECHOPS is one system for a contractor’s office, from the first lead to the final invoice: a lead board with follow-ups counted for you, estimates from your own price book, e-signatures, project stages and schedules, invoices from each job’s payment plan, expenses with receipts read by AI, time sheets and a profit per job report. It runs in your phone’s browser. It connects to QuickBooks Online, so invoices, payments and job costs reach your books on their own, and every report also downloads as a CSV for your accountant. Plans start at $149 a month for three users, with a 14-day free trial and no credit card needed.

Sources

1. U.S. Small Business Administration, Choose a business structure
2. IRS, Get an employer identification number
3. Contractors State License Board (California), Before applying for a license
4. Maryland Home Improvement Commission, Maryland Department of Labor
5. Texas Sunset Advisory Commission, Texas Residential Construction Commission
6. Texas Department of Licensing and Regulation, Apply for a new electrical contractor license
7. U.S. EPA, Renovation, Repair and Painting Program: Contractors
8. OSHA, Construction industry
9. U.S. Small Business Administration, Get business insurance
10. FAR 28.102-1, Bonds and other financial protections: General (Acquisition.gov)
11. U.S. Small Business Administration, Surety bonds
12. U.S. Small Business Administration, Open a business bank account
13. IRS, How long should I keep records?
14. IRS, Self-employment tax (Social Security and Medicare taxes)
15. IRS, Estimated taxes
16. OSHA, On-Site Consultation Program