LLC for Contractors and Tradespeople (2026 Guide)

Do Contractors Need an LLC?

No federal law tells a contractor to form an LLC. But contractors have more risk than most small businesses. You work on homes and buildings. You buy materials on credit. You hire helpers and subcontractors. Each of these can cause a claim against the business.

As a sole proprietor, you are the business. A claim against the business is a claim against you, your house and your savings. An LLC puts a legal wall between the business and you. The wall is not perfect, but it stops many business claims.

An LLC is a strong choice when one or more of these conditions is true:

• You work on property that other people own.
• You buy materials or equipment on business credit.
• You hire employees or subcontractors.
• You bid on commercial or public jobs.
• You own a house or savings that you want to keep separate.

What the LLC Protects, and What It Does Not Protect

Many contractors think that an LLC protects them from all claims. This is not correct. The LLC protects you from claims against the business. It does not protect you from claims about your own acts or your own signature.

Warning: Surety companies usually ask the owners to sign a personal indemnity agreement. If the surety pays a claim on your bond, it can recover the money from you personally. Read this agreement with a lawyer before you sign it.

Contractor Licenses and the LLC

Most states license contractors. Some states license the person. Other states license the business, or both. If your state licenses the business, the LLC can need its own license. A license in your own name may not cover work that the LLC does.

Caution: Do not start work in the LLC name before you know the license rule in your state. Work without the correct license can stop you from collecting payment and can cause penalties.

Example: California (CSLB rules)

California lets an LLC hold a contractor license. The CSLB gives these requirements for an LLC license:

• Liability insurance: at least $1 million in total for 5 or fewer personnel of record. Add $100,000 for each additional person, up to $5 million.
• LLC employee/worker bond: $100,000. This bond is in addition to the $25,000 contractor bond.
• Personnel of record: every officer, member, manager and director is on the license record.
• Qualifying individual: a responsible managing person qualifies the license.
• Good standing: if the Secretary of State suspends the LLC, the CSLB says that personnel of record can be personally liable up to $1 million.

Other states have different rules. Speak to your state contractor licensing board before you file the LLC. Ask three questions:

1. Does the license belong to the person, the business, or both?
2. Can I transfer my license to the LLC, or must I apply again?
3. Which insurance and bond amounts does the LLC need?

Insurance and Bonds: The Second Layer

The LLC protects your personal assets from many business claims. Insurance pays the claim. A contractor needs both. Without insurance, a large claim can close the LLC, even if your house is safe.

Most states require workers' compensation insurance when you have employees. The rules depend on the state and on the number of employees. Texas is different: the Texas Department of Insurance says that the state does not require employers to provide workers' compensation coverage. But general contractors and public contracts often require it in Texas too.

A personal auto policy can exclude business use. Ask your insurance agent if your truck needs a commercial policy.

Taxes for a Contractor LLC

By default, the IRS taxes a single-member LLC like a sole proprietorship. You report the profit on Schedule C. You pay income tax and self-employment tax. Self-employment tax is 15.3% on 92.35% of net profit. The Social Security part stops at $184,500 of earnings in 2026.

An LLC can elect S corporation tax treatment with Form 2553. Then the LLC pays you a reasonable salary through payroll. The remaining profit comes to you as distributions, without self-employment tax.

Example at $150,000 net profit, with a $75,000 salary:

Payroll and accountant costs are often $1,500 to $3,500 per year. So the net saving in this example is about $6,220 to $8,220. This example does not include state taxes or the income tax deduction for half of the self-employment tax. The salary must be reasonable for your trade and your hours. Ask a CPA to set it. For more examples, read our LLC vs S-Corp tax comparison.

Subcontractors, Employees and Payroll

The IRS uses different rules for employees and for independent subcontractors. The difference depends on control. If you control how, when and where a person works, that person is often an employee. Wrong classification can cause back taxes and penalties.

For each subcontractor

1. Get a signed Form W-9 before the first payment.
2. Get a copy of the subcontractor's insurance certificate.
3. Pay the subcontractor from the LLC bank account.
4. Send Form 1099-NEC if you pay $2,000 or more in 2026.

