Business entity choices for contractors compared

The main forms compared

An S corporation is a federal tax election, not a separate kind of company under state law. A corporation, or an LLC, can make it if it meets the IRS eligibility rules.

A worked liability example with invented numbers

A contractor loses a $300,000 judgment for property damage that is not covered by insurance. The business has $120,000 of assets.

• Sole proprietorship: the business and the owner are the same person. After the business assets are used, the remaining 300,000 - 120,000 = $180,000 can be collected from the owner's personal assets.
• LLC or corporation: liability is generally limited to the company's assets, so the creditor's recovery generally stops at $120,000, unless the owner personally signed for the debt, personally caused the harm, or a court sets aside the company's separate status because the owners did not keep it separate.

Check: 120,000 + 180,000 = 300,000.

Why the shield is thinner for contractors

• Surety indemnity. Sureties usually require the owners, and often their spouses, to sign the indemnity agreement personally. If the surety pays a bond claim, the owners can be personally liable to repay it, whatever the entity. See bid bond vs performance bond vs payment bond.
• Personal signatures on credit. Banks and many suppliers ask owners to sign personally for credit lines and accounts.
• Your own negligence. An owner who personally causes an injury can be liable personally. Insurance, not the entity, is the main protection against that. See general liability vs builders risk vs workers comp.

A worked double-taxation example with invented rates

These rates are invented to show the mechanics and are not current law. A C corporation earns $100,000 and pays out everything left after tax as a dividend. Use a company rate of 20% and a dividend rate of 15%.

• Company tax: 100,000 x 0.20 = $20,000, leaving $80,000
• Dividend tax: 80,000 x 0.15 = $12,000, leaving $68,000 for the owner
• Check: 100,000 x 0.80 x 0.85 = 68,000

In a pass-through form, the $100,000 is taxed once, on the owners' returns, at their own rates. Which form costs less overall depends on the owners' income, how much profit stays in the company, salaries and state taxes, so the choice is made with an accountant, not from a table.

Licensing and the qualifier

Many states license the business entity through a qualifying individual, an owner or employee who holds the license or passed the exams, and require a new qualifier if that person leaves. Some states license individuals only. Check the licensing board in each state where you work; passing the NASCLA exam does not settle any of this. The which states accept the NASCLA exam guide covers the exam side.

Common mix-ups

• Thinking an LLC protects owners from surety claims. The personal indemnity agreement reaches them anyway.
• Calling an S corporation a type of company. It is a tax election.

On the NASCLA exam

Business organization falls under Procurement and Contracting Requirements, 31 of the 115 scored questions. Tab the business organization topic in the NASCLA Contractors Guide to Business, Law and Project Management. Ask two things: who is liable, and how many times profit is taxed.

Practice it

Read the entity's balance sheet with contractor financial ratios, and see what sureties ask for in what is a bid bond.

Take the free 10-question check

Start the free 10-question check. It is weighted to the twelve NASCLA subject areas, needs no signup and explains every answer, so you see which area to study first.

The NASCLA Commercial course has a lesson for each of the 12 subject areas that shows which listed reference to open and how to apply it, original practice questions with every answer worked, and four timed practice exams of 115 questions on a 330-minute clock. Your scores come back by subject area, so you know where the next study hour goes. See the course.

Not affiliated with or endorsed by NASCLA or PSI. NASCLA and PSI are named only to identify the exam and its test vendor.

Sources

Show the list

• Business structures, Internal Revenue Service.
• PSI Candidate Information Bulletin 1458, content outline and reference list, updated 7 Jul 2026. Retrieved 5 Nov 2026.