How to Start a Construction Company in California
According to the Bureau of Labor Statistics, the state of California has one of the highest unemployment rates in the country. It is therefore not surprising that more people are now venturing into business for self-sustenance. What’s more interesting is that graduates and professionals are also opting for self-employment opportunities. One notable sector that seems to be the preferred destination for most prospective entrepreneurs in California is the construction industry.
The building and construction industry is growing at a tremendous rate, considering that the state is the leading industrial hub in the country. Nevertheless, as with other industries, you need to meet various requirements and comply with a number of regulations before you can start a construction company in California. The reason for enforcing these stringent requirements is to streamline the industry and protect consumers from unscrupulous construction professionals.
Besides meeting the state requirements, you must also consider other factors such as the starting capital, structure of the company, building permits, insurance and tax obligations, among others. Navigating through these hurdles might seem impossible. However, with the right mindset and a full understanding of the legal expectations, you may establish your company quickly without any problems. Here is a comprehensive guide on how to start a construction company in California.
1. Gain Firsthand Experience
The construction industry is one of the few sectors that do not require contractors to have much experience. Essentially, you can join immediately after college and continue learning on the job. However, starting a construction company is somewhat different as far as requirements are concerned. The California Contractors State License Board (CSLB) requires that all contractors must have at least four years of related experience or education before they can apply for a license or start their own construction company. Moreover, your level of experience must be verifiable, failure to which your application for a license may not sail through.
Without a license, you might face challenges applying for loans or even insuring your business. Moreover, attracting potential clients could also be a problem, as they will probably want to see your licenses and certifications to ascertain that you know what you are doing.
2. Draft a Business Plan
Starting a company without a plan is tantamount to preparing for failure. For your construction business to be successful, you must draft a solid plan highlighting your company’s vision. By writing it down on paper, you will be able to interrogate the fundamental ideas behind your business and establish whether they are sensible or not. Creating a clear and solid business plan will also help determine your company’s revenue goals. You will also be able to know how much you need as starting capital and identify possible credit facilities that may help finance your business.
Moreover, a good business plan can help you attract investors and business partners to your venture, since most people prefer putting their money in a business that is more promising. With that said, you may consider enlisting a financial adviser to help you draft and refine a viable business plan for your company. A well-drafted plan may come in handy, especially when applying for loans.
3. Register Your Business Name and Construction Company
Registering your business name is undeniably one of the most critical steps. The CSLB demands that you must register a fictitious name with the county clerk for your business to gain official recognition by the state. Given that the name that you choose may determine the overall appeal of your company, you are advised to avoid using terms or phrases that might be difficult to remember. Instead, opt for simple names that are unique, professional and easy to recall.
4. Determine Your Business Structure
Once you pick and register a business name, the next crucial step is to decide on the structure of your company. The structure that you choose entirely depends on the size of your company and your area of specialization.
Moreover, one business entity might have an advantage over others, and it will affect how you pay taxes. It is therefore vital to settle on a structure that best suits your interests. With that said, the most common structure recommended for construction companies is to operate as a Limited Liability Corporation (LLC). An LLC will give you more flexibility when running your business. Your business and personal assets will enjoy greater protection from creditors in case you go into debt or face legal challenges. Nevertheless, you must provide proof of two different assets before the CSLB may issue you with a license.
5. Apply for Relevant Licenses and Bonds
Applying for the necessary contractor licenses can make or break your dream of establishing your own construction company. This is because you might need several different licenses for just about everything! In the state of California alone, contractors have to apply for up to 43 different types of licenses depending on the structure of your company and your area of specialization (roofing, electrical, masonry, etc.). You may also have to take and pass two examinations in Law and Business, and Trade for licensure. Applicants have to undergo an FBI background check, and you must provide your fingerprints for further scrutiny.
The CSLB may dismiss a license application from anyone involved in a crime substantially related to the qualifications of a contractor. Failure to disclose information about a previous conviction may be grounds for denial of a license. In addition to the necessary licenses, the CSLB requires all licensed contractors in the state to post a $15,000 bond. On the other hand, certain contractor licenses might require a $12,500 bond. The bond must have the signature of an attorney on behalf of a surety company registered with the California Department of Insurance.
6. Purchase a Contractor’s Insurance Plan
Let’s face it. Construction is a type of business that involves a number of safety hazards. Essentially, you will be handling heavy machinery and working with dangerous tools that may pose a great danger to you and your employees. With this in mind, it is crucial to invest in a comprehensive insurance plan to protect your business, clients, and employees from liability.
