How to Start an Electrical Contracting Business
You’ve earned your chops, are acing your craft, and love being an electrician. But wouldn’t it be nice to be your own boss, make your own schedule, and build your own customer base?
If you are thinking of starting your electrical contracting business, read on. Find out the current industry trends, what licenses you typically need, and what expenses and income you may expect when setting up your own electrical contracting business.
Before we continue, let’s just clarify the difference between an electrician and an electrical contractor.
While an electrician will typically perform electrical work for a homeowner or business, such as replacing electrical wiring, an electrical contractor specializes in the design, installation, and maintenance of an entire electrical system and is likely involved in the planning and construction phase of a building.
Both the electrician and the electrical contractor sell electrical equipment and will need to be able to undertake professional electrical work to code. This may include power installation, telecommunications, and fire and safety systems. You can broadly apply the following details to both.
There will always be a need for electrical work, which makes starting your own electrical contracting business a comparatively sound and stable choice.
With the average electrical contracting business employing 13 electricians and achieving a revenue of $2 million to $3 million, this market segment is achieving the lion’s share of the industry, with $175 billion annually.
According to IBISWorld, the industry’s future is looking positive and resilient, with increased demand in the broader construction industry and for retro fittings and renovations, bringing electrical work up to new codes.
The US Bureau of Labour Statistics expects the industry to grow 7% between now and 2031; an average growth rate across the US.
Overall, the industry has seen an increased demand for solar power installations, and this trend is likely to continue. In fact, 2021 was a record-breaking year for the solar industry, increasing demand for specialized electrical work.
Your target market should reflect the type of electrical work you plan to specialize in. For example, you may target residential customers and offer repair, maintenance, and replacement work, alterations, renovations, and bringing existing electrical work up to new code.
You may focus on new builds and larger construction projects that require the planning, installing, and maintaining entire electrical systems. In that instance, we recommend you build good working relationships with architects, property developers, facilities managers, and building contractors.
Checklist for Starting an Electrical Contracting Business
If you’re thinking about starting your own electrical contracting business, there are a few things you should keep in mind. Here is a checklist of the essentials to get started.
Step 1: Write a Business Plan
Before starting an electrical contracting business, it’s important to have a solid business plan in place. While it may seem unnecessary, a business plan will better help you to get organized and plan for the future of the business.
Not only will a bank require you to have one, but multiple studies have shown that a business plan helps increase the odds of starting a successful business.
Related: How to write a business plan
Step 2: Name the Business
When it comes to naming your electrical contracting business, there are a few things to keep in mind. Since your business name is often the first thing that potential customers will see or hear, you want a professional name that is easily memorable and will make a good first impression.
Related: Tips on naming a business
Step 3: Form a Business Entity
A business entity (also referred to as a business structure) refers to how a business is legally organized to operate. There are four primary business structures to choose from, which include the sole proprietorship, partnership, corporation, and Limited Liability Company (LLC). Each type of entity has its own pros and cons, such as liability exposure, costs, and administrative requirements.
When deciding on which business entity is best for an electrical contracting business, it normally comes down to the sole proprietorship and Limited Liability Company.
A partnership opens the owners up to unnecessary personal liability because if a partner does something to get the business sued, or runs off with cash from the business, the other partners are personally liable to repay.
The corporation can be a good choice to minimize liability risk because it separates the business assets from the owner’s personal assets. If the corporation is sued or certain business debts can’t be paid back, the owners aren’t personally responsible to repay them. The downside to the corporation is that it is more complicated than all the other entities and requires more administration than the LLC. If you plan on raising a lot of investment though, the corporation is usually the better choice.
That leaves the sole proprietorship and LLC.
The sole proprietorship is the least expensive and easiest entity to start which is appealing. The downside is that the owner is personally liable should anything happen to the business, which is an important consideration. The LLC offers the ability to operate as a sole proprietorship with the liability protection of a corporation. Depending on the state, the cost to form an LLC runs from $40 – $500, which is pretty inexpensive for protecting the owners from business-related lawsuits and certain debts.
