Construction businesses face extensive regulation from numerous state and local bodies, often necessitating thorough licensing processes. This is due to the potential risks associated with construction projects.
If your construction company fails to comply with business license regulations in any given jurisdiction, you may be subject to penalties of tens of thousands of dollars. The actual amount varies depending on the size of your company and the amount of work you do in a specific location or state.
In this article we explore basic business license requirements in the construction industry and best practices for staying on top of changing requirements.
The importance of lead times
Lead time for obtaining the appropriate business licenses is crucial, whether you’re starting a new construction company or expanding into new locations. License requirements vary considerably, so start planning months in advance.
While many contractor licenses are regulated at the state level, you will also run into local licensing laws. In addition, you must also comply with general business license requirements that allow you to operate or conduct business on a job site within a city’s limits.
Do your research or work with a partner who understands contractor and business license requirements. Once you know what licenses you’ll need, proceed with the application process with the appropriate filing authority.
License requirements are complex
Because of the nature of the work, contractor licenses are more complex than other industries. In addition to lead times for research, your business must meet certain requirements before you submit your application for review. These can include fingerprint and background checks. Many authorities also request company financial statements and surety bonds (varies by region).
Initial contractor license applications also require that you have a qualified party listed on the application. That individual must meet stringent criteria. For example, they must have a certain amount of work experience. This can range from 4,000 to 8,000 hours of work on a job site with a licensed contractor in their specific classification. Before they can apply to become a qualified party and be listed on your contractor license, they must also pass an exam within that jurisdiction.
It pays to work with a trusted partner who can help you navigate the application process, meet jurisdiction-specific requirements, and submit everything to the filing authority.
Typical licensing requirements for a construction business
There are various licensing and registration requirements for a construction company. Here are some common requirements. Keep in mind that your company will have to meet separate requirements for each state in which it will be operating.
- Business registration. LLCs and corporations and popular business structures for construction companies. LLC formation or incorporation requires filing documents with the state you selected as your formation state.
- General contractor license. Depending on the state a general contractor license may be required at the state and/or county and city level.
- Specialty contractor licenses. General contractors seeking to offer services related to sanitation systems, HVAC, electrical, solar, or any other specialized field may require a specialty contractor's license.
- Federal tax ID (EIN) number: The EIN (issued by the IRS), also known as a tax identification number or employer identification number, is necessary for nearly all forms of business.
- Basic business operation license. This license can be obtained from the city where your business is located, or from the county if your business operates outside the city's jurisdiction.
- Building permit. If you intend to renovate or construct in a commercial area, obtaining a building permit will most likely be necessary.
- Workers’ Comp Insurance. In the majority of states, having workers' compensation coverage is obligatory if your business employs at least one person.
- Payroll tax registration. If your business employs one or more individuals, it probably must adhere to various payroll tax regulations at both federal and local levels.
Stay on top of changing requirements
The contractor license regulatory environment is always evolving. Authorities change their statutes or regulations at any time and without notice. This increases the risk that your business could unknowingly fall out of compliance, so it’s important to stay on top of any changes.
Organizational changes can disrupt compliance
Organizational changes can impact compliance responsibilities. If you change your name or enter a merger or acquisition, you need to understand how this will impact your registrations with the Secretary of State.
However, changes made at that level may also trigger updates or changes to your business licenses – both your contractor licenses and basic business licenses. Typically, you will have a grace period of 30 days from your Secretary of State filing to make those changes.
In addition, if you were required to submit a beneficial ownership information (BOI) report to FinCEN, you will need to file an updated BOI report for changes to the information reported about the company or beneficial owners.
Unfortunately, these changes aren’t always clear cut and can involve more than amending an existing license. For instance, if your business is involved in a merger or acquisition (with or without a name change) or your EIN is changing, most jurisdictions will require that you obtain a new license and cancel your previous license.
It’s a complex and time-consuming process. If you file your paperwork incorrectly, your application may be rejected, and your business could fall out of compliance and be exposed to fines and penalties.
CT Corporation can help
CT Corporation can help you navigate the construction industry’s uniquely complex regulatory and licensing challenges. Our suite of compliance and business licensing services for construction businesses can protect your business from penalties and put you in a good position to bid and win jobs. Learn more.