Question
I have been working as a helper, but am going to start on my own. I registered my business name a few months ago, got my cards printed, and got a quote from my insurance company. Even though NJ insurance is quite high, the quote they gave me seems like a lot. Is anyone here from NJ and if so, what should I do or ask the agents?
Also, I know a few subs in the field and at least one doesn't have a business license. Is this required for cabinet installations in NJ? I used to work around this guy at my old job, and he likes my work. I am working for him now and he is going to help me move in as a subcontractor. I just want a few more opinions and some good advice. I had this planned for some time now. I had a partner and was just waiting for some downtime at my job. He got a better offer in the state he came from, so I told him to take it. I didn't want him to pass up the chance waiting around for me. I had a lot of work at the time, and I couldn't leave it. I now have his brother to work with (called him the other day), so I want to get things rolling. Any advice would be greatly appreciated.
Forum Responses
(Business Forum)
From contributor S:
As somebody who has started from the bottom, I understand how you feel right now. It's exciting and scary all at the same time.
If you need to have a partner, then do, just make sure you don't share profits with him if he isn't putting the same amount of money and time into the venture. You could start off by bringing him aboard as a sub, and them pay him according to a rate that is fair to you first, then him, as you are the one taking the risks and putting yourself out there.
As for insurance, the highest coverage you can get is best, but at first you might get by with less coverage and later, when the phone rings more often and you can afford better, do so.
Don’t expand too fast. Many small businesses fail because the owner’s overheads expand at the same rate and can become overwhelming very quickly. Keep your overhead and spending down, as having money in the bank is your net to fall on during slow periods.
A good example of this is here in Florida. It can rain for 90 days at a time. During this time, many businesses that work outdoors close down, as they don’t have a net to catch them during this period.
A low overhead will afford you lower rates, and that is what is going to get you going during the first few years.
Go after many small projects rather than one or two big ones. Making a mistake on a small project will hurt you, but not much. And so you can learn the ins and outs of dealing with clients and other contractor’s relatively easily.
When hiring, do it w-9, get a subcontractor agreement and ensure that the sub has his own liability insurance. Put everything on paper. When pay time rolls around, put on the checks "for sub work” and name the project. Never, ever pay cash.
When it comes to working with others, look after you first. In business, nobody has your back on the job site.
When I started out, I had 100K coverage only and I made sure that everybody I did business with knew it. Today I have 1 million coverage. My tools and myself are insured, too.
Take things slow. Don’t share profits with people if they don’t share responsibility.
Put it on paper. Crawl, walk, then run.
Some states allow you to exclude yourself as a business owner from the policy, but if you get hurt on the job, your private insurance will not cover you. Your sub also needs this insurance for himself and his workers. A lot of businesses start off as not having some of these items and that is a bad way to start. Make sure your pricing will pay for this overhead. Having low overhead when first getting into business is good but make sure that it is smart low overhead.
When I started, I had a shop that was small and grew very fast, but I stayed at this shop too long and lost money because of its size. The rent was low but I was fooling myself. We are now in a shop that is 4-5 times bigger than the old one and we can see the difference in production. 1 mil is the average liability coverage.
"Never ever pay cash."
He gave you very good advice, but you wrote that you will pay cash.
What are you going to do when the guy you are paying cash to gets injured and goes to the hospital and says it happened at work? What are you going to tell his family if he can't ever work again and there is no insurance? What will you tell your family when you have to sell everything to give to this guy?
What are you going to do when you have paid this guy cash for three years and had no problems and then you disagree and don't pay him, and he goes to the labor board and they come knocking?
What are you going to do when the local competition finds out and points out to the homeowner that no one has comp and if they get hurt, it may end up on the homeowner?
What are you going to do when the sales tax board comes around for an audit and you have no sub records and no proof of where this cash went? They will figure it out and you will pay sales tax on the sales.
What are you going to tell the bank when you want to borrow money? Bond a project? Get a mortgage?
If the only way you can afford to be in business is do disobey the law, maybe you should reconsider. Otherwise, step up to the plate and pay the expenses of being in business and charge accordingly.
I won't be subbing anything out. He will be a helper, whose money I will be paying the tax on.