Related: Guide to forming your LLC
Forming an LLC sounds complicated and expensive, but using an entity formation service guides you through the process so you know it was done right.
Some popular LLC formation services include:
IncFile - $0 plus state fees & free registered agent for 1 year!
IncAuthority - $0 plus state fees & free registered agent the first year!
ZenBusiness - $49 plus state fees & free registered agent for 1 year!
Step 4: Select Your Location
While most electrical contractor businesses operate out of their personal residence, it’s important to consider a few things.
One, you will want to be sure there is space to securely store the vehicle, tools, and supplies.
Two, be sure to check the zoning of your property. In some instances, there are HOA or covenants restricting a business from operating out of a home. Even though your business is mostly mobile, just parking a vehicle with a logo can cause neighbors to complain. Additionally, if you are renting a property, be sure there are no restrictions in your lease.
Step 5: Apply for Business Licenses and Permits
Like any business, an electrical contracting business owner will likely need to register for a variety of business licenses and permits in order to operate.
Depending on the type of work being done, some states require an electrical contractor license or similar type of license. Additionally, every town and city has different licensing requirements for electricians, but many require registration before beginning work on a property in that town or city.
There may also be general requirements such as a business license, sales tax permit, and Employer Identification Number (EIN)
Step 6: Find Financing
Coming up with a good business idea and having the skills to run it are one thing, but getting the funding to start an electrical contracting business is another. Fortunately, the cost to start a new electrical contracting business is relatively low; however, funding to start a business can be difficult.
A lender is typically going to want the borrower to have good credit and be able to invest 15-25% of their money towards the total start-up costs.
Step 7: Open a Business Bank Account
Keeping your small business and personal finances in separate bank accounts is important to track the income and expenses of your business and identify trends.
Many banks offer free business checking accounts, so be sure to find a cost-effective option for your business.
Step 8: Get your Marketing Plan in Place
Marketing a new electrical contracting business isn’t going to be easy, but there are some simple steps that can help to get the word out and start attracting customers.
First, it is important to create a brand that is professional and trustworthy. This can be done by developing an attractive logo and using high-quality marketing materials, business cards, vehicle signage, shirts, etc.
Next, it is crucial to identify the target audience and develop a marketing strategy that resonates with them. This may involve advertising in trade publications, networking with other local businesses through the Chamber of Commerce, or sponsoring local events.
Finally, it is important to stay active on social media platforms like Facebook and LinkedIn, and create a website that is easy to navigate. By following these tips, you can market your new business effectively and attract the attention of potential customers.
Step 9: Get Business Insurance
When it comes to insurance, electrical contracting businesses need to be covered for a variety of potential risks.
Given the potential danger of the job, general liability insurance coverage is important in protecting the company if it is sued for damages resulting from an accident or injury. Professional liability insurance will cover the company if it is sued for errors or omissions in its work. In addition, workers’ compensation insurance is typically required in each state to protect employees in case they are injured while on the job.
Many states also require electricians to carry bonding insurance, which protects customers in case the contractor isn’t able to complete the work that was paid for by the customer.
Step 10: Set up an Accounting System
An electrical contracting business can use software to help make the business run smoothly.
– Quoting software will help you quickly and accurately generate proposals for potential customers.
– Scheduling software will help to keep track of appointments and ensure technicians are always where they need to be.
– Invoicing software will make it easy to send bills to customers and get paid quickly.
– Accounting software helps to manage the company’s finances and makes sure bills are paid on time.
The thought of accounting can be intimidating for a lot of new entrepreneurs. There are a number of ways of handling bookkeeping, from DIY to hiring a bookkeeper. These include:
- Pen and paper - Low expense, but difficult to track.
- Spreadsheet - Low expense, but easy to make errors.
