General Contractor Entity Structure: The LLC, the S Election, and the Bonding Line That Wants a Balance Sheet

General contractors decide their entity with a surety and a subcontractor's injury in the room. The liability floor: a general is responsible for the whole job — its own crew's work, every sub's work (completed operations on the roof the sub installed and the wiring the electrician ran), the site (a passerby injured by falling debris, a homeowner's child on an open stairwell), and the contract (a dispute over scope, delay, or defects) — and the claims run to the general first; the LLC or corporation separates the business's liabilities from the owner's personal assets, with general liability including completed operations at the limits the contract requires, workers' compensation on the general's own crew (and the certificate discipline that keeps subs' payroll off the general's policy — the general contractor deductions guide), builder's risk per project, an umbrella, and the license bond as the first line; the entity is formed before the first contract, and the completed-operations coverage is bound before the first sub starts. The license layer: general contractor licenses attach to a qualifying individual and often to the entity (the electrical entity guide's coordination point) — in several states the license is held by the entity with a named qualifier who must be an owner or employee, and a change of entity requires a new license or a transfer; confirmed before formation. The tax structures (the LLC cost guide): a sole proprietorship or single-member LLC on Schedule C — self-employment tax on all net profit; an LLC electing S status — a reasonable salary through payroll, distributions free of payroll tax, Form 1120-S; a partnership for co-owners; and — for a general with a bonding line that wants retained earnings on the balance sheet — the C corporation, considered more often in this trade than in others because sureties measure working capital and net worth at the entity level and a pass-through that distributes its profit each year shows little of either. The pass-through revenue — what makes the general's arithmetic different: a general's gross is mostly subs and materials (the deductions guide — 70% to 85% of revenue on a typical remodel), so a US$3 million general nets in the low-to-mid six figures, and the S election worksheet runs on the net, not the gross; the owner who thinks in terms of "a three-million-dollar company" is computing the salary and the distribution on the wrong line. The reasonable salary for a general contractor-owner: a construction project manager's or superintendent's market wage in the local market (the state's workforce data for construction managers and first-line supervisors, the industry's surveys) plus the owner's estimating, sales, and management component — a figure that for most owner-operators lands in the US$75,000-to-US$120,000 range depending on the market and the company's size; documented and revisited. The saving: payroll tax avoided on the distribution portion — a general netting US$300,000 with a US$105,000 salary saves payroll tax on US$195,000 (about US$15,000 — limited because most of the distribution sits above the Social Security wage base); a solo remodeler netting US$110,000 with an US$85,000 salary saves payroll tax on US$25,000 (about US$2,500). The payroll: a general with its own crew (carpenters, a laborer, a superintendent) runs the payroll the S election needs — adding the owner costs little incremental; a general with no employees (all subs) creates the payroll for one, which weighs against the election at lower profits. The bonding line — the entity question the trade adds: a surety that writes performance and payment bonds for commercial and public work underwrites the contractor's financial statements (percentage-of-completion basis, usually reviewed or audited — the construction accountant cost guide), its working capital and net worth, and the owner's personal guarantee and indemnity — and it prefers an entity that retains earnings; an S corporation that distributes everything each year (to pay the owners' tax and take the saving) shows thin equity, and the surety sizes the bonding line accordingly; the general who wants a larger line either retains earnings in the S corporation (distributing only enough to cover the owners' tax on the pass-through income — the common practice, which builds equity while keeping the single tax) or considers a C corporation (earnings retained at the corporate rate, no pass-through tax, but double tax on eventual distribution and the built-in gains complications of a later S election); most bonded generals stay S corporations with a disciplined distribution policy and a personal guarantee. The accounting method and the entity: the method (cash, completed-contract, percentage-of-completion — the deductions guide) is chosen at the entity level; a general that crosses the gross receipts threshold loses the small-contractor exemption, so new long-term contracts other than residential construction contracts move to percentage-of-completion on a cut-off basis (a C corporation also loses the cash method) — a change the S corporation absorbs like any other. The qualified business income deduction: general contracting is not a specified service trade, so the 20% deduction applies at all income levels subject to the wage-and-property limitation — satisfied by a general with crew payroll and trucks (a general with no employees and little equipment has a thin limitation above the threshold, which the S election's salary addresses — the coaching entity guide's mechanics). The models. The solo remodeler (subs for everything, no employees, one truck): net profit under about US$90,000 — Schedule C with an LLC (a project manager's salary consumes most of the net; a new payroll for one weighs against a small distribution); US$90,000 to US$140,000 — the worksheet; above US$140,000 — the election usually pays. The residential general with a crew: the payroll exists — the election pays at a lower profit; the salary is a superintendent's plus management; the crew and the trucks satisfy the QBI limitation. The commercial contractor with a surety line: an S corporation with a retained-earnings policy (distributions sized to the owners' tax), percentage-of-completion statements reviewed or audited annually, the personal guarantee documented, and the bonding capacity as a line in the entity decision — or, for a contractor building capacity fast, the C corporation analysis. The co-owner case: two generals in partnership face two salaries (a project manager's and an estimator's) against the shared profit; the surety wants both owners' guarantees. The annual re-run: profit (on the net, normalized across the job cycle), the crew count, the method, the bonding line's requirements, the retained-earnings policy, and the salary against updated wage data — revisited each January, with the license renewal, the insurance review, and the surety's financial statement deadline alongside.

