Helping Brother start a construction company

9 Replies

Hello construction people,

My brother and his coworker are looking to ditch their fencing jobs and become an independent company. They're looking to start out fencing but could get into excavating and other jobs needed with heavy machinery.  They want to start their company before the next season starts (NY). Both guys are smart workers and business minded, and have an opportunity to pick up work from the shortage of fence businesses in the area. They want to start small as a two man crew but grow into a large company. 

I'm interested in their business idea and I'd like to partner with them as a silent partner to get them started. Before I offer to invest in them I have a few questions about starting out. They're subjective questions but I'd like to know your opinion and what works for you. 

Would it be better to form an C-Corp, S-corp, or LLC?

Is it better to rent your machines or to purchase them?

Is a separate location for business needed or can they start from out of their garage? 

What marketing did you find effective in gaining more customers?


Thanks.

I use an SCorp, as it makes the most sense....protection with no double taxation.

As for the equipment....rental cost are certainly higher than owning, IF they use that piece of equipment at least half of the time.  A machine they will use a lot..buy.  Machines they need occasionally, rent as needed.

Local laws will dictate what kind of business you can, can not, run from home.

Of course, proper insurances are important not only for themselves but most owners and all gc’s they will sub for will require it.

Don’t strive to be the cheapest...strive to do the best work and be dependable.

Talk to your accountant about the business entity itself. 

define machines? Is a machine something you use one time or something That's fundamental to the business? You mentioned something about excavating, it wouldn't pay to buy a backhoe if you don't use it a decent amount etc. Put a post hole digger would be something to consider buying as a fence co. 

they could absolutely start from their garage. A separate location is not needed and acutally keeps your overhead lower by not having one. 

The best form of advertising for any contractor is word of mouth. If you do quality work people will refer you. Get a website, lawn signs, letter a truck, join a local business association are effective cheap advertising methods. It takes years to build a steady customer base. 

Also you should look into other expenses that the business would have. In my state a fence company would need a home improvement contractors lic and you need 500k in general liability insurance minimum to obtain hic lic. Are there any employees who don't own a part of the business, if so workman's compensation insurance. Will there be a company truck? If so you need to register it commercial and get the proper insurance for that. Next does said truck have inland marine insurance? If not when someone steals your paying out of pocket. 

Other questions that you should be asking: how many fence companies are in Target market? How many customers can I expect to have immediately? Who is my customer? What would my profit margins be? If your brother and his friend both up and quit their jobs, how will they support their income now with a new business? do they both have the ability to not get a paid potentially for a few months if business slows or doesn't do so well in the first year? it would actually be better for your brother to ditch his friend and start his own business and work part time at a different company to supplement income. 

being in the trades I can tell you first hand that 90% of the co-workers I've ever had have pipedreams of quiting their job and starting their own businesses, which is fine but they don't have enough work, already have huge debts, don't understand business expenses & when they do start a co they end up behind on their taxes etc. Then they usually end up working for someone again. 

The best way to help your brother out is to be realistic. If he wants to start a company, you can definitely be a silent partner but know that it takes time to become a large contractor and he'd be better off with slow steady growth with a business on the side for now. 



Nick,
Good luck to you, your brother and his co-worker.  I have never (for more than 10 minutes at a time :) looked back at my decision to form my own company in construction.  It's a tricky business, but your brothers model of starting small and growing organically sounds great.
So far as your questions;
I am an S-Corp for tax purposes and I include myself on payroll, which is a great benefit.
Renting machinery is far more expensive, but if you do not have the ability to purchase at this time, it is a viable alternative.  Just make sure your budgets include this additional expense.
I use a separate UPS mail box, which comes with a street address.  The expense is about $100 per quarter.  This keeps my business and personal life defined.  The UPS store can also accept packages, a great bonus.
Marketing; social media and build a strong networking group.

Good luck to you!!
Sue

Nick,
I've dealt with a lot of Contractors starting up. My advise is not to skimp on using your advisors.

From your Accountant you will need advise on
- how best to set up the business (new tax laws & state tax laws may influence what is best)
- how to price your quotes (how to allocate your costs, both fixed and variable)
- what are the costs of different scenarios such as employees vs subcontractors, material costs in different purchase options, etc.

Attorney
- As tough as it is to think about, you need to prepare for the time that the business needs to be dissolved. You need to have written agreements between the partners/owners on what happens if someone wants out.
- The Attorney will have advise on how to make the protection you get from an LLC or Corp. work. If your procedures cause a court to break the veil of the corporation you could be personally liable. There are ways of operating to prevent that and the attorney can give you advise.
- you will need help drafting the documents needed by the business (contracts with clients, contracts with employees, and (in many cases the most important) sub contractor agreements

You also need to engage an experience Insurance Agent early in the process. We write in many states including NY and it is one of the more difficult for contractors insurance. The Scaffolding laws cause some insurance issues with the Workers Comp. and Liability coverage and many companies will avoid NY because of that.

At minimum, you will need General Liability coverage. You may also need equipment coverage. I recommend getting a Workers Comp. policy even if none of the partners choses to be covered. You will also need Business Auto coverage for any vehicle owned by the business. If there are none, you should get Hired Auto & Non-Owned Auto coverage (usually can be added to the General Liability policy).

Pricing of different options is also important. Excavation is much more expensive to insure than Fence installation. You need to know the costs of different scenarios so you can decide what services you will provide and how to price them.

Lastly, you need to have the agent educate you if you plan on using sub contactors. There are things you will need to do or have available to show they are truly subs and on employees. The Workers Comp laws of each state govern this. Be aware that the Revenue dept & Labor dept tend to start with the assumption that any sub is actually a misclassified employee and will be looking to fine you unless you prove differently.

If you have any questions please feel free to PM me. Good Luck on the new business

It's nearly always best to go as an S-Corp or LLC. They're likely not going to ever publicly trade their company, so C-Corp wouldn't make much sense to them. It's usually better, in my experience, to rent equipment, because then someone else has the liability to make sure the equipment is in good working order. The separate location for business is rarely needed, and wouldn't be needed in Illinois. The only red flag I see if that a construction company is going to have strict liability and will need to have some surety posted with a reputable insurer before opening shop.

Your business desperately needs a lawyer to open it.  With the kind of liability construction could have, you want to make sure that it's all LIMITED liability.

Thank you everyone for the info, I’ll carry this along with me when I make a decision. I’ll be in touch how the business comes along!

Good luck with everything! Great advice above and love that people are recommending starting small and building out. 

Not starting in debt and concentrating on the cash flow. I'm a big fan of word of mouth, Renting what you don't need, proper insurance, and not leasing space if you don't need it yet. Start the business foundation strong ;)

@Nick Rutkowski

Hi Nick,

If you rent the larger expensive equipment (excavators, ect) it will be less risky, and it will (should) have maintenance done on it for you, as well as you won't have to insure it 365.

So from a STARTUP STANDPOINT it May make business sense to rent what's needed, unless you are talking smaller tools or hand tools.

Watch your expenses too. Keep your reoccurring monthly expenses as low as possible, and pay as little as you can for things, while still maintaining quality (for instance, a used post hole digger on ebay might be as serviceable to you as a brand new one).

Cut costs wherever possible to increase profits.

Good Luck!

Most contractors rent equipment now a days. It doesn't pay to buy them due to the up front cost, the maint, the trucking, insurance ect. Excavation is a tough cut throat business. Do some more digging on contractor talk there are many good threads on this exact topic in the excavation section. 

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