Licensing, Bonding, and Insurance for a Start-Up Woodworking Business

Thoughts on the relative importance of certain business formalities. April 20, 2008

I have started a custom woodworking business and am wondering if being bonded and insured is going to slow down business. I plan on getting a license soon so I can install the projects I build. For now, is it going to be hard to get jobs when the customer knows I'm not licensed, bonded, or insured?

Forum Responses
(Cabinetmaking Forum)
From contributor A:
What state are you in?

From contributor B:
First you need to decide if you are in business - if you are then you need a license. If someone knowingly hires you without a license it is because they expect you to be less expensive. Are you? In this state if you install work without a license and someone turns you in, you will be fined. If the person who hired you decides not to pay you have no recourse. If I find you working in my neighborhood without a license I will turn you in.

From contributor C:
It depends on the state or even the city you are in. If you need to be licensed then get one. As a rule, there is no law requiring you to have insurance if you work alone. If you have employees or helpers, it's another story. It is a very good idea, however, to have it for yourself. Liability insurance is not all that expensive.

As far as bonding goes, unless you are going after commercial work don't waste your time. It is not easy to get bonded when you are first starting out. Just stay as you are. Build it, deliver it, and get paid for it.

From contributor D:
To contributor B - you are right about the license. It is especially frustrating for us licensed contractors to see unlicensed guys who often do inferior work take business away. Some people look for unlicensed types hoping to get a better price. Just because a guy has a license doesn't automatically make him good at his trade, but it indicates that the guy is serious about it and plans to stay in business. Also, it means the licensee has the qualifications for the license, and that means experience. I urge those who want to show credibility in their trade to get licensed. It also will open up doors you wouldn't otherwise have a chance to knock on.

The question was whether insurance and bonding is a good idea. Bonding is often a requirement to hold a license. But there are other types of bonding, like for doing public works jobs. Those are not necessary unless you bid on public works. As for insurance, get liability if you work alone and if you have employees cover them with workers comp as well as the liability or you won't last long.

From contributor E:
I'm a one man shop in business for a bit over seven years now. I'm fully insured, not bonded or licensed. I've never been asked if I was licensed, only insured, and that's generally only when working in large buildings where they need proof of your insurance on record.

I don't need a bond for the work I do and the license is dependent on the state. In mine they couldn't even tell me if I needed a license or not. To be honest, the licensing would be fine if it had anything to do with installing cabinets, which is all I do in client's homes. But in my state the only thing available is a Construction Supervisor's license, which is not much good for a cabinet installer from what I can tell. I guess if I had to have it I would get one, but it doesn't make sense to me to have to know everything about general construction to hang a box on a wall.

From contributor F:
In Oregon, if you work on a residential or commercial property you have to be licensed. A home owner can work on his own home but cannot hire someone to work on the neighbor's home. If you manufacturer cabinets and do not do any job site work you don't need a license. If you install them, you do. If you hire a licensed contractor or subcontractor to do work, you need a contractor's license unless it is your primary residence. That is, a home store selling cabinets and contracting for the installation also needs to be licensed as a contractor. If you build a home with the intent to sell, you need a contractor's license. If you hire a subcontractor to work on that home, you need a contractor's license.

To get a license you have to post a bond (this bond has nothing to do with public works jobs and its required bonding) and provide proof of insurance, plus if you have employees you also have to have workers comp insurance. This also applies to one man shops in Oregon. I don't make the rules. I just try and live by them.

From contributor G:
A license is nothing more than a way for the state to get more money. Have you ever taken one of the tests (with fee included)? Has anyone here or elsewhere been ripped off by someone with a license? I am insured for my equipment and my customer's peace of mind, because they truly believe it makes a difference. I have integrity and it's better than a license.

From the original questioner:
Thanks guys for the input. I live in Bend, OR. I plan on getting licensed, but for now I don't know if I can afford to be insured. What does that cost? I'm in the business to make money and have happy customers who will come back to me. I'm not in it to screw people over and take their money and leave. If I can communicate with the customer that I'm a trustworthy guy and want him/her happy with the product I give them then it shouldn't be a big deal, right? But you guys are right about customers knowing a licensed and insured builder vs. a non licensed and insured builder. Who do you think is going to get the business - no doubt the licensed and insured one. I have been lucky with the jobs I have done. They came to me because my dad works with them and put a good word in about me and my work. I've completed a few custom built-ins and a built-in entertainment center so far. I'm 19 and I think that is a big deal to customers. So it's really slow for me now.