Key takeaways

• The LLC or corporation is the floor — the general answers for the whole job, every sub's work, the site, and the contract — with completed-operations coverage bound before the first sub starts and certificates keeping subs' payroll off the general's policy.
• Run the arithmetic on the net, not the gross: subs and materials are 70–85% of a general's revenue; a US$3 million company nets in the low-to-mid six figures.
• Reasonable salary is a construction project manager's or superintendent's market wage plus estimating, sales, and management — typically US$75,000–120,000 — documented and revisited.
• The bonding line wants a balance sheet: sureties measure entity-level working capital and net worth on percentage-of-completion statements, so bonded generals retain earnings in the S corporation (distributing only the owners' tax) or consider a C corporation.
• Not a specified service trade; a general with no employees has a thin QBI limitation above the threshold, which the S election's salary addresses.
• Models: the solo remodeler on Schedule C under US$90,000; the residential general with a crew electing at a lower profit; the commercial contractor with a retained-earnings policy, reviewed statements, and a personal guarantee.

The general contractor's entity worksheet

Licensing rules confirmed. Coverage bound (completed operations at contract limits, workers' comp on own crew, builder's risk per project, umbrella, bond). Sub certificate discipline in place. Net profit (after subs and materials; normalized across the job cycle). Reasonable salary (project manager / superintendent plus estimating and management). Distribution portion; payroll tax saved. Election costs (1120-S, incremental payroll — near zero with a crew, a new system if all subs, basis tracking, state layer). QBI under each (limitation check for a no-employee general). Method on the return and the books. Bonding: surety requirements; retained-earnings policy; statement basis; personal guarantee. Net result. Fifteen minutes each January, with the surety's statement deadline alongside.

Worked example

Three general contractors. One: a solo remodeler subbing everything, netting US$96,000 on US$1.1 million of gross — a single-member LLC (formed for the completed-operations exposure on 14 subs' work), Schedule C, the full QBI deduction; the S election worksheet (an US$82,000 project manager's salary, a US$14,000 distribution, about US$1,000 saved against a new payroll for one and the 1120-S) says no. Two: a residential general with a four-person crew on payroll and US$3.4 million of gross, netting US$290,000 — the payroll exists; a US$108,000 superintendent's salary plus estimating and management, documented; a US$182,000 distribution saving about US$14,000; the 1120-S and basis tracking as the real costs; the crew's wages and three trucks satisfying the QBI limitation. Net: strongly positive; he elects. Three: a commercial general with a US$5 million bonding line, twelve employees, US$9 million of gross, netting US$620,000 to two owners — an S corporation with percentage-of-completion statements reviewed annually for the surety, distributions sized each year to the owners' pass-through tax (about 40% of profit) with the rest retained to build the equity the surety measures, both owners' personal guarantees on file, and salaries set as a project executive's and an estimator's; the C corporation analysis was run when the line was increased and rejected — the single tax and the disciplined distribution policy built equity fast enough. Three generals, one liability profile, and the surety decided the third one's distribution policy before the tax worksheet did.

Official sources

The IRS states: “S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes.” — Internal Revenue Service, S corporations, https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations

Publication 538 states: “A corporation or partnership, other than a tax shelter, that meets the gross receipts test can generally use the cash method.” — Internal Revenue Service, Publication 538, Accounting Periods and Methods, https://www.irs.gov/publications/p538

Practitioner note

A general contractor's entity decision has a party the other trades don't invite: the surety, which measures working capital and net worth on the entity's percentage-of-completion statements and sizes the bonding line by what the S corporation didn't distribute. Our general contractor worksheets run the election on the net after subs and materials, set the salary from a project manager's market wage, and write the retained-earnings policy the bonding line requires — because the general who distributes everything to take the S election's saving has traded bonding capacity for payroll tax.

See also: For related guidance, see setting up a contractor's books: chart of accounts, job costing, and the method decision; and browse every small business tax guide, by situation.

Next step

Fairlight Accounting is a cross-border accounting and tax practice with a U.S. Tax Desk and a Canadian Tax Desk. Our U.S. Tax Desk handles general contractor entity planning — licensing coordination, LLC formation with completed-operations and builder's risk coverage, the S election worksheet on net profit with a construction manager's reasonable compensation, retained-earnings policies and statement preparation for sureties, accounting method elections, and QBI computation. See pricing or book a call.