I’ve put together a ton of information on this website to try to help the average guy (or gal) get his (or her) own contracting or service business going and thriving, but occasionally I’m asked basic questions that demonstrate to me that I need to go over more of the basics. One question I get over and over again: “What exact steps do I have to take to actually become a contractor?” These questions come from folks who usually already have a skill but have never owned a business before and are afraid that starting one would be too complicated or too risky. It doesn’t have to be either. Learning how to become a contractor is actually a rather straight-forward process. Here’s a basic list for turning that dream into a reality (note that this list could be slightly different for your state):
- Have the guts to go for it. Either you can make excuses all day long not to start your own business or you can grow a pair and take the leap. As for me, I worked at a job that I hated for years, putting up with apathetic managers and average pay just because it was a predictable paycheck and because it offered the illusion of security. I reached a point however, around my 30th birthday, when I realized that life was passing me by and I wanted something more. I wanted to take a risk. I wanted to be in a leadership role. I wanted to experience the ups and downs of the American entrepreneurial experience by becoming a professional contractor. Above all, I wanted to build something that was tangible and that I could be proud of. So I went for it, and I’ve never once regretted the decision. There have been highs and lows, good days and bad, but overall it’s been a terrific experience, and my only real regret is that I didn’t have the stomach to strike out on my own sooner in life. (Please make this transition in a smart and calculating way, my friends. Unless you have mass cash reserves set aside, it’s a good idea to keep the day job and work your biz on the side until things really start rolling. For more on this subject, please see my post about knowing when to quit your day job.)
- Decide what kind of service to offer. I think the most important part of this decision is making sure it’s something that you have at least some level of interest in. Don’t become a contractor in a trade that you hate just because you “heard” that there’s good money in it, because you’ll burn out before the big money even starts to roll in. You don’t have to love it, either, but it should be something you can tolerate long enough to get to that point when you can hire on laborers. Ideally, your business should also involve something that you’re already skilled in. Learning the ins and outs of a new trade is extremely time consuming, and time is money (you’ll have your hands full with administrative tasks, anyway). If you still don’t know what to do, ask your family and friends for advice. Often times those closest to us know our talents better than we do. If you’re more of an organizer and a leader then you might want to focus your efforts on learning how to become a general contractor.
- Name your business. Keep it short and memorable, but not hokey. People shouldn’t laugh when you tell them the name of your business, nor should it be so convoluted that you have to repeat it five times before they get it. Remember, your business is a brand, and you’ll be identified with it for the foreseeable future. Make it a name to be proud of, and include the type of service you offer in the name if possible. Check the website of your state’s Secretary of State to make sure the name is still available, then register it as a sole proprietorship, LLC, or corporation (among others). My business is set up as an LLC but check with a lawyer to decide what’s best for your situation. I’ve added a post that discusses setting up as an LLC versus an S Corp.
- Apply for an EIN (Employer Identification Number). If you are set up as a corporation or LLC then you need to do this even if you have no employees, and you can apply online here for free. You’ll need this for things like opening a bank account, applying for a license, and filing a tax return. If you are a sole proprietor then you are usually not required to have an EIN, but it may benefit you to have one anyway as it helps to protect your personal information and shape your image as a real pro with a legitimate business.
- Apply for a service vendor’s license from your state. This one came as a surprise to me back in the day when I was in the process of learning how to become a contractor, but it’s one of those red-tape steps that shouldn’t be overlooked. Depending on your business and state this may or may not be necessary but it was for me. Again, a simple google search should point you in the right direction on this one. Most states now have a business gateway website that will walk you through a lot of this kind of stuff.
- Open a business bank account. This is easy. I walked into my local bank, met with someone for about 15 minutes and it was done. I walked out with a booklet of checks and received a debit card in the mail a week or two later.
- Get insured. Nothing says “amateur” like an uninsured contractor. This will be a significant expense for you but well worth the cost when you consider how many potential customers will turn you away if you don’t have it. Talk with a local agent to go over your particular situation and to make sure you’re fully covered for your services, vehicles, and equipment. If you plan on hiring employees right off the bat, you’ll also need workers compensation coverage and probably an unemployment compensation tax account with your state’s department of job & family services(check with your state for more information).
- Register with your state’s department of taxation if you’ll be collecting sales tax. This is usually a pretty straight-forward process, and I pay collected sales taxes to my state on the internet once a month.
- Make sure you take the necessary steps to become a licensed contractor, if the law requires it. My business did not require any sort of trade license, but obviously for people like electricians and plumbers this is a must-have. In some states you’ll need a license even if you’re trying to learn how to become a general contractor. Starting a legitimate contracting business means playing by the rules, and avoiding them will burn you eventually so take this one seriously. It’s hard for me to be more specific about getting a license because every state handles it differently, but just Google it and you should have your answer.
- Find a location. Obviously it would be wise to start your business from home and then if growth justifies it look for an industrial space to rent or buy. Many states also offer a department of development website with an online database of available commercial space.
- Set up a business phone number. Setting up a dedicated line for your business not only comes across as more professional but also usually gets you a complimentary listing in the phone book. Try also to get a number which translates into an easy-to-remember “vanity” number. For example, if you’re starting a roofing business see if they’ll find a number for you that ends in 7663 (which coordinates with the letters R-O-O-F). It’s easier for a potential customer to remember 999-ROOF than 999-1928. When I set ours up the rep at the phone company was very helpful with this and it was done in a matter of minutes.
- Prepare for the accounting. You can either hire this out or use software like Quickbooks. I use Quickbooks and it’s a huge timesaver once you get the hang of it. I know, I know, you want to become a contractor, not an accountant, but sometimes in the early stages you have to wear several hats. It comes with the territory. If you would rather just hand this stuff off to a pro then I recommend Randal DeHart at Fast Easy Accounting.
- Learn about how to price your work. This is a biggie. The most common mistake I see with new contractors is that they don’t know what to charge their customers. Usually this means that they don’t understand their cost structure, they don’t understand buyer psychology, and they don’t place a high enough value on their own time. Result? Epic failure. Well, the good news is that there’s an easy button for that. Check out my buddy Dan Perry’s guide to becoming a $100k Handyman (it’s applicable to any home services or remodeling business). He’ll show you EXACTLY how to price your work for maximum profits. Follow along as he shows you how he went from making $25 an hour to over $90 an hour with his business.
- Get the word out. Time to tell every person you know and meet about your cool new contracting business. Have professionally designed construction business cards on you at all times. Order postcards and have them direct mailed to wealthy suburbs in your city. Most importantly, start a blog using my complete, step-by-step guide. Our web efforts have been, by far, the single biggest factor in providing us with free construction leads and growing our business. Web marketing is far more cost-effective than TV, radio, or print ads. It’s still shocking to me just how few contractors bother to utilize the internet, but that’s a good thing for you because if you go that route you’ll have very little competition. Also, start networking with other professionals in your city who are even remotely connected to the home improvement industry. Check out Jonah’s great tutorial on how to get no-cost leads through realtors.
Now sit back and watch the money roll in. Yeah, right! Now the real work begins, but if you’ve made it this far you’re already ahead of the 99% of people out there who talk a good game but will never do what it really takes to get a business off the ground and running. Please keep in mind that this is a generic list and that there could be additional steps and procedures in becoming a contractor that you’ll need to take depending on what state you live in, what your legal structure is, and how many other owners are involved. Though I set up my business without the help of a lawyer, you’d be wise to consult one just to make sure all your bases are covered.
So now you know how to become a truly self-employed contractor. It’s not hard. You just need to do it. Do you have it in you? How much longer will you tolerate a job you hate before you start to make your move?