Avoiding Sr. Pedro’s Ordeal
When it comes to deciding how to organize a company, few industries require as much forethought as construction, and the consequences of making the wrong decision can be catastrophic.
Consider the ordeal experienced by one of my clients a few years ago, whom for the purposes of this article we will call “Señor Pedro.”
Sr. Pedro worked for an independent contractor.
One day, he asked his boss how he could earn more money and get benefits. “The only thing you have to do,” his boss said, “is create your own company.”
Sr. Pedro enlisted someone to help him form a C Corporation. When he returned to his boss, his boss asked him, “And what about insurance, such as workers’ comp, liability insurance, and the EIN number?” Sr. Pedro went back to the person who helped him set up his C Corp, who offered him an insurance policy, which Sr. Pedro accepted.
Two weeks later, Sr. Pedro reached out to me in distress, after learning that he had to pay insurance premiums and payroll taxes without even knowing why. After asking him a series of questions, I realized Sr. Pedro never understood the consequences of his decisions.
Avoiding the Trap
To avoid this trap in the United States, it is important to consider the entire scope of the construction company you want to create so you can select the right business structure and be aware what taxes, insurance, accounting and other costs and administrative tasks you will incur.
In the United States, the business structure determines not just the owners tax obligations, but their personal liability, how many reports must be filed every year, as well as overhead expenses and other obligations. Those business structures are:
- Sole corporation
- Collective partnership
- General partnership
- Limited partnership
- Limited liability partnership
- Limited liability company
- C corporation
- S corporation
- Professional corporation
Of these, S and C Corporations are the most commonly used in the construction industry.
A C Corporation pays taxes separately from its owners, as defined by the Internal Revenue Service (IRS). It is different from any other type of companies in that both its income and dividends are double-taxed. However, it offers several advantages, such as:
- The business owner is separated from the incorporated company from a legal perspective. This means they can’t be held liable for obligations undertaken by the corporation. In other words, if an employee, creditor, customer or other potential claimants feels the corporation has failed to fulfill an obligation, they can’t sue the owner/s of the corporation personally in pursuit of their claim.
- The health insurance, life insurance, retirement packages and other employee benefits offered by C Corporations surpass the benefits offered by other types of organizations.
- Their shares can be listed and traded on public stock markets, which is appealing to business owners who want to see their companies grow.
S Corporations are very popular because they allow companies to enjoy the same legal protections of a corporation without the double taxation. Other features of this form of incorporation include:
- Corporate losses are directly borne by its shareholders, and may be used by shareholders to reduce the amount of taxes stemming from other revenues.
- Income from capital gains or exemptions are directly borne by the shareholders.
- Tax credits are borne by shareholders on a prorated basis.
The most difficult part of creating a company is choosing what business structure it will have. In the construction industry, you are either a C Corporation or an S Corporation.
Creating a C Corporation takes one to two business days, while creating an S Corporation takes longer, since it requires more paper work. You must create a Limited Liability Company-(LLC), which takes around one to three days to incorporate and file an application with the IRS to be incorporated as an S Corporation. It can take up to 60 days to get an answer the IRS on your application.
Below are some web pages that may help you create your company:
These webpages are the first step on your journey to create a company. Please remember that you should file a registration with all the counties, towns and the state where your business operates for state taxes and occupational license purposes.
Back to Sr. Pedro
Sr. Pedro’s story did not end well. He paid for services before understanding the consequences of selecting one form of incorporation over another. Ultimately, he lost all the money he invested to incorporate because he could not afford to purchase the insurance required by the contractor and state law or pay self-employment taxes.
Sherly Ramirez is the owner of SR Accountant Services, a tax and accounting consultancy firm specializing in the construction industry. You can connect with her on her social media channels. You can find her as SR Accountant Services on Instagram, Facebook, Twitter or LinkedIn, or visit www.sraspro.com. You can also send her an email at email@example.com