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Greg Corombos talks with remodeling business coach and contractor Shawn McCadden about the difference between being a contractor and construction business owner.
Did you know 90% of contracting businesses fail within 10 years? Shawn McCadden and Greg Corombos discuss a variety of critical issues related to construction businesses including choosing a business entity, risk mitigation, and hiring the right people.
Greg: Hello I’m Greg Corombos and our guest today is Shawn McCadden, an award-winning remodeler. He’s also a remodeling speaker and remodeling business coach. He knows the business well. You can find his work on www.ShawnMcCadden.com. For the next few minutes Shawn will help us understand what it takes to start your own contracting or construction company. Shawn it’s great to have you with us and thanks for your time.
Shawn: Thanks for having me Greg.
Greg: What’s the first thing—after you get this idea that you believe you’d be good at it—there is a market for you, whether it’s testing an idea, financing... What are the first things you need to think about and start working on when you’ve decided to do this?
Shawn: Truthfully my suggestion would be that the person should think, am I looking to start a job for myself to keep myself busy and just earn a wage? Or am I actually going to create a business, an entity that perhaps doesn’t even need me around in the future, and I guess put together a money-making machine that doesn’t need me?
I’m not saying one is right or wrong Greg but I’m saying it’s definitely a decision. The way I put it I suggest contractors need to make the decision…are they going to be a contractor and only have to worry about building a business and keeping themselves and maybe 1 or 2 people busy or are they going to be a construction business owner? The responsibility is completely different and truthfully being a construction business owner doesn’t have a lot to do with knowing how to use the tools. It’s more about knowing how to run a business and make sales happen.
Greg: Let’s get into some of the things you have to have lined up before you can go out and start looking for customers. You mentioned one and that’s the proper business entity. Is there a major difference on what you should explore there depending on whether you want to be a contractor or a construction company?
Shawn: I think in the beginning probably starting out as a sole proprietor might be a good way to go. Figuring out really what kind of business you’re going to have, what kind of customers and job types you’ll take and how big it’s going to be.
Starting out as a corporation could be a little expensive at first, especially because of the extra accounting and tax filing and legal fees to do it. At the same time, if your business starts doing well, and you start making money, there is a lot of legal protection and tax liability benefits to becoming a corporation.
My suggestion is if you’re going to do it at least start out small and try to get things going and try to get that flywheel moving in the beginning. Maybe stick with the sole proprietorship, and then depending on the direction you and your business wants to go, consult legal counsel to help you with what will be the best legal entity.
Again we’ve got liabilities and the customers and work we do and at the same time tax liabilities. So those two things are certainly worthy of considering before you ultimately choose your business’s legal status.
Greg: Let’s talk about the paperwork now. It varies I guess from state to state but when it comes to licenses, permits, insurance, etc., in general what do you need to keep in mind when you start exploring those things?
Shawn: Probably keep in mind there is a lot more to realize and you’re going to be responsible for than you’re aware of. Or even then what you think based on other businesses up until the point where you’re thinking of starting your own. So don’t make assumptions.
Unfortunately, as far as legal goes, ignorance about these things isn’t going to be a valid excuse with the government. What I try to help contractors understand is even though the Constitution says we’re innocent until someone proves us guilty, as a business if you get accused, especially by the government or consumer, you’ll automatically be assumed to be guilty until you prove your own innocence.
I truthfully think you should invest in—if you can do the research yourself great—but really find out what it takes to start a business on your own. If you’re not confident about doing it yourself, I’d highly recommend you get some legal counsel to help you or maybe even a business coach who has experience helping contractors get started.
Greg: You mentioned liability a couple of times now Shawn, and we’re talking with Shawn McCadden a long-time remodeling expert, speaker and remodeling business coach. When it comes to protecting yourself, your employees and customers, how do you navigate that?
Shawn: I think there are two ways for a contractor to look at getting started. Either you have to protect yourself by transferring the risk—so, for example, that would be with insurance or with the legal agreements you use, how you might transfer the risk so it’s not just you that has it, or you don’t have it at all, and somebody else has to have that risk.
The other thing would be to look at ways that you’ll avoid and prevent certain risks from happening in your business. So construction people would certainly understand protecting worker safety but at the same time if you want to protect your business, some of the things you might want to do to keep yourself out of trouble is to think about how you’re going to collect your money. When will you collect the money? How are you going to word information in your payment schedule so if your client doesn’t pay you, you don’t have to go back there to that location until you do get paid.
So looking at ways you avoid the problems to begin with, try to have ways to mitigate challenges when they do happen. Construction industry and being in business as a contractor is definitely a risky business to be in. Don’t get me wrong, it’s a great place to be, and you can earn some great money. But based on the risk you’d be involved with, you seriously have to think about not only protecting your business from the legal side of things but also the financial end of things and making sure your business will be healthy—good cash flow, good profitability and reserve funds.
So if you have challenges, you still have money to make sure your business stays open, and you can keep the machine going.
