The Legal Steps to Start a Construction Business in California
Starting a construction company is an extremely exciting thing, but you have to do it correctly. California has strict compliance and licensing requirements for contractors and construction companies. Violating these rules can mean losing your license, or not getting one to begin with. It can also mean lawsuits, steep fines, and other penalties.
At Plumtree & Brunner, LLP, our California construction lawyers can guide you through the legal steps to start a construction business in California.
Step 1: Choose Your Business Structure
Before applying for a contractor’s license, you need to know how you are going to structure your new business. Common structures include:
- Sole proprietorship
- Partnership
- Limited liability company (LLC)
- Corporation (S-Corp or C-Corp)
What you choose has a major impact on your business and your personal assets. A sole proprietorship is rarely advisable, as it leaves your personal assets at risk. Many contractors choose an LLC for the flexibility, but bigger companies may prefer the structures of a corporation.
Step 2: Register a Business Name
If you are going to use a different name than your own, or the name you filed with the state, you’ll need to file for a fictious business name. Most people know this as a “Doing Business As” name, or DBA.
Step 3: Meet the Requirements for a California Contractor’s License
To legally perform most construction work valued at $500 or more, you must hold a valid contractor’s license issued by the Contractors State License Board (CSLB). California requires:
- At least four years of journey-level experience in the trade
- A qualifying individual (QI) who meets experience requirements
- Passing two exams: the trade exam and the law and business exam
- Fingerprinting and background checks
- Proof of workers’ compensation insurance (if you have employees)
- A contractor’s bond
The CSLB offers dozens of classifications, including general building (Class B), general engineering (Class A), and specialty trades (Class C).
Step 4: Obtain Required Bonds and Insurance
California requires you to have several financial protections before you can operate in the state.
Contractor’s Bond
All licensed contractors must maintain a contractor’s bond (or cash deposit) with the CSLB. This bond protects consumers from financial harm caused by violations of contractor laws.
Workers’ Compensation Insurance
If you have employees for your company, you have to protect them with workers’ compensation insurance. Without this coverage, the CSLB won’t issue or renew your contractor’s license.
General Liability Insurance
General liability insurance is a must to protect yourself and your business. Many clients will actually require some proof of this insurance before they will do business with you.
Step 5: Secure Local Business Licenses and Permits
Most California cities and counties require construction businesses to obtain a local business license. You may need:
- A city business tax certificate
- A home-occupation permit (if operating from home)
- Zoning approval for commercial locations
You must also comply with local building permit requirements for each project.
Step 6: Register for State Taxes
Construction businesses must comply with California tax requirements, which may include:
- Sales and use tax permits
- Payroll tax registration
- State income tax obligations
Step 7: Understand OSHA and California Safety Requirements
Construction businesses must:
- Maintain an Injury and Illness Prevention Program (IIPP)
- Provide safety training
- Comply with fall protection, trenching, and equipment rules
- Keep required safety records
Failure to comply can result in significant penalties and increased liability.
Step 8: Set Up Contracts and Legal Documents
California requires written contracts for most construction projects. Your contracts should include:
- Scope of work
- Payment terms
- Change-order procedures
- License information
- Mechanic’s lien notices
- Warranty terms
Well-drafted contracts protect your business and reduce disputes.
Step 9: Build a Compliance-Focused Business Plan
A successful construction business in California requires more than technical skill. You must plan for:
- Project management systems
- Accounting and payroll
- Compliance tracking
- Insurance renewals
- Marketing and client acquisition
Get Started the Right Way When Forming Your California Construction Business
You want to get off on the right foot when starting your construction business. Whether you’re looking to start a small contracting company, or a major construction enterprise, you need to follow the steps correctly under California law.
Our team at Plumtree & Bruner, LLP helps you with your California construction law needs. Contact us today for a consultation.
