A framing contractor doing $1.2 million a year decides to spin his concrete crew off into its own company. He forms the LLC online on a Tuesday. Two weeks later the new crew pours its first foundation, and for the next six months the concrete company runs out of the framing company’s bank account. By the time anyone asks about taxes, the window for a clean S-corp election has closed. Both sets of books then have to be untangled line by line.
That story is common, and it’s avoidable. A second company can be a smart move for a growing contractor. It just has to be set up as a real business on day one, not a new name on the side of a truck. The S-corp election for contractors is usually the first decision on that list, and it’s the one with the hardest deadline.
Why contractors add a second company
The good reasons are mostly about protection and focus. Some contractors want to separate a riskier trade, like roofing, demolition, or restoration, so a claim on one side can’t reach the assets on the other. Some take on work that needs its own license or bonding. Others want to hold equipment or a shop building apart from the company that does the work, or build a line of business they might sell someday.
Saving tax by itself is rarely a good reason. Two companies don’t lower your bill just by existing. If you split the same profit across two returns, you usually end up in the same place with twice the filing fees. The savings come from structuring each company correctly, and that starts with the election.
The S-corp election runs on a clock
A new LLC is taxed by default as a sole proprietorship (one owner) or a partnership (two or more). To be taxed as an S-corp instead, the company files Form 2553 with the IRS.
For the election to apply from the company’s first day, Form 2553 generally has to be filed within 2 months and 15 days of the start of its first tax year. A new company’s tax year usually begins when it first has owners, takes on assets, or starts doing business. Miss that window and the company spends its first stretch under the default rules. During that time you pay self-employment tax on every dollar of its profit. Relief for late elections exists, but it means extra paperwork and a reasonable explanation for the delay.
Whether the new company should elect at all depends on what it will earn. A concrete outfit expected to net $30,000 in year one may not justify running a separate payroll. One expected to net $150,000 probably does. Project the first year’s profit before you file anything, and treat the S-corp election for contractors as a numbers decision, not a checkbox on the formation paperwork.
Owner pay and crews when you run two companies
If both companies are S-corps and you work in both, each one needs to pay you a reasonable salary for the work you do there. You can’t run your whole salary through the framing company and pull everything from the concrete company as distributions. Your pay should follow your work.
Crews work the same way. A laborer who pours for the concrete company and frames for the other one should be paid by the company he’s working for that day. The alternative is a written agreement where one company bills the other for his time. Moving guys between companies with nothing on paper is exactly what a workers’ comp auditor or an IRS examiner picks apart, and it muddies the job costs in both sets of books.
Separate books, separate accounts, separate everything
Each company needs:
its own EIN
its own bank account
its own books
its own payroll account
its own state registrations: contractor registration, business license, and any sales or excise tax accounts your state requires
Set all of it up before the first dollar moves. When one company pays a bill that belongs to the other, record it as a transaction between the two companies, with an invoice or agreement behind it.
If one company owns equipment and the other uses it, put a written lease in place at a fair market rent. That arrangement can be a legitimate planning tool. It only holds up when it looks like a deal two unrelated businesses would actually make.
Retirement plans don’t stay in their own lane
This is the one most contractors don’t see coming. When you own both companies, the IRS can treat them as a single employer for retirement plan purposes under what are called controlled group rules. This generally applies at 80% or more common ownership.
Say you open a Solo 401(k) in the new company while the framing company has a crew of eight. Those eight employees can count against that plan, and a plan that leaves them out may not hold up. Check retirement plan design across both companies before you open accounts, not after.
What to settle before the first job
Write down why the company exists. Liability, licensing, a separate trade, or an equipment hold are all solid reasons.
Project the first year’s profit, decide on the S-corp election, and put the Form 2553 deadline on the calendar.
Get the EIN, open the bank account, and finish the state registrations.
Set up payroll and decide on owner salary for each company.
Put every arrangement between the companies in writing, including equipment leases, shared labor, and shared office or yard space.
Review your retirement plan setup across both companies.
Get those six right and the second company does what you built it to do. Skip them, and you’ll likely spend part of next tax season paying someone to rebuild a year of records.
Download our guide to choosing the right business entity.
It covers how the S-corp election works, who it makes sense for, and the mistakes contractors make when they get the structure wrong.