The most common types of insurance plans that you should consider for your construction business include: – General liability insurance- Worker’s compensation- Equipment insurance- Employment practice liability insurance- Property insurance
All these insurance plans protect you and your employees against jobsite accidents, injuries, and damage to property. Insurance coverage may also protect you against legal liabilities filed by third parties.
7. Develop a Safety Plan
In some instances, an insurance policy may not offer sufficient coverage against accidents and mishaps. For this reason, you are advised to develop a safety plan to reduce possible injury claims from your workers, clients, and other third parties. You therefore need to invest in appropriate safety gear and equipment and enforce safety measures. You should also introduce breaks to make sure that your employees get enough rest. This helps to help prevent accidents caused due to fatigue.
8. Apply for Relevant Permits
Most people, particularly newbies, assume that once you register your company and obtain a contractors’ license, you do not require any other document to do business in the construction industry. Well, nothing could be further from the truth. Essentially, you still need to apply for relevant permits for you to run your business legally.
Typically, all licensed contractors have to apply for a building permit from the Building Department of California to construct or modify any structure. This applies to all new constructions, improvements, and repairs to any building, irrespective of the size or location.
Other Permits Required Include:
- A development permit
- Contractors/Owner Builder’s Declaration
- Seller’s Permit
9. Find Out About Your Tax Obligations
It is a requirement for all registered businesses, including construction companies in the United States to pay taxes. Importantly, construction companies in the state must register with the California Department of Tax and Fee Administration to be tax compliant. It is therefore your responsibility to find out about your tax obligations by visiting your local office. The good news is that all this information is readily available online.
You may register with CDTFA, establish your filing due dates, file tax returns, make payments, and update your company info online.
10. Seek Financial Assistance from Banks and Credit Institutions
Starting a construction business is typically a costly affair. In essence, you need sufficient funding to rent a business premise, acquire construction equipment, buy supplies, maintain your tools, and keep your operations running smoothly. The overheads involved can be overwhelming if you do not have enough financial support. Considering this, planning an operations budget is of utmost importance.
Fortunately, you can seek financial help from several credit facilities and institutions that offer business loans and equipment financing to construction companies. However, you must first qualify by having a good credit score before you can secure these loans.
Why a Construction Franchise is a Viable Alternative
The idea of starting your own construction company is certainly a noble and practical one. However, the processes and complexities involved until you get your company up and running can overwhelm even the most resilient individual. You have to go through numerous steps, including taking an exam, before the CSLB can issue you with a license and register your business.
The processing times can take up to a month before you receive all the relevant documents to start your construction company. Considering all these requirements, it does not come as a surprise that most aspiring contractors give up even before they get started.
Fortunately, this does not have to be you.
Essentially, you can opt to buy a construction franchise and avoid the tedious process of establishing a new brand from scratch. On the face of it, investing in a franchise can help you start your own construction company without necessarily all the requirements demanded by the CSLB.
So, What is a Franchise?
Well, a franchise is any business in which the owner (franchisor) sells the rights to their business name, logo, and model to third party operators or entrepreneurs (franchisee). The franchisee has to pay an initial franchise fee to the franchisor in order to use their brand for a specific number of years (mostly up to 20 years). The franchisor may help you establish your own location, provide you with initial training, and offer business advice.
You may also enjoy free advertising and support if your franchise fee includes continuing royal payments and marketing fees. However, construction franchises still have to pay taxes just as with any other business.
With that said, franchising is an all-inclusive investment that comes with so many advantages to the franchisee, ranging from reduced startup risks to ongoing training and support.
Essentially, you stand to gain financially from a proven business model without going through the hassle of starting a construction company from scratch.
Below are some of the reasons why you should consider buying a construction franchise:
Skipping the Startup Process
The process of starting a construction company from scratch can be daunting, especially to aspiring entrepreneurs getting into business for the first time.
Firstly, you have to write a business plan, perform market research, and draft a budget for your business. In addition, you must have at least four years’ experience in the industry before the CSLB can issue you with a license. As if that is not enough, you also have to go through various complex steps, including sitting for two exams to become a licensed contractor. Buying a construction franchise allows you to skip this stage and enjoy the benefits of owning a company right from the start without much hassle.
You may take advantage of the franchisor’s experience to open your business in your preferred location, seek business advice, and network with other franchisees who have gone through a similar process. You also get to benefit from instant name recognition, meaning that you will not have to struggle to attract prospective customers.
Proven Business Model
According to various statistics, up to 90% of businesses fail within their first year. The percentage could be higher for construction companies considering the complex intricacies involved with this type of business, both during the formation and operation stages.
