Licensing, insurance and the paperwork that actually matters

There are about forty pieces of paper people will tell you a trades business needs. Maybe six of them will ever affect your week.

The trouble is that the six are not the ones that get talked about most, and the consequences of missing one are not spread evenly. Some cost you a fine. One or two can cost you the business.

This is a map of which is which. It is not advice about your particular situation — rules differ by state, by trade and by what you actually do, and the whole point of the last section is finding the right person to ask.

The ones that can end you

General liability insurance. If you damage someone's property or someone gets hurt because of your work, this is what stands between a bad day and losing everything you own. It is also the one most commonly carried at too low a limit, because the cheap policy and the right policy look identical until the day you need them.

Do not pick the number yourself. Ask the builders and GCs you want to work for what they require — it is usually $1 million per occurrence with a $2 million aggregate, and some contracts ask for more on top — and buy at least that. You will need the certificate to get on their sites anyway.

Workers' compensation, the moment you have anyone working for you. The rules on who counts vary, and they catch people out. In some states a sole owner is exempt but the first helper triggers it immediately. In some, a sub who does not carry their own coverage counts as yours — which means the "independent contractor" you have been paying cash on Fridays may be an employee as far as the state is concerned.

This is the single most expensive thing to get wrong quietly, because it accumulates. You do not find out you were wrong for two years until something happens, and then you were wrong for two years.

Your trade license, current and in your own name. Working under an employer's license ends the day you leave. Renewals lapse quietly — most states send one notice, to whatever address they have, and an expired license discovered mid-job is a stopped job.

The ones that cost money but not the business

Business registration and an EIN. Registering the entity and getting a federal tax ID. Straightforward, and the thing that lets you open a business bank account.

Sales tax registration, if your state taxes what you sell. Many do for materials, some for labor, and the rules about which is which are genuinely strange in places. Getting this wrong tends to be a bill with penalties rather than a catastrophe.

Permits, per job. Boring and unavoidable. The cost of pulling one is small. The cost of not pulling one is that the work may have to come out — and a homeowner selling the house in three years finds out during the inspection and comes looking for you.

Vehicle and tool coverage. Personal auto policies often exclude commercial use. A lot of people discover this at a claim. Worth one phone call to check what yours actually says.

The ones people worry about too early

Which entity to form. This matters, but less urgently than the internet suggests, and the right answer genuinely depends on your income, your state and whether you will have employees. It is a question for an accountant who knows your numbers, not for a forum. What matters on day one is that the business is registered and the money is separate.

Trademarks. Almost never urgent for a local trades business.

A formal contract drafted by a lawyer. Useful eventually. Long before that, a clear written quote with inclusions, exclusions and payment terms does most of the protective work, because most arguments are about what was agreed, not about whether the paper would hold up in court.

The separation that saves you

One habit is worth more than any document: the business account is not your account.

From the first job, every dollar in and out goes through a separate business account. Not because it is a rule, but because of what it makes possible.

At tax time, the person doing your return can see what the business earned and spent without guessing. When you want to know whether last quarter was actually good, the answer is in one place. And if anyone ever questions whether your business is a real business — an auditor, an insurer, a court — the separation is the evidence.

The alternative is the shoebox, and the shoebox costs real money. An accountant reconstructing a year of mixed personal and business spending from bank statements might charge $800 to $2,000 to do what would have cost nothing if the accounts had been separate. Worse, they will miss deductions, because they cannot tell a material run from a grocery run six months later — and every missed deduction is tax you did not owe.

A worked example

Two people start the same year in the same trade.

The first runs everything through a personal account, keeps receipts in the truck, and gets insurance quotes online choosing the cheapest. At tax time the accountant charges $1,400 to sort it out and cannot substantiate about $6,000 of spending, so it does not get deducted. In year two a GC asks for a certificate showing $1M coverage; the policy is $300,000 and the job goes to someone else.

The second opens a business account on day one, photographs receipts into a folder on the phone, and asks two local builders what coverage they require before buying a policy. Their accountant charges $450 because the records are already clean. When the GC asks for the certificate, it is emailed the same afternoon.

The difference in year-one cost between those two setups is maybe a couple hundred dollars of insurance premium. The difference in outcome is a GC who went with somebody else, and about two thousand dollars.

Finding the right person to ask

The most valuable paperwork decision is who you ask about paperwork.

You want an accountant who already has trades clients in your state. Not a national chain, not a friend's cousin who does returns. Someone who has seen a dozen businesses that look like yours, because then the questions you have are questions they have answered before.

Two ways to find one: ask the other trades you work alongside who they use and whether they would recommend them, and ask your supplier's counter staff — they know everybody.

Have the conversation before you need it. An accountant met in January can tell you how to set things up. An accountant met in April can only tell you what it is going to cost.

What to do this month

1. Find out what liability limit the builders you want to work for require, then check what your policy actually says. Not what you think it says.
2. If you have anyone working for you — including a regular sub — find out how your state treats them for workers' comp. Ask the accountant, not the internet.
3. Check your license renewal date and put it in your calendar with a month's warning.
4. Open the business account if everything still runs through personal. Today, not at the year end.
5. Find an accountant with trades clients in your state and have one conversation about how you are set up.
6. Start photographing receipts into one folder. It takes four seconds and it is the difference between a $450 return and a $1,400 one.

None of this is the part of the job anybody got into the trade for. It is also the part that decides whether a good year stays good.