You might have heard horror stories of partnerships ruining companies. That is why most electrical contracting companies are officially organized as corporations, not partnerships. However, corporations may be surprised to find a silent partner at the end of the day. This partner is government obligation, and if you are not aware of its existence, you may find yourself in your own horror story.

Your partner’s cut

You have a silent partner that has invested nothing and makes no visible contribution to daily operations; however, he demands an increasing share of your time and profits. Your silent partner takes a share of your profits by a direct tax. You make direct payments in the form of other taxes such as sales, property, vehicle use and capital gains.

Added to that, you are obligated to act as an agent of the government by collecting and remitting withholding taxes from your employees. These include Social Security, Medicare, and state and federal income tax. If you resell materials or equipment, you also may be required to act as the collection agent for sales taxes from the buyer. The problem you need to be aware of is your silent partner’s demand of this as a free service, so factor in these other expenses.

Cross your t’s and dot your i’s

Your silent partner demands compliance with reporting and regulatory requirements. For example, OSHA requires Material Safety Data Sheets and accident reporting logs. You are inspected for everything from working fire extinguishers to sprinkler systems. You must buy permits for your work, and you spend time and money learning and following new building code specifications and employment laws. Your direct costs include training, staff time, supplies such as software to track and report compliance, and professional feeds for advice and, in the extreme case, criminal defense. Indirect costs include increases in stress, interference with job performance and the risk of incurring penalties, such as fines or even jail time.

In addition, rules and regulations are limited to the interpretation of government agents, and if they are ineffectively worded, it could pose a problem for you. For example, three separate inspectors in one jurisdiction required one contractor to install work in three different ways. The contractor wasted time in rework and was frustrated by unsuccessful attempts to obtain final clarification of the requirements in order to avoid future incidents.

Operations

Sometimes, even if you adhere to the paperwork and reporting requirements, governments will insist on overseeing whom you hire and fire, how you compensate them and how you manage their time. You must consider equal opportunity requirements, and you may have to modify the work environment for those with disabilities. In addition, under the law, you are required to protect employees from the acts of peers and supervisors. Again, all of this has a cost, but the cost of these requirements is impossible to estimate. 

The hardest part about all of this is that you might be liable for acts that may not seem to be under your control. If you have ever paid increased workers’ compensation premiums following a fraudulent claim, or tried to limit the abuse of overtime, you know the frustration of losing control over your operations.

You may be surprised how often contractors have incurred fines and criminal penalties despite fulfilling the necessary requirements.

Give me a break

Here are a few words of comfort. Your silent partner gives you the occasional break. Although you pay taxes on profits, you can deduct some losses. I suggest consulting a financial expert, such as an accountant, to take advantage of all available tax breaks. In addition, you may personally benefit from Social Security and Medicare after you retire. You can enjoy the satisfaction of giving back to society by paying unemployment compensation, contributing to the healthcare system, and complying with sensible safety requirements and building codes. And, if you’re forced into a deep enough hole, your silent partner may step in and protect you by granting bankruptcy, even though you’ll feel a backlash from that down the road.

If you can calculate your expenses, you already may be amazed that you experience any profitably or feel any sense of control over your business. If you can factor in the additional costs of working with your silent partner, give yourself a pat on the back, and enjoy the knowledge that you are an even better business manager than most, and your business will be better off for it.

Just remember, be aware of your silent partner. Cover your bases, and you should be fine.   EC

NORBERG-JOHNSON is a former subcontractor and past president of two national construction associations. She may be reached at bigpeng@sbcglobal.net.