Should Your Construction Business Be an LLC?

"Should I form an LLC?" is one of the first questions new contractors ask. The answer is usually yes, but probably not for the reason most people think. An LLC is mainly about legal protection. On its own, it doesn't change your taxes. Here's what an LLC does and doesn't do, and when it makes sense to go a step further with an S-Corp election.

What an LLC actually does

A limited liability company is a legal entity created under state law. Its main job is to separate business debts and lawsuits from your personal assets, like your home and savings.

For construction, that matters. A dispute with a customer, an injured worker or an unpaid supplier is aimed at the business, not at you personally, in most cases.

How an LLC is taxed

By default, the IRS ignores the LLC for income tax:

• Single-member LLC: taxed like a sole proprietor, reported on Schedule C of your personal return
• Multi-member LLC: taxed as a partnership, filing Form 1065 and issuing K-1s to the owners

Either way, you still pay self-employment tax of 15.3% on most of your profit. That's where the S-Corp election comes in.

Sole proprietor vs. LLC vs. LLC taxed as an S-Corp

	Sole proprietor	LLC (default)	LLC as S-Corp
Liability protection	None	Yes	Yes
Self-employment tax	On all profit	On all profit	Only on your salary
Payroll required	No	No	Yes, for owners
Extra tax return	No	Only if multi-member	Yes, Form 1120-S
Paperwork	Lowest	Low	Highest

When an S-Corp election makes sense

With an S-Corp election, you pay yourself a reasonable salary through payroll and take the rest of the profit as distributions, which aren't subject to self-employment tax. For a profitable construction business, that can save thousands a year.

It isn't free: you'll pay for payroll, a separate business return and more bookkeeping, and your salary has to be reasonable for the work you do. As a rough guide, it starts to make sense once your business consistently earns a solid profit after expenses. We cover the math in detail in S-Corp vs. LLC: when does an S-Corp make sense?

To be taxed as an S-Corp for a calendar year, the election (Form 2553) is generally due by March 15 of that year.

What an LLC costs in Illinois

• Articles of Organization: $150 filing fee with the Illinois Secretary of State
• Annual report: $75 per year
• EIN: free from the IRS
• Operating agreement: not filed with the state, but strongly recommended, especially with a partner

Other states have different fees, and your city or county may require separate contractor licensing.

Our take

For most contractors, forming an LLC early is worth the small cost for the protection alone. Electing S-Corp status is a tax decision that should be based on your actual numbers, and it's one we'd rather run with you before you file than fix after.