How to Become a Subcontractor
Becoming a subcontractor is a very popular option in the building industry.
Many tradies will complete their apprenticeship, get a couple of years under their belt, then go out on the own as a subcontractor.
Why do it? Some people see extra money, extra freedoms and perhaps a bit of variety if you’re subcontracting to different builders rather than just working for one.
Whilst the process is fairly easy, there are plenty of things to do before you make the leap from wages to subbie. Here are the steps we’ll be looking at in this guide.
Steps to becoming a subcontractor:
- Ensure you have the right trade qualification
- Decide on and setup your business structure
- Obtain any applicable licenses
- Setup your business insurance
These are the basic steps, but at this point it’s also important to look at the financial side of things and ensure that you will have enough work to survive on.
Check your Qualifications
This might seem pretty obvious. You’re not going to become a plumbing subcontractor if you’re not a trade qualified plumber right!
But it’s still worth looking at, as some trades do have different requirements when going from an employee of a contractor to being a contractor in your own right.
For example to obtain a Qld electrical contractors licence you need more than just your trade qualification, and will need to complete a number of additional modules in order to obtain your licence.
So sure this is a pretty obvious step, but still one you need to sort out before moving on.
Setup your Business Structure
When becoming a subcontractor you’re going self-employed, which means you need to set yourself up as a business.
There are various ways to structure your business, but these are the most common:
- Sole trader
- Company (Pty Ltd)
- Family trust
Many subbies start out with the easy option of being a sole trader. All you really need to become a sole trader is an ABN (Australian Business Number). If you expect to turnover more than $75k a year you’ll also need to register for GST (Goods and Services Tax).
Whilst going with the sole trader option is very fast, cheap and easy, it doesn’t offer the same level of protection as subcontracting via a Pty Ltd company. This is because as a sole trader, you and your business is one and the same. If your business is sued, it is really you being sued. Same goes with business debts and other financial issues.
Setting up as a company does have higher upfront and ongoing costs, however it does offer a greater level of protection as well as giving you a lot more flexibility in terms of tax planning.
With a company, you and your business are separate entities. If your business is sued or has debts, those belong only to the business and not you personally. There are some exceptions here, particularly where you have done the wrong thing, but generally speaking there is separation between your business affairs and your personal affairs.
A company structure also allows greater flexibility with tax planning. You can use a variety of income types such as wages, dividends, director fees and more to get the best outcome from a tax planning perspective. These options are not available as a sole trader.
The last of the common business structure options when becoming a subcontractor is a family trust. We recommend speaking with an accountant for more information about this one, but it can provide even greater benefits in terms of asset protection and tax planning.
Getting your business structure correct right from the start can save you time and money down the track, so speak with your accountant to get some good advice before you go too far.
Licensing
Depending on which trade you’re undertaking, you may need to obtain a licence in order to contract to others.
Plumbers and electricians are the two main trades which require licensing in most Australian states. We recommend checking with the relevant authority in your state to check if your trade requires licensing. Generally the Office of Fair Trading is the relevant department, but they do have slightly different names from state to state.
Business Insurance
Once you become a subcontractor you are on your own in a lot of ways.
If you cause property damage or personal injury to a third party as an employee, you will be covered by your employer’s insurance. But if the same thing happens as a subcontractor, you’ll be on your own and potentially liable for hundreds of thousands of dollars in the event of a large claim.
For this reason public liability insurance is absolutely vital for any subcontractor. This is the insurance that will save your back in the event that your negligence results in property damage or personal injury to a third party.
For certain trades you’ll find that public liability is mandatory in order to obtain your licence (electricians and plumbers especially) and you’ll also find that many builders require that all subbies on site have their own insurance.
Another consideration once you’ve switch from wages to subcontracting is that you’ll have no more sick leave, and depending on your state and business structure, no access to workers compensation.
So if you can’t work due to injury or illness, you’ll be completely on your own. This makes income protection insurance vital for any self-employed tradie.
Income protection can replace up to 75% of your income for a period of time whilst you are unable to work due to injury or illness.
There are many other forms of tradies insurance available, but when first becoming a subbie you’ll find that public liability and income protection are two of the most important.
More Information
We hope this guide has helped to answer the question of how to become a subcontractor. It is not an exhaustive guide however, and we do strongly recommend speaking with the relevant professionals.
For your business structure this will be an accountant, for licensing it will be your state government, and for your insurance it will be an insurance broker.
It’s also a great idea to speak with other subcontractors about their experience, especially if they’re in the same trade as you. If they’ve successfully made the switch, they should be a good source of advice.
Thanks for reading our guide, and we wish you all the best best in becoming a subcontractor and building your trade business!