"What are you going to do when the guy you are paying cash to gets injured and goes to the hospital and says it happened at work? What are you going to tell his family if he can't ever work again and there is no insurance? What will you tell your family when you have to sell everything to give to this guy?"
My work doesn't involve anything that is that dangerous, and I will discuss this issue with them, before they are able to work with me, for cash.
"What are you going to do when you have paid this guy cash for three years and had no problems and then you disagree and don't pay him, and he goes to the labor board and they come knocking?"
If he is working with me for three years full time, I will surely have him with insurance on my payroll.
"What are you going to do when the local competition finds out and points out to the homeowner that no one has comp and if they get hurt, it may end up on the homeowner?"
If I am doing a job for a homeowner through a middleman (another company), I will need workman's comp. If I am doing a job for a homeowner directly and I don't have insurance, then they will know before I start the job and decide for themselves. I don't have insurance now, so if I get a cash paying job, I don't think insurance will be a problem for the homeowner, since my price will be so low, but when I start my company fulltime, I will have insurance. Cash paying jobs will still be welcome, though.
"What are you going to do when the sales tax board comes around for an audit and you have no sub records and no proof of where this cash went? They will figure it out and you will pay sales tax on the sales."
What sub records and what sales and what cash going where? I will not be hiring subs. I spend money on miscellaneous things all the time. Who's to say I didn't spend that money on dinner, movies, things for the home, clothes, or anything else? Are you saying I have to show where all my money goes?
"What are you going to tell the bank when you want to borrow money? Bond a project? Get a mortgage?"
I don't understand the problem with this. If I want a mortgage, then I ask them for a mortgage. I don't understand why that would have anything to do with these things.
"If the only way you can afford to be in business is do disobey the law, maybe you should reconsider. Otherwise, step up to the plate and pay the expenses of being in business and charge accordingly."
Although you made some good points, I think you may not fully understand some things about my business. I have no problem getting workmen's comp for me and, if I am paying someone for three years, he will surely be on it. But what do I do when I have a helper for one day and not the other, for three days and not the next 10? Do I have to keep calling insurance so they can keep adjusting the premium? I have been around many subcontractors, and they all pay cash for their help. I will be working alone, most of the time. If I need help, I will have another sub help me. We have already agreed on this. If I bring someone else in, like a friend, and paying him cash is going to be a problem, then I won't do that, but I don't think it will be, in my situation.
You will use these guys only when you need them, and when you think nothing will happen, trust me - it will. In August our shop was destroyed by a fire that started from someone else's storage trailer behind our shop and made it into our shop. I never thought that would happen, but I did have insurance and we were covered. Paying cash is done a lot in this business, but if you want to grow your business, it can be a bad way to start off. What you can do is have the guy that works with you carry his own insurance and then pay him like a sub.
I don't want you to think that I think I have it all figured out, because I don't. I am taking note of all everyone is saying here. When I said I was going to pay cash, I meant that that looks like the best way to do it in my situation. I am not in a rush to figure this all out. I want to work with this guy and see how he runs his business. He is always on top of things, so I'm sure I will learn a lot from him.
You also need to look at the tax advantages. If you pay in cash, you have no write-offs. And just because a customer pays you in cash doesn't mean they won't 1099 you at the end of the year. They don't need to write you a check to 1099 you. You better rethink what you want to do. Better yet, don't even waste your time thinking about it, and just do it legit.
If the cash amounts are small, you probably have nothing to worry about, but if they are for a few hundred or thousand, he'll 1099 you.
1) The worker is a sub to your business. You get a tax ID # from him that is a S/S # or a number given to him by the government to identify his business with them. Mostly corporations use these numbers. In January of every year, you add up what you have paid this person no matter if it is cash or check and fill out the form that shows this amount and one is sent to the sub, the other is sent in with your taxes to show that this money was paid out and to whom.
2) Pay on a payroll check, take out the taxes and give him a W-2 form at the end of the year. For workman's comp insurance, it works like this. You have to pay on workman's comp so much per every $100 paid out for labor done by a sub or an employee. If the sub has his own workman's comp insurance and can give you proof of that, then you do not have to pay W/C on what you pay him.
The two things that we as business owners should have is a accountant and an insurance man. And sometimes a lawyer. Let these folks help you set up what is best for you. And yes, shop around - prices can vary. Here in the Chicago area, we pay $1500.00 for liability and $9.50 per hundred for workman's comp for manufacturing.
