While the process of becoming a licensed contractor varies from state-to-state, there are basic steps to follow no matter where your business is located. The application process to get your contractor’s license includes examinations and supporting paperwork regarding legal residency, a criminal background check, experience in your area of expertise, and purchasing any necessary insurance or bonds.
No matter where you live, these general steps should get you well on your way to becoming a licensed contractor:
Step 1. Find out what license class you need to apply for
The size of the projects you plan to undertake will tell you the type, or class, of license you should apply for. For example:
- Class A contractors may be allowed to work on projects of any value
- Class B contractors might be allowed to work on projects up to $200,000
- Class C contractors might be limited to working on projects of $10,000 or less
Fees and insurance requirements may vary by class. You should know that working on projects beyond your license class-limits is a violation of regulations, and can result in disciplinary or legal action.
Step 2. Determine your area of specialty
In many places, you may be classified either as a general contractor or a specialty contractor.
General contractors typically oversee many aspects of managing a project, including hiring subcontractors, and obtaining building permits with the city or local municipality.
Specialty contractors, on the other hand, focus on a specific area. Common specialties include:
- Heating, ventilation, and air conditioning (HVAC) systems
No matter what type of license you have, you should not do work outside of what you’re licensed for. It is common for inspectors to drop by a worksite unannounced, and check the license of everyone working at the site.
Step 3. Register your company
Before you can practice as a contractor, you need to register with your state and/or local authorities. This is when you’d choose a name for your company to be registered under, making sure that it is not already used by another company. Most states offer an online database where you can check for this information.
When you register your company, you will also need to decide how you want to structure your contracting business. There are three basic company types:
- Sole proprietorship
- This is a company that is owned by one person where business income flows through their personal tax return. It is the simplest type of business structure because you don’t have to file any separate tax returns, but it’s also the riskiest because there’s no legal separation between you and your business.
- Limited Liability Corporation (LLC)
- This is a flexible, hybrid corporate entity that offers its owners, known as members, a limit on personal liability, protecting their personal assets from the business. It’s a great middle ground between a sole proprietorship and a corporation because it offers you some liability protection.
- Corporations are a legal entities that are separate and distinct from their owners, with most of the rights and responsibilities for individuals: they can enter contracts, loan and borrow money, sue and be sued, hire employees, own assets, and pay taxes.
The structure of your business dictates many important aspects of how your business can function, and how protected you and your assets are in the event of legal issues.
Step 4: Pass a written exam
In each state, you will be required to pass a written exam or set of exams in order to legally practice as a contractor. These exams might be composed of multiple topics including dealing with business aspects of the company, as well as technical and trade practices.
Step 5: Purchase liability insurance and bonds
In many states, you must purchase liability insurance in order to practice as a contractor because contracting work is often dangerous, and involves large amounts of money. Liability insurance protects you against liabilities and covers any losses. In addition to insurance, you may be required to purchase a surety bond, which is essentially protection against losses in the event that you are unable to finish a project or complete it satisfactorily. The cost of insurance and/or bonds that you must purchase will vary depending on your location and the type of projects you will do, and it can be substantial. Before you can get your license, you will need to show proof that you have purchased insurance and/or bonds in order to receive your contractor's license.
Step 6: Pass a background check
Depending on the state(s) where you will be doing business, you may have to pass a criminal background check before you can receive your contractor's license. Complete the background check according to the instructions provided by your state. Make sure to keep a copy of the certificate showing you have passed the background check - you will need this later when submitting your license application.