- Accounting software - Medium expense, but owner typically inputs expenses. Some great accounting software programs include Freshbooks or Wave Accounting.
- Hire a bookkeeper - Higher expense, though very affordable at $100-$200 per month in most cases. A dedicated bookkeeper will probably save money because, in addition to handling all of the bookkeeping (so you can focus on the business), they also provide personalized tax advice and ensure the business is in compliance.
Find bookkeepers in your local area or use a service like 800Accountant.
How much does it cost to start an electrical contracting business?
Your start-up costs may vary quite a bit depending on your target market and location. But here are some general points to consider and add to your business plan and budget.
Licensing and insurance: Licencing requirements will vary from State to State. In some States, entry into an apprenticeship is enough to start work. In others, you will need proven work experience or a record of academic hours. Health, safety, and liability are your top considerations regarding insurance.
Vehicle: An appropriate van to reach customers and transport the right electrical equipment is essential.
Office and Storage: If you are concentrating on repair and maintenance work, you may use existing space at home to store basic stock and do your business administration. If you aim to get work on new builds, installing power, lighting, and security systems, a brick-and-mortar office and showroom will allow you to showcase your work and ideas far better to potential customers.
Tools, equipment, and inventory: This amount will depend mainly on the focus of your business. Excellent working relationships with your suppliers and understanding of demand will help you keep your stock at a minimum.
Affiliations and memberships: Don’t underestimate the power of a good professional network and connecting with your industry and its current trends and opportunities.
Communications and marketing: An online presence is a non-negotiable regardless of your target market. But also consider doing a print campaign in your area, having an ad on the local radio, and attending relevant trade expos and events.
How profitable is an electrical contracting business?
The average profit margin for an established electrical business in the US ranges from 1.5% to 2%. But, it depends on the size of your company, where you operate, and your competition. And, of course, it is vital that you price your services confidently and correctly.
If you are employing electricians to extend your services, the median annual income in the US is currently just over $60,000. On the other hand, due to an ongoing labor shortage, your income could reach as high as $200,000 in the US if you own a successful electrical business.
Are there grants to start an electrical contracting business?
It’s extremely rare to find a grant to start an electrical contracting business. If you search for business grants, you will come across a lot of scams and misinformation. Occasionally an organization will offer grants to start a business, however, be skeptical and don’t provide any sensitive personal information or pay money to get more information.
Legitimate federal grants can be found at Grants.gov, and you can check on your state’s economic development office to see if they have any grants available.
What skills are needed to run an electrical contracting business?
Professional expertise and competence. Staying up to date and adhering to relevant codes and local requirements is perhaps the most critical part of running a successful electrical business.
Keeping in touch with the latest innovations and emerging trends and showing your affiliations and certifications will help you assure customers that they will get top-notch, professional know-how and advice.
Excellent organizational skills. A positive can-do attitude, attention to detail, and solid organizational skills are vital in this business. Of course, you are your own boss, so you can decide how much – or how little – you want to work and what contracts you’d like to take on. But there will always be an urgent need for this work, and you may be called in after hours or on weekends.
Regardless of your workload, you must organize your time well and plan each work project to meet your customers’ requirements and expectations. Good time management is part of good customer service, which, in turn, will ensure repeat business and will help expand your brand through word of mouth.
Good time management also means you assign time to look after your business administration, meet with potential clients, develop your marketing, and keep up with quotes and invoicing.
What is the NAICS code for an electrical contracting business?
The NAICS code for an electrical contracting business is 238210.
The NAICS code (North American Industry Classification System) is a federal system to classify different types of businesses for the collection and reporting of statistical data.
Related: What is a NAICS code?
Electricians will always be in demand – even more so now that we are increasingly connected and rely on automated workflows and processes. To be a successful electrician starting your own electrical business, never stop learning, be curious, be a master problem solver and ace your customer service and communication skills.