Risk Management is critical/very important for contractors. The construction industry is a lot riskier than other industries. I have had several companies go out of business because of a tragic claim. If you have a death or major bodily injury claim, the workers compensation insurance company or survivors might sue you repeatedly. There are armies of attorneys out there that take these cases on a contingency basis. If you have a tragic event happen, you may have to dissolve your business and start a new one in order to shed that legal liability. It is an unfortunate occurrence but this happens often.
What happens to the completed operations risks when you want to retire? Retirement possess its own sets of risks. If you shut down your sole proprietorship and then have a claim what happens? Are you liable? Unfortunately, if you are a sole prop you may still be liable for your projects.
Being a sole proprietorship and having a claim after you retire puts your personal assets on the line. If you form a limited liability corporation for your construction business and then you dissolve the business you would no longer be liable.
There are also many tax advantages for small businesses. You have several options. You can choose to file as a sole prop by default or you can file a Form 2553 and elect to be taxed as an s corp. You get to “pass through” all the expenses like materials, labor, and/or sales taxes and then pay taxes on the net income only on your personal returns. We advise our contractors to speak with a CPA about their specific situation. Also certain retirement accounts like a SEP-IRA, or self employed individual retirement account, allow contribution of up to 25% of gross sales which can be a lot more than the individual IRA contribution limits ($5,500 normally , $6,500 if you are over age 50). The increased limit on retirement accounts can further push down your LLC’s income prior to becoming your personal income.