Avoiding the hazards of an unlicensed business
Jerri-Lynn Wier, an attorney and a compliance specialist, explains how contractors can prepare for state licensing and registration requirements.
Editor's Note: This piece was written by Jerri-Lynn Wier, an attorney and a compliance specialist for Harbor Compliance, which provides license and entity management solutions for businesses. She has 20 years of experience in insurance, business and election compliance, and has licensed many large construction, engineering and architectural firms.
In construction, licensing is a particularly challenging task. In addition to the usual corporate filings businesses must manage when entering a new state, contractors are subject to a regulatory labyrinth of testing, qualification and licensing requirements. These requirements vary by state, county and municipality as well as by job size and specialty trade. Each new jurisdiction you enter requires a good bit of due diligence and research to ensure that your firm has met all of its regulatory obligations.
Elizabeth “Lib” Burke, secretary/treasurer of Sumter, South Carolina-based Burke Industrial, knows that challenge too well. “I wish they had a uniform order in each state,” Burke said. “I think each state finds out what the others do and then they go in the opposite direction.”
Her company, an industrial general and mechanical contractor, recently expanded to meet the needs of several large clients in the poultry industry. “We started branching out, from South Carolina into North Carolina, Alabama and Georgia. We’re slowly working toward being licensed in the southeast, wherever our clients have plants,” Burke said.
When a substantial opportunity arose in Virginia, Burke needed to license the company and register with the secretary of state in time to meet the bidding deadline, which was fast approaching. “Virginia requires so many pretests before we can even apply for the license,” she said. “So we did everything and took all the tests, and it came down to the deadline, and the person from the state said, ‘Well, we’re four weeks behind.’ ” To make matters worse, it was a holiday weekend.
Burke reached out to a compliance solutions provider that was able to expedite her state paperwork. “Our CPA worked overtime on our financial statements, and the compliance service put feet to their promises, and by Tuesday morning, the miracle happened,” she said. “All of our problems were totally solved. But it was a very long weekend. Half the world was enjoying their day off, while we were chewing our nails.”
The challenges of entering new states in time to bid and win new projects are familiar to contractors of all types and sizes. Understanding the range of licensing and registration requirements contractors need to meet when entering a new jurisdiction can help your company capture more opportunities and avoid the risks of unlicensed practice. The following are regulatory areas firms need to address.
Registering with secretary of state registrations
Before entering a new state, construction firms must generally register with the secretary of state to do business as an out-of-state company, a process called foreign qualification. Firms must appoint a registered agent to receive legal notices and other important documents as part of this process. These registrations must also be maintained by updating the state of any changes in relevant information about your firm and filing annual reports.
In some states, nearly half of applications are rejected due to errors or omissions, eating up valuable time. To avoid delays, it’s important to make sure filings are accurate the first time.
Licensing through the state contractors board
In 34 states and the District of Columbia, companies must also apply for a construction firm license from the state contractors licensing board. In another 17 states, firms must meet city or county requirements. The construction firm license usually requires a qualifier to take the exams and provide the requisite experience.
In most states, foreign qualification precedes board licensure, but that is not always the case. It’s important to research the order of steps required in each state to avoid rejected applications and delays.
In addition, each state has different business ownership, management and name requirements, which may require forming a new corporate entity. So, it is best to examine secretary of state requirements and license board requirements side by side before beginning any filings.
Like your corporate good standing, contractor licenses often require maintenance through periodic renewals.
Sitting for exams
In more than 20 states, a representative of the firm must sit for exams and in some cases satisfy experience requirements within the state to qualify for a license. Many states require a business and law exam. Some states have reciprocity agreements for exams such as the National Association of State Contractors Licensing Agencies (NASCLA) exam, but business and law exams are never included.
In some states, the firm must apply for a license through the state board of contractors and receive an authorization number before taking the exam, while in other states, the exam precedes the application.
Licensing of subcontractor
In many states, contracting with an unlicensed subcontractor carries the same penalties as operating without a license yourself. You can reduce the risk to your firm by ensuring that subcontractors are fully licensed.
Planning ahead to meet clients’ needs
Wherever licenses are required, they must generally be in place before advertising or offering services, bidding on jobs or working in a new jurisdiction. For this reason, and given the amount of time it takes to fully license and register a construction firm in a new jurisdiction, it’s wise to include licensing and foreign qualification as an early step in sales and growth plans.
Sometimes, of course, growth finds you and not the other way around. At those times, expedited service might allow you to get your license in place in time to make the bidding deadline.
“Sometimes you can’t find opportunity, it lands on your lap,” Burke said. “We started out working with a huge poultry plant in our hometown. One man oversaw the whole maintenance of that plant, and we became close to him, and did a lot of work for him. All of a sudden he gets his engineering license, and he’s managing two states, and he calls us and says, ‘Why don’t you all come over here and do what you did there for me?’ That’s how the ball rolled for us.”
Navigating regulatory requirements can be a challenge, but with some planning, due diligence and support when needed, construction companies can position themselves for growth and avoid the hazards of unlicensed practice.