How to Start a Contracting Business in Michigan

Start with the structure and the contract price

Michigan does not licence "contractors" as a single category. LARA's Bureau of Construction Codes administers Article 24 of Public Act 299 of 1980, which the Bureau describes as licensing and regulating persons engaged in the construction of "a residential structure or combination residential and commercial structure", and persons who undertake "the repair, alteration, addition, subtraction or improvement" of such a structure "for compensation other than wages for personal labor". If that sentence describes your work, you are inside Article 24 and you need a licence before you take the money.

The second question is the dollar figure, and it is much lower than most new owners expect. MCL 339.2403(f) exempts a person "working on 1 undertaking or project by 1 or more contracts, if the aggregate contract price for the labor, material, and any other items for the undertaking or project is less than $600.00". Note what that sentence does: it aggregates every contract on one project, it counts materials as well as labour, and it is $600 for the whole undertaking rather than $600 per invoice. The same subdivision then closes the obvious loophole, providing that the exemption does not apply where the work is only part of a larger operation or where the operation is divided "in contracts of amounts less than $600.00, to evade this act".

MCL 339.2403 also lists the other people who may work without an Article 24 licence: an authorised representative of a government body, an owner of property working on a structure "for the owner's own use and occupancy", an owner of rental property with reference to maintenance and alteration of that rental property, an officer of a court acting within the scope of that office, and a person other than a salesperson who works solely under contract with a licensed builder or contractor. Read those against what you are actually doing. Building a house on your own lot to sell is not the same thing as building for your own use and occupancy.

• Residential structure, or combination residential and commercial structure, for compensation: Article 24 applies.
• Aggregate project price under $600.00 including materials: MCL 339.2403(f) exemption may apply.
• Splitting one job into sub-$600 contracts to stay under the line: expressly excluded from the exemption.
• Owner building for the owner's own use and occupancy: exempt.
• Owner of rental property doing maintenance and alteration on that property: exempt.
• Working solely under contract to a licensed builder or contractor, other than as a salesperson: exempt.

Official sources: LARA Bureau of Construction Codes: Residential Builders; Michigan Legislature: MCL 339.2403

Pick the licence type before you spend a dollar on education

LARA issues more than one thing in this programme. Its Licensing Section page lists Individual Residential Builder, Maintenance & Alteration (M&A) Contractor, Builder Company, M&A Company, Residential Builder Salesperson and Branch Office licences. The individual licence is the anchor: a company licence in Michigan cannot operate without a qualifying officer, and LARA states that if the qualifying officer fails to renew the individual licence, the company licence "will be placed in Section 2405 Suspension".

The split between Builder and M&A is the split between building and changing. A Maintenance & Alteration Contractor licence is issued by craft, and LARA lists those crafts as carpentry, concrete, excavation, insulation work, masonry, siding, roofing, screens and storm sash, gutters, tile & marble, house wrecking, swimming pools and basement waterproofing. The Bureau adds that the crafts a contractor is qualified to practise "are listed on the license", so the licence document itself is the scope statement. If you intend to build new houses, you want the Residential Builder licence rather than a stack of M&A crafts.

Three trades sit outside this programme entirely. LARA licenses plumbing, electrical and mechanical contractors through their own programmes, and MCL 339.2403 exempts a licensed electrical, plumbing or mechanical contractor from Article 24 only "to the electrical installation, electrical maintenance, or electrical repair work", the plumbing work, or the mechanical work respectively that the contractor performs. Holding one of those licences does not let you take general residential remodelling work, and holding a builder licence does not let you do the wiring.

Official sources: LARA Bureau of Construction Codes Licensing Section; LARA Maintenance & Alteration Contractor License Information; LARA BCC License/Registration Renewals; Michigan Legislature: MCL 339.2403

Then do the 60 hours, in the order LARA sets

Michigan front-loads the education. LARA states that since June 1, 2008, an applicant for a Residential Builder or Maintenance & Alteration Contractor licence "must complete 60 hours of approved prelicensure education prior to taking the examination or submitting a license application to the Department". You cannot sit the exam first and study later, and the courses must be preapproved by the Department, from its published Approved Prelicensure Education Course List.

The 60 hours are not free-form. LARA requires at least 6 hours in each of seven subjects: Business Management, Estimating, and Job Costing; Design and Building Science; Contracts, Liability, and Risk Management; Marketing and Sales; Project Management and Scheduling; The Michigan Residential Code; and MIOSHA Construction Safety Standards. The remaining 18 hours "can come from other topics on the approved course list". After the hours, LARA states the applicant must submit a completed application and applicable fee, be of good moral character, and successfully complete the Residential Builder or M&A examination once all other requirements are met.

Examinations are conducted by PSI. LARA states that approved applicants will be contacted by PSI to schedule at one of five PSI testing centres in the state, that testing is available six days a week, and that all examination fees are paid to PSI at the time the examination is scheduled rather than to the Bureau. Two administrative rules are worth knowing before you start: under R 338.1521, if an applicant fails to complete all application requirements including any required examination within one year of first applying, "the application shall be void and the application processing fee shall be forfeited", and a passing examination score "shall be valid for 1 year" from the date it was passed.

