Making the transition from a licensed contractor to a construction business owner means adding a whole new skill set to your skilled labor expertise. From operating to hiring, marketing, training, and customer service, becoming a business owner can be an exciting -- if not overwhelming -- venture. As you build your construction business, it's important to ensure you've got your paperwork in place to ensure you're ready to do business.
Do I Need a License, Permit, or Bond For My Contracting Business?
Licenses, permits, bonds, and insurance can all fall under this "necessary paperwork" category. While the question is simple, the answer can be nuanced, as different states, counties, and cities may have varying requirements for construction businesses.
Licenses for Construction Businesses
Your business licensing requirements will depend on your location and the type of work you plan to offer, but in general, you can expect to need:
- Business license
- General contractor license
- Trade-specific licenses
Business licenses allow you to legally operate a business in the U.S. They are typically issued by the city or county government where your business operates. You can expect to pay a fee to obtain your business license, and you may have to meet certain requirements, such as registering your business with the state and obtaining a Federal Employer Tax ID.
General contractor licenses are required in most states for anyone who manages or performs construction work over a certain dollar amount. For example, you'll probably need a general contractor license if you offer services for jobs priced over $500.
To obtain your general contractor license, your state may require you to pass an exam, meet certain education requirements, or have some construction experience under your (tool) belt.
State requirements for general contractor licenses can vary, so check with your state contractor board to determine what you need to obtain this.
Trade-specific licenses ensure that certain trade professionals, such as HVAC technicians, plumbers, and electricians, have the necessary skills, training, and experience to safely and competently perform their work. Check with your state and local government officials to determine if you'll need trade-specific licenses to offer that type of work to clients.
Permits for Construction Businesses
Once you're ready to engage in a specific project, you may need to obtain permits to break ground and get started. Again, state and local government requirements may vary. But in general, you can expect to need either a project permit or an annual permit for most types of construction projects.
In California's Sacramento County, for example, a building permit is required when:
- Constructing a new building
- Adding to or remodeling an existing building's interior or exterior
- Changing the use of a building
- Conducting miscellaneous repairs
Remember to check with your state, county, and local city governments when planning a project to ensure you've got the right permits in place.
Bonds for Construction Businesses
Construction bonds are legal contracts between you, a surety company, and the state agency requiring you to be bonded. License bonds protect the people who do business with you, ensuring that you fulfill obligations like completing a project for a customer or paying your suppliers in full.
Most states require you to carry a license bond in order to obtain your general contractor license. A license bond provides assurance that you will follow all state laws and regulations outlined by your specific contractor license.
You may need other types of bonds in certain situations. These may include a bid bond, which guarantees you'll complete a project as bid, a performance bond that assures you'll perform the work according to the parameters set in the contract, or a payment bond, which guarantees payments will be made to subcontractors and suppliers.
Insurance for Construction Businesses
While bonds are intended to protect the people who do business with you, insurance is intended to protect your financial investments and construction business assets.
Some insurance policies are required by law and may be required for obtaining your general contractor license. In other cases, certain types of insurance coverage may be required to bid on a particular project.
Workers' compensation insurance is required by law in most states, regardless of the type of business you operate. It protects your employees in the event of an injury or illness resulting from their work. Workers' comp is usually required even if you only have one employee.
In some states, you may be required to carry workers' compensation even if you have zero employees. California requires concrete, HVAC, asbestos abatement, roofing, and tree services contractors to carry workers' compensation coverage whether or not they have employees. By 2026, this list will expand to include all licensed contractors.
Keeping track of all necessary licenses, permits, bonds, and insurance requirements is a necessary part of running a construction business. Do your own research annually to see if your state or local government has changed any of their requirements, talk to professionals in your industry to keep in the know of changes, and make sure you have a system in place for keeping track of all of your documents and expiration dates.