Smart Business for Contractors: For Pros By Pros
Financial and Legal Concerns of Running a Construction Business

Jim Kramon

A guide to money and the law

• price your work and keep track of expenses
• resolve contract disputes
• get all the tax benefits you're entitled to
• work effectively with an accountant or a lawyer
• plan for retirement

EXCERPT:

Drawing the line: Business vs. Personal Finances

In Chapter 5 of his book, Jim Kramon explains how to make more money and avoid unnecessary difficulties by keeping business finances separate from personal and family affairs. You can read this chapter if you click on the excerpt pages below.

This excerpt is a PDF file and requires the free Adobe Acrobat Reader to view and print. The 12-page download should take approximately two minutes on a 56k modem.

(click picture above for excerpt)

Civil suit

I have just received a summons for breach of contract and not upholding a warranty. It is for $11,000 damages.

I have multiple correspondence with the plaintiffs asking to be allowed to repair the problem. They would not agree to allow me to do it. They wanted other things as well, and I told them I would address those things when we met to do the warranty work. They say they have lost faith in me. I am in Colorado. Is it not my right to have the first opportunity to correct a problem?

The answer to your question depends upon the terms of the warranty you provided to your customer. Most warranties provide contractors with the opportunity to correct their work, provided that they do so in a workmanlike fashion within a certain period of time. Check to see that the customer's claim was made within the time period of the warranty and in accordance with the terms of the warranty. If not, check with the responsible government office in Colorado to see whether you have any liability beyond the warranty. If the customer is going after your bond, check with the government office that requires the bond to see what steps you need to take.


Financing a home

I live in Southern California, and my question concerns the financing of homes to be constructed. Recently I refinanced my mortgage and owe about $600,000, or 75% of the property value. My wife and I want to knock down the current house and build a new one that will cost approximately $500,000. What are our financing options?

My book does not concern financing of residential property, but I will offer one or two thoughts. This is certainly a good time to be in the market for a mortgage, since rates have never been lower. Your property is apparently worth about $800,000 with the house currently on it. I assume that the new house you intend to build, at a cost of approximately $500,000, will be more valuable than your current house. This will increase the value of your property even further. I would expect your current mortgagee to be very happy to negotiate a new loan, since the debt to equity ratio will doubtless improve. Good luck!


Liability insurance for a small company

I am changing my business from general interior renovations to a time and materials kitchen and bath repair company. I have looked around for new liability insurance and been told that carriers are willing to continue existing policies but that very few (I haven't found any yet) will write new policies for small-scale carpentry-type firms. What do you suggest?

The first piece of advice I can give you is to review the subject of billing in Smart Business For Contractors. Every contractor's business is a time and materials business, although it may be called something else. The only thing a contractor has to sell is time and materials. If you bill correctly, you will do fine.

With regard to the matter of liability insurance, I recognize the difficulties in today's market. My recommendation for small business operators is to find an independent insurance broker who knows how and is willing to beat the bushes for you. The incentive you can give such a broker is all of your business -- home, car, life and/or disability, and your business insurance. Although a number of small contractors go bareback (without liability insurance), I definitely do not advise this.

You may get some help from one of your state offices and/or a trade association if you are associated with any.


Getting started as a contractor

I am 50 years old, and I want to change professions. I have Always wanted to own my own business. I have some construction experience -- from masonry to carpentry, electrical, heating and cooling systems, plumbing -- you name it, and I have probably done it. my question is how to get started Any information you can give me on how to get started would be appreciated.

Unless you have some customers in mind, the best way to get started is through other contractors. Many small contractors periodically have more work than they can do, but for good reasons don't want to enlarge. Those individuals often engage other people as needed on a job-by-job basis. I know a small general contractor who does this regularly, and it works out very well for him. If you begin this way, you will shortly get jobs referred to you by the other contractors you get to know when they are either too busy or simply not interested in those jobs. The other thing is to be sure that you fully satisfy every customer. For a contractor, there is no reference in the world as good as a satisfied customer.


LLC or corporation?

I am starting a new construction business and know I do not want a sole proprietorship for liability reasons. Which is better for a small builder, a corporation or an LLC? I'd also like to know why you think one would be better than the other. I feel that a person must do something to try to protect personal assets in today’s legal climate.

You are absolutely correct that some form of limited liability business is very useful for a contractor. There is information concerning that in Smart Business For Contractors, and I hope you will find it useful.

With regard to whether to use a corporation, an LLC or some other type of business, there are several considerations. One consideration is the tax impact; another is flexibility in matters such as adding partners in the future. Some colleagues may disagree with me, but I think the best person to discuss the matter with is probably your accountant. If you don't have a regular accountant, I recommend you get one. This matter is also discussed in my book. Good luck with your new business!


Merging two businesses

A friend and I are both successful masons. Recently, we have discussed merging our businesses. Each of us uses a corporation that we have had for quite a few years. What should we be thinking about in considering whether to merge?

. Mergers, partnerships, and other such agreements have a certain appeal, but there are serious issues to consider. The most obvious issue is how you and your partner would determine how much each of you would be paid. Can you agree upon a basis for salaries? Can you agree upon how to distribute any excess profits? Another important question is what will happen if one of you dies or becomes disabled or decides to retire before the other? Even if you are the best of friends and trust one another completely (if not, forget about the whole matter), you will need some written agreements for this purpose if you decide to go ahead. You will find food for thought in this matter in Smart Business For Contractors, and I advise you and your friend to consider it very carefully.