Greg: Shawn, when it comes to finding the right workers, who are you looking for? Obviously experience is good and most demand fairly decent wages. How do you balance all that?
Shawn: That’s a tough one for contractors getting started. Typically you need help right away that knows what they’re doing. That will be difficult to find and it’s challenging enough out there in the industry right now to find people who know what they’re doing, but it’s also going to be challenging to find people who don’t have a job or how you’ll convince people what you have is a better opportunity than maybe what they already have.
That will be a difficult thing for contractors. I highly recommend they be careful about how much work they take in and commit to until they have some steady and reliable help to help get that work done. Then as business and volume grows, my suggestion is to think about it, and start with floor sweepers. If you get them before they have misconceptions on how the industry works and how to do the work, if you already have a good crew going, can that crew take a guy who is a floor sweeper and bring him through and give him a career path, instill in him the ethics we need and the craftsmanship—not only in the skills that person needs to be a craftsman but maybe in the attitudes and behaviors the true craftsman has.
So if you have a machine already going, I suggest you try to bring people in from the bottom. But if you are just starting out, you’re going to have to try and find and attract some people who already have some skills.
Greg: Shawn you mentioned a couple of times now that it’s important to decide whether you want to be a construction business or a contractor, and it matters in terms of taxes. It might matter in terms of entity, etc. Does it matter in all these other areas as well? Or at some point is it a decision you make at the top, but decisions you make on personnel, on liability and so forth?
Shawn: It’s definitely going to be different, Greg. If you’re planning on staying small, maybe look at it as I said, you really only have to keep yourself and a few people going. At the same token if you’re going to be a construction business owner, maybe you have to think about the people you hire—are you looking for people to assist you because you’re going to be a contractor or small business? Or how about if you’re thinking of growing and becoming a construction business owner, maybe you ought to think about the people you hire today. Are they going to be people who have the willingness, skills, cognitive ability to learn new skills and grow as the business grows?
One way I ask contractors to think about it is, is it really going to be green using that analogy green to throw the employees you have at some point into the dumpster cause they no longer have the skills your business needs and you have to seek out new people? Or will you be a bit conscious and create a sustainable business?
What I mean again by using that analogy is what you find and help advance people who will be ready for the positions your business will need to fill before you get there. Think about it, attracting good people who have a desire, a want to be part of a business like that that has a vision for the future something they can be part of. If you’re going to do it, what I recommend is you find a good way to articulate that vision so you can use it again to try and attract and sell those good people on wanting to be part of your team instead of someone else’s.
Greg: Last question on the contracting construction business divide, you mentioned it has an impact on taxes down the road so explain that a little more.
Shawn: Maybe a simple way to look at that is when you’re a sole proprietor all what you pay yourself and the profit that the business earns so personal taxes and you pay payroll taxes on all those dollars. As a corporation, and there are different entities in corporations, but typically in a corporation you have to pay yourself as a business owner, a W2 wage like you’d pay an employee, and you’ll pay payroll taxes on those wages. However, the balance of the money your business generates that you’re going to consider net profit that money is taxed too but that’s only income tax. You don’t have to pay payroll taxes on that money. So there potentially could be a significant savings in tax liability for that business owner.The key is all the extra cost of being a corporation will be well offset by the tax savings. Again that would be something I’d suggest an accountant particularly someone familiar with tax accounting would be able to help you with and anticipate when you should do that. If you’re going to change your entity, Greg, my suggestion is plan ahead because a good time to do it is right at the beginning of the year, and that way you close the old business entity with a tax filing and start your brand new business entity on January 1, so you don’t have to file two tax returns, one of the old entity and one for the new one in the same year. You put a transition point on your tax year.
That’s how I might recommend looking at it and planning ahead for it. Again with some kind of professional help.
Greg: Excellent advice. I hate to end on a negative question but I’m sure you get this quite a bit. In addition to what we already talked about on a variety of issues here, what are some common mistakes beyond what we discussed that people often make and should be avoided?
Shawn: Yeah it’s a great question and I’m glad you asked. Although it might seem to be a negative question maybe it’s the most valuable piece of information folks can pull from this podcast.
My suggestion is, know and understand how to price the work you do before you jump in. Don’t compare yourself to what others are doing and think you have to price within what everyone else is charging in the market. Truthfully, Greg, the failure rates in construction businesses is one out of ten businesses survive and so nine out of ten businesses fail typically within ten years.
My suggestion for contractors is know and understand what markup you need to put on your estimated costs to sell jobs to cover your overhead and profit. Otherwise, for all the hours you put in, you might actually end up earning less per hour than the people you’re hiring to do the work inside your business.
Greg: Also good to know before you go down that road. Shawn fantastic advice all the way across the board. It’s great to have your insights and thank you so much for your time.
Shawn: Again thanks for having me Greg I really appreciate it.
Greg: Absolutely, Shawn McCadden is an award-winning remodeler and also a remodeling speaker and a remodeling business coach. He really knows the industry. I’m Greg Corombos reporting for CT Expert Insights.
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