I sent out an installer that put some cabinets in and ran a screw though the electrical line into the low voltage computer line that connected the dumb monitor to the mainframe computer at the headquarters of a chain store. The 110 volts fried the main frame. Because of some complex circumstances, the main frame had to be replaced at a cost of 50k. We still do work for the chain to this day, and they were very, very relieved that we could pay for the damage. The alternative…?
We did a high-end commercial job were the architect stated that we were the best millwork company they had ever dealt with; the gc and the owner said similar things. But the construction manager (owner's rep) decided that the job was sub par and not only didn’t pay, but decided to sue every sub on the job for purposes of saving money at the expense of everyone. To accomplish this, he hired the largest law firm in Los Angeles. My liability insurance company is picking up the tab for this.
My neighbor is a successful landscape contractor for almost 30 years and did not have liability insurance. He is currently being sued by the Segrestroms sp (the people who own South Coast Plaza, one of the most successful malls in the U.S.). He was forced into bankruptcy and just to twist the knife, the Segrestroms are now trying to take his house to boot. His wife and kids are not having fun. His competition is quick to bring up the story and has forced him out of the prime markets because of this. This is a good guy and extremely competent at what he does, but…
What contributor A said is extremely real and you should consider it.
P.S. Not having workman’s comp makes not having liability insurance look small.
Regarding the 1099 thing, this is an area that the IRS loves to scrutinize and I wouldn’t even consider without talking at length with a lawyer who specializes in this.
I would say the odds are much higher that you are going to run into this sort of thing if you are just starting out. You might consider writing a business plan, as the stuff you are talking about is just one area of many to look at.
Say you earn 60K and your helper makes 30K. You are going to show 90K as income and pay tax on that. Simply make the responsibility of paying tax the subcontractor's by making him fill out a w-9. Your next responsibility is to send him reminder of the amount earned. Let him pay the tax on that 30K out of what he earned.
Trust me - you are going to have plenty of other things to worry about and pay for.
Further, make him take out a 100K liability. Here in Florida, it's 200 down and 38 a month for 9 months to have 100K liability. (Better than nothing.)
Always remember that he works because you produced the opportunity for him to work. Don’t let people lead you around by the nose making you believe that you are to be grateful for their participation in your project.
When it comes to subs, expect them to have experience, insurance, their own tools and transportation. Anything else is an employee and should be treated respectfully as such. An employee has rights that should be handled with care. An abused employee will be your downfall.
Not too long ago, one person threatened to take matters further should I not address a situation in the workplace. The situation? Religious harassment. The other guy in the shop was handing out religious material on a daily basis and inviting others to prayer meetings without me knowing about it. That was a close one, and I was able to stomp out the fires before it got out of hand.
So, should your friend be paid cash, he can be seen as an employee and have rights that you could easily violate without knowing and this can cost you everything at the drop of a gavel.
You pays your money, you takes your chances, or you go with the sure thing and cover your 6.
That said, I do know from my day job (my woodworking is a side business) that the world of liability and business laws is a rough one. While negligent work should be penalized and also honest but expensive mistakes happen, on the other hand, there are people out there that just resent your success and proud accomplishments and feel the world owes them something for whatever reason... and suing you because you left an opening is not beneath them. Please CYA; I would hate to see you running a business one day and living in a box under the freeway the next.
"Do just once what others say you can’t do, and you will never pay attention to their limitations again."
Comment from contributor D:
When it comes to the amount of liability coverage to carry, the best advice I have ever received is: carry enough to protect your assets (that's assets, not net worth). As you are just starting out and certainly not incorporated, this includes your home, car, tools, bank accounts, investments and anything else you own. For all practical purposes, if you lose a law suit, regardless of the judgement, you cannot pay any more than what you have. Do not over-insure yourself, but be careful to not underinsure either. And if you use your vehicle in your business, be sure to carry commercial liabilty insurance on the vehicle - many personal auto policies exclude business use in their coverage.
Again, protect your assets, and in many states your wife's and minor children's assets too, regardless of whether they participate in the business or not.
Even if you successfully defend yourself against a lawsuit, the cost of lawyers can amount to a bundle. Just because you prevail does not mean that you do not have to pay your attorneys.