Official sources: LARA Prelicensure Education Requirements; Michigan Administrative Code R 338.1511 to R 338.1566; LARA Bureau of Construction Codes Licensing Section

Build the company alongside the licence, not after it

If you will trade as an LLC or corporation, that is a separate filing with a separate LARA bureau. The Corporations Division states that "a limited liability company is formed by filing the Articles of Organization with the Bureau", and that a foreign LLC "transacting business" in Michigan must first obtain a Certificate of Authority. The State of Michigan business portal also points at a name-availability search and a licence-and-permit search, both of which are worth running before you print anything.

Then register with Treasury. The Department of Treasury directs new businesses to Michigan Treasury Online, and states that where the business has a federal Employer Identification Number, "the EIN will also be the Treasury business account number". A business not required by the IRS to have an EIN completes the paper registration and Treasury assigns an account number, which Treasury says takes 7-10 days for mailing plus roughly two more weeks for processing. An electronic application is recognised on Treasury's system within 15 minutes but "can take up to 48 hours to process".

Michigan sales tax is 6 percent on the total price of taxable retail sales to the final consumer, with a 4 percent rate for residential electricity, natural or artificial gas and home heating fuels, and Treasury states that "Michigan does not allow city or local units to impose sales tax". The sales tax licence "is valid January 1 through December 31". Treasury sets your filing frequency each year; monthly filers are due on the 20th of the following month, quarterly filers on the 20th of the month after the quarter ends, and "all filers must submit an annual return by February 28, regardless of assigned filing frequency".

Official sources: LARA Corporations Division: Limited Liability Company; State of Michigan: Business; State of Michigan: State License Search; Michigan Treasury: New Business Registration; Michigan Treasury: Sales and Use Taxes

Workers' compensation: the thresholds are lower than most new contractors expect

Michigan's Workers' Disability Compensation Agency publishes the coverage criteria directly. Employers that must carry workers' compensation insurance include "all private employers regularly employing 1 or more employees 35 hours or more per week for 13 weeks or longer during the preceding 52 weeks" and "all private employers regularly employing 3 or more employees at one time", and the agency notes explicitly that the three-employee test "includes part-time employees". Agricultural employers, householders employing domestic servants and all public employers have their own criteria on the same page.

Who counts as an employee is broader than a payroll list. The agency states that an employee is "any person in the service of another, under any contract of hire, express or implied", that "a partner is considered an employee of the partnership", that "a corporate officer is considered an employee of the corporation", and that "a member who is a manager is considered an employee of a limited liability company". The one clean exclusion is that "a sole proprietor (self-employed individual) working in his or her sole proprietorship is never an employee of that business". A two-member manager-managed LLC with one helper is therefore closer to the three-employee line than the owners usually assume.

There are three ways to comply, and doing nothing is not one of them: the agency states that compliance "may be achieved by purchasing insurance, self-insuring, or properly executing an exclusion form", and that an employer below the criteria may voluntarily assume the liability. It also warns that "failure to comply with coverage requirements could result in prosecution and financial penalties". Decide which of the three routes you are on before your first hire, not after an injury.

Official sources: Michigan WDCA: Workers' Disability Compensation Insurance Requirements

Keep it alive: renewals, records and the rules that catch people

The renewal cycle is long enough to forget. LARA states that an individual Residential Builder or M&A Contractor "must renew every three (3) years by 5/31", that you can start renewing 90 days before expiration, and that "not all residential builder licenses renew the same year", so your date is your own. Renewal is $150.00. Missing it costs an additional $20.00 late fee, rising to $35.00 if you have not renewed within 60 days of expiration. Company, M&A company and branch licences renew on the same three-year, May 31 pattern at the same $150.00, and cannot use LARA's Express Pay.

Continuing education is tiered by cycle rather than flat. LARA requires 21 hours of continuing education for a first or second renewal cycle and 3 hours for a third or higher cycle, and states that you do not submit proof "unless you are audited" but should keep a copy. The administrative rules add the arithmetic: R 338.1564(4) gives continuing competency credit based on programme length, "with 50 minutes of continuous instruction constituting 1 qualifying hour", excluding meals and breaks.

Two operating rules cost licences more often than the exam does. R 338.1532 requires that a licensee "include the name, license number, and actual business address, as shown on the license, in all advertising" and prohibits using a telephone or post office box number alone. R 338.1533 requires that all agreements and changes to agreements be in writing and signed by the parties, with copies given to the customer, and that the writing clearly state cost, the type and amount of work, and the type and quality of materials. R 338.1534 simply requires that "a builder or contractor shall keep and maintain a complete, accurate set of books and records". Set all three up in week one, because retrofitting them after a complaint is not persuasive.

Official sources: LARA BCC License/Registration Renewals; Michigan Administrative Code R 338.1511 to R 338.1566

Check the official page yourself before you file or sign

Michigan publishes its contractor rules across at least four agencies: LARA's Bureau of Construction Codes for the licence, LARA's Corporations Division for the entity, the Department of Treasury for tax registration and returns, and the Workers' Disability Compensation Agency for coverage. No single page carries all of it, and each one changes on its own schedule.

Before you file an application, sign a contract, or hire anyone, open the specific LARA page for your licence type, confirm the hours, the renewal date and the fee, and keep a dated copy of what you read. LARA publishes a licensing phone line at 517-241-9316 and an email address for the Licensing Section, and it warns that "application fees are non-refundable" and that processing "may be up to 3-5 weeks". A ten-minute call before you pay is cheaper than a non-refundable application filed into the wrong licence type.

Official sources: LARA Bureau of Construction Codes Licensing Section; LARA Bureau of Construction Codes: Residential Builders