Work not code compliant

I am an electrician for a fairly large electrical company, and I do some moonlighting as well. One of my after-hours customers, who pays very well, has asked me to do some electrical work that wouldn't completely comply with code. My customer tells me that no one will know about the work except him, and it isn't dangerous work. What's your advice?

My advice is simple: Don't do the work. In the first place, your employer probably has decent liability coverage, but it would not extend to you when you are doing work outside the scope of your employment. In the second place, even the simplest electrical work can be dangerous under certain circumstances. As you surely know, people don't respond very well to being electrocuted, especially around water. If someone was ever hurt by your out-of-code electrical work, most lawyers today would consider suing you even if there was nothing intrinsically dangerous in the work. The fact that the work failed to comply with code would be very unfavorable for you. Good as the pay may be, turn down this job.


Being a contractor without being an accountant

Like a lot of contractors I am good at my work and lousy at paperwork. I'm sure I miss things that would help me on taxes and insurance and probably in other ways as well. But in all honesty, I can't stand the whole mess. What can I do to get things straight without becoming a business clerk -- something I would hate?

You are typical of most contractors I know. One of the big differences between contractors and people who work with papers most of the time is that contractors get their satisfaction out of seeing good-looking finished products. My finished product is a mess of files that doesn't look good to anyone. When I have a cup of coffee with a good friend who does tile work, I get very jealous!

The answer to your dilemma is to read Smart Business For Contractors and do exactly what it says. You will be able to organize all the necessary matters and keep them organized with much less difficulty than you think. You will also make money doing this because you will save time, taxes, and the need for professional assistance once you get going. If you use the systems that are explained in the book, your paperwork will take only a little of your time and you won't find it overbearing. Trust me on this.


Where's my check?

I am halfway into a $34,000 custom carpentry job in a private home. My customers agreed in the written contract to pay me every 30 days, but they are two months overdue. They tell me not to worry about it, but I'm really uncomfortable. This is my big job right now. What should I do?

When a contractor is unpaid in accordance with the agreement, it is stop-the-music time. A customer who fails to make timely payments for work is the same as a contractor who fails to show up to do the work. I tell my clients not to listen to excuses. If you do, you won't have the slightest idea if they are true, which in the end doesn't really matter anyway. Tell your customers that you cannot continue work until they bring your payments up to date. You'll find more specific information about this matter in Smart Business For Contractors.


What to do when the pickup truck is in the shop

My most important tool for my work is my pickup truck. Like any other truck, it's in the shop from time to time for repairs and service. When that happens, I am out of the box insofar as work is concerned. What do contractors do about this?

Unless you can figure out a way to forego your work from time to time, you must replace your pickup truck when it is out of service. This will obviously cost some money. The expense of your truck should be treated as a general overhead expense in the manner explained in Smart Business For Contractors. If you make a regular arrangement for this -- with a dealer who will give you a loaner or a friend who can lend you a truck from time to time -- you should be able to minimize the cost.

Don't be one of those "my truck broke down" contractors if you can possibly avoid it. People lose confidence in contractors who don't show up when expected.

Contents:

Introduction

CHAPTER 1 Money Matters: Pricing, Billing, Collecting

How to Price Your Work
Using the Hourly Rate Approach
Keeping Track of Expenses
Billing and Collecting Payments for Your Work

CHAPTER 2 Putting It in Writing: Contracts and Beyond

Estimates and Contracts
Following through after the Contract
Contract Disputes

CHAPTER 3 Running and Growing Your Business

Setting Up Your Office
Working Smart
Getting Help
Growing Your Business

CHAPTER 4 Managing the Paper Chase

Getting Motivated
What Is a Record?
What Records to Keep and How to Keep Them
When It's Time to Use the Records
Getting Help with Record Keeping

CHAPTER 5 Drawing the Line: Business vs. Personal Finances

Legal Reasons for Separating Business and Personal Finances
Good-Sense Reasons for Separating Business and Personal Finances
Methods for Separating Business and Personal Finances

CHAPTER 6 Sizing Up Your Options: Corporations, Partnerships, Employees

Look to the Future First
Should I Incorporate?
Business Expansion: Employees, Job Sharing, Subcontractors
Taking on a Partner
Hiring a Lawyer

CHAPTER 7 Taxes: Plain and Simple

Tax Estimating and Reporting Requirements
For the Do-It-Yourselfers
Tax-Related Issues for Contractors
Selecting the Right Accountant

CHAPTER 8 Insurance: Money Well Spent

Types of Insurance
Insurance to Protect Your Business
Insurance for Employees
Including Insurance Costs in Your Prices
Filing Claims
Working with an Agent or Broker

CHAPTER 9 Medical Insurance: How to Live with It

Basic Medical Coverage
Group Medical Coverage
Types of Medical Insurance Plans
Selecting the Right Medical Insurance
Medical Insurance and Taxes
Making the Best Use of Your Health Care Coverage

CHAPTER 10 Disability: Anticipating the Solution

Disability: A Clear and Present Danger
Disability Insurance
Other Solutions for Dealing with Disability

CHAPTER 11 Retirement Planning: Never Too Early

Getting Started
Defining Your Objectives
Estimating Your Future Expenses
Retirement Income: Putting Together the Pieces
Balancing Income with Expenses
Medical Care during Retirement
Retirement and Estate Planning

Glossary

Index

Soft-cover, 8 x 10 in., 208 pages
Published 2001