The OBBBA raised the 1099-NEC threshold from $600 to $2,000 for payments made in 2026. After 2026, the threshold changes with inflation.

For each employee

Hold back income tax, Social Security and Medicare from each paycheck. Pay these amounts to the IRS on time. The IRS can hold "responsible persons" personally liable for these taxes, even with an LLC. A payroll service helps you meet each deadline.

Step-by-Step Setup for a Contractor LLC

Do these steps in this order. The license step comes first, because the license rules can change how you form the LLC.

1. Read your state license rules. Ask your state licensing board if the LLC needs its own license.
2. Select a name. Make sure that the name is available in your state. Some licensing boards also check the name.
3. Select a registered agent. The agent receives lawsuits and state notices for the LLC during business hours.
4. File the Articles of Organization. File with your Secretary of State and pay the state fee. Use our LLC fee calculator to see your state fee.
5. Get an EIN. Apply free on IRS.gov after the state approves the LLC.
6. Open a business bank account. Use the LLC name and EIN. Put all job payments into this account.
7. Get insurance in the LLC name. Get general liability first. Add workers' compensation, commercial auto and tools coverage as needed.
8. Apply for or update the contractor license. Put the license in the LLC name where your state requires it. Get the bonds that the board requires.
9. Update contracts, bids and invoices. Use the LLC name and license number on each document.
10. Set up payroll and bookkeeping. Use a payroll service if you have employees.

Habits That Keep the Protection Active

A court can ignore the LLC if you treat it as your personal wallet. Do these things every month:

• Pay all business costs from the LLC bank account.
• Do not pay personal bills from the LLC account.
• Sign contracts as "Your Name, Member, Your Company LLC."
• Put the LLC name on bids, invoices, lien notices and change orders.
• File the annual report and pay state fees on time. Read annual LLC compliance by state.
• Keep the insurance active in the LLC name.

Trucks, Tools and Equipment Deductions

Contractors buy expensive trucks, tools and machines. The OBBBA made two large changes:

• Bonus depreciation: 100% bonus depreciation is now permanent for property placed in service after January 19, 2025.
• Section 179: the limit is $2,560,000 for 2026, with a phase-out that starts at $4,090,000.

So you can often deduct the full cost of a new tool or machine in the year that you start to use it. Vehicles have special rules and limits. If you use a truck for personal use too, deduct only the business part. Keep a mileage log for each vehicle. Ask a CPA before a large purchase.

For the full list, read small business tax deductions.

Frequently Asked Questions

Should a contractor have an LLC?

Yes, for most contractors. Construction work has a high risk of claims, and an LLC keeps many business claims away from your personal assets. But the LLC does not replace insurance. Get general liability insurance, and workers' compensation insurance when your state requires it.

Does an LLC protect a contractor from lawsuits?

Only partly. The LLC protects you from business debts and from contracts that the LLC signed. It does not protect you personally from your own negligent work, from personal guarantees, or from unpaid payroll taxes. Insurance pays most claims about work quality and injuries.

Do I need a new contractor license for my LLC?

It depends on your state. Some states license the business, so the LLC needs its own license. In California, the LLC needs its own CSLB license, $1 million or more of liability insurance and a $100,000 LLC employee/worker bond. Ask your state licensing board before you form the LLC.

How much does a contractor LLC cost?

The state fee is $35 to $500, one time. Some states also charge an annual fee. Northwest charges $39 plus the state fee, with free registered agent service for year one. After year one, the registered agent fee is $125 per year. Insurance and bonds are extra costs.

When should a contractor elect S-Corp status?

Ask a CPA when net profit is about $80,000 or more per year. At $150,000 net profit with a $75,000 salary, the tax difference is about $9,720 per year. Payroll and accountant costs of $1,500 to $3,500 per year reduce that saving.

Do I send a 1099 to my subcontractors?

Yes, send Form 1099-NEC to each subcontractor that you pay $2,000 or more in 2026. Get a signed Form W-9 before the first payment. Payments to corporations usually do not need a 1099-NEC, but an LLC subcontractor can need one. Ask your CPA.