However, this is not the case with franchising. The chances of failure after buying a franchise are significantly lower, given that franchising is a proven business model. This type of business structure operates using a tried and tested process.
In addition, the franchisee gets an opportunity to benefit from the economies of scale of this business model, particularly in the areas of marketing, research, and technological development. This subsequently reduces the likelihood of failure. What’s more intriguing is that you are likely to ride on the success of the franchisor, to attract more customers and attain your revenue goals.
However, you still have to work hard to sustain your business rather than rely on the effort of the franchisor.
One of the most important factors to consider when buying a franchise is the brand. Customers will always associate with a brand that they know and trust. For this reason, the franchisor will do anything within their power to protect the reputation of their company. In effect, you will also benefit from the protected reputation of the franchisor. Notably, franchisors normally have designated legal departments that deal with anything that may damage the reputation of the company.
These departments handle inevitable issues such as accidents, lawsuits, and other legal battles that may tarnish the name of the franchise. The franchisor also offers customer support and responds to queries from prospective clients. This, in turn, builds trust and enhances loyalty between the franchisor and franchisees.
Nevertheless, it is the responsibility of the franchisee to keep their end of the bargain by abiding by franchise rules. Essentially, you should avoid engaging in any activities that may disrepute the company. Otherwise, your business permit may be revoked.
Help with Marketing
Marketing is important, especially if it involves promoting a new business. Essentially, you cannot survive without marketing your business to your target audience. With the cost of advertising rising steadily every year, it will reach a point where it could be too expensive for startups to run successful marketing campaigns without spending much money.
Moreover, if customers are unfamiliar with your brand, they will still take time to come in even if you promise them exceptional services. Thankfully, franchising can help reduce the cost of advertising. When you buy a franchise from an established brand, you do not have to worry about marketing, as most franchisors run national advertising campaigns on behalf of all their franchisees.
The cost of running these campaigns is often included in the franchise fee. However, you may still be required to invest a small amount in local marketing campaigns, but the cost is usually affordable, considering that it targets a specifically smaller audience.
Easier Access to Financing
Whether you want to start your own company from scratch or buying a franchise, you need to secure sufficient funds. Starting and running a construction business involves many expenses. Fortunately, you may seek financing from various credit facilities such as banks and peer-to-peer lenders. Nevertheless, different lenders have varying eligibility requirements. On the face of it, you must meet certain requirements before you can secure a loan from these lenders.
Comparatively, it is easier to access financing from credit institutions and banks when running a franchise than when starting your own business. The Small Business Administration normally reserves a portion of their credit allotment specifically for franchise businesses making it easier for you to qualify for one.
In addition, the risks involved when lending a franchise are significantly lower. This makes it possible for a franchisee to acquire financing easily. However, the franchisor’s credit score may play a role in the final loan decision by the creditor. You will therefore be able to make huge business decisions and compete with other brands, both regionally and at the international level.
Ongoing Training and Support
Another benefit of buying a construction franchise rather than starting your own company is the ongoing training and support offered by the franchisor. When starting your own business, you may not know how to act in different situations or respond to various queries due to lack of experience. This is where franchising has the upper hand. The fact that the franchisor has a stake in your business means that they will go out of their way to ensure that you are successful. One way of ensuring your success is to offer ongoing training and support.
This may include direct assistance in opening a franchisee location, business advice and training, help with filing taxes and handling legal issues.
As earlier mentioned, you will also get help with marketing your business, nationally. The best part is that all training programs are included in the franchise fee, meaning that you will not have to incur additional expenses.
Increased Buying Power
One obvious advantage of buying a franchise is that you get to enjoy indefinite access to increased purchasing power. The franchisor is able to afford large amounts of supplies and equipment, allowing all the franchisees operating under their network to acquire these assets at significantly reduced costs.
Moreover, some franchisors may be willing to lend essential equipment to their franchisees at no additional costs. This will certainly increase your profit margins, as you will now be able to use construction machinery without buying or renting.
Here’s the point: While a franchise could be a proven business model, buying into one does not translate to instant success. You have to understand the machinations of this business model before you can pump your money into it.
Moreover, you still have to work hard and comply with the rules of the franchisor in order to attain your goals and sustain your construction business.
Essentially, you are solely responsible for the success of your business. Nevertheless, compared to starting a construction company from scratch, buying a franchise is undoubtedly worth every dime. You do not have to go through the overwhelming processes to establish your own company. With franchising, you get to enjoy free training, advertising and on-going support, subsequently making it a viable option for most entrepreneurs.