From contributor H:
I'll stir the pot just a little. What kind of license are we talking about? Is this a business license or a contractor license? I'm sure it depends on where you live. In my town, if you get a business license, you've just handed the government your wallet. I operated my "hobby" for years and bought a good number of tools. As soon as I got the business license, they sent me a bill for business tax. The first year it was $450. When I called to ask what it was, they told me that was tax on my tools and inventory. I asked where they got the numbers, and they told me they guess the first year. That tax was almost $1200 last year and I haven't bought any more tools. Getting the license is inevitable, but at 19 and getting my feet wet, I'd put it off as long as possible. Once you do it, they will bug you every year and fine you if you are late filing it. The license is their way of separating the contenders from the pretenders - they do it through the wallet.

From contributor I:
You should consider insurance just as important as your most important tool as it protects your most important investment you. You cannot afford not to have insurance.

I don't know Bend, OR requirements, but most insurance packages, especially considering your age, require a few hundred deposit and monthly payments. You should not operate without insurance no matter where you live.

Now, that being taken care of, I applaud your entrepreneurial spirit and courage to ask important questions, but to be honest, you might want to take advantage of your age and go work for someone else for 1-2 years, and learn all you can, from customer service to management, to process development, what works and what doesn't, (the list goes on). I know that seems like a long time at your age, but trust me, depending on your commitment level, that time will fly by very fast.

Save as much as you can during this period. Resist the normal young man's urges to blow the money you earn. You will be better off in the long run and issues like being able to afford insurance, etc. will be already answered. At 19, if you live at home, find out how much rent, utilities, insurance, etc. would cost you if you didn't and still pay this amount every month, but pay it to yourself into a separate interest bearing account. This will be on top of your savings, so you will find your savings rapidly increasing.

I know at your age, you want to go out and take on the world and make your mark, but consider this. Starting out, there are so many other issues and expenses related to being in business (i.e. - quarterly taxes, rent, electric, gas, insurance, paperwork development and administration, etc. - just touching on few items, but the list is much longer) in addition to finding customers, securing new business, actually making the product and installing it, customer service, setting up vendors all of the things that go along way to setting up a business. In addition, consider that you could be setting all this up in the background in your free time, while gaining valuable experience and getting paid on someone else's dime. If you have the experience to make "custom", you could most likely get a job making $25-$35K per year just starting out. If you've read a lot of posts at this site, you'll see that there are a lot of more seasoned guys making around the same while owning the business, but with all the other headaches and challenges associated with it. You'll also see posts with guys making six figures, but those are the exception and the ones with strong business experience. Just being a great woodworker is not enough, as a lot of guys on this site will tell you.

You can take a couple of years educating yourself on not just woodworking, but what's involved in actually running a business (just look at your employer as a long term client/customer you contracted with for this period to feed your entrepreneurial spirit) or your can go head first and go through the School of Hard Knocks (they call it hard knocks for a reason).

From contributor J:
I live and work in the state of Washington, where I both build and install custom cabinets and do small remodels. Ours is a two-person shop, with my wife doing most of the finishing. For this I have the following:
1) Master license for any business, used to collect and send in sales tax. For this I have a UBI (Unified Business ID) number, which in itself carries no fee. I could be subject to a B&O tax, but have never grossed enough.
2) Bonding and insurance. This is based on our gross sales (not profit) each year. Mine cost me $240 for bond and $882 for insurance in 2007. And we have a small shop.

3) Contractor's license. You have to have one to do installs or remodel. You also have to be licensed and bonded to get one. The fee isn't very high, but at the moment I can't locate mine.
4) City license - required for some cities you do work in. Runs $25 to $50 per year and does absolutely nothing for the contractor or customer.

By the way, I have a general contractor's license, as there is nothing specific to cabinet installer or remodels.

From contributor F:
If you live in Oregon and work in a customer's home and get caught without a license, the fine can run $5,000.00 the first time. Anyone can turn you in and in Bend there are plenty of slow cabinetmakers who would do just that. Read the following: Oregon Contractors License

From contributor K:
I have been licensed in quite a few states as a builder as well as other licenses. Each state is totally different. Most of my work these days, other than true custom work, is fixing everyone else's mistakes. I now live and work in Florida full time and am just amazed at how poor the quality of work and cabinetry is here. But again, this is a tough market area with too many guys who can read and pass a test, but have never done any contracting, building, or anything else remotely like it. The only other part is that licensing (again this is dependent upon location) can be cost prohibitive for someone starting out. So be careful and make sure you work with a reputable company for your license prep. If you find that you can't afford it right away, think about talking to good builders and see if you can be their cabinet supplier. You may be surprised at the kind of a deal you can make with some of them until you can get set up.