10 Legal and Financial Basics Every New Subcontractor Must Handle First

Starting as a subcontractor in Los Angeles or Orange County is exciting—you get to put your skills to work, land jobs, and build your reputation. Before you pick up your first tool or submit your first bid, ensure that the legal and financial aspects of your business are in order.

This isn’t the fun part, but it is the foundation. Without it, you risk fines, delayed payments, or losing out on contracts. The good news? With a little organization, you can cover the essentials and set yourself up for success.

Here are the 10 most important legal and financial steps to take before your first subcontracting job.

Part 1: The Legal Blueprint

1. Choose Your Business Structure

Your business structure determines your liability, how you pay taxes, and how clients view your company.

• Sole Proprietorship: Simple to set up, but your personal and business assets aren’t separate.

• LLC (Limited Liability Company): Offers liability protection, more credibility with clients, and is popular among subcontractors in California.

• Corporation: A more formal structure that provides liability protection and may offer tax advantages. Small subcontractors typically choose between S-Corps and C-Corps, but it's important to understand that both structures come with stricter compliance and reporting requirements than LLCs or sole proprietorships.

Many new subcontractors start as sole proprietors for simplicity, but if you want liability protection—or plan to grow into government contracting opportunities—consider an LLC or corporation. Always check with a CPA or attorney before deciding.

2. Get Your Licenses and Registrations in Order

You can’t bid—or even operate legally—without the proper paperwork.

In California, most construction-related work requires a contractor’s license from the Contractors State License Board (CSLB) if the job is over $500 in labor and materials. In addition, most cities (including Los Angeles, Anaheim, and Santa Ana) require a local business license. Professional service providers may not need a contractor’s license, but they often still need city business licenses.

Action Step: Check CSLB’s website for license classifications, and confirm city or county requirements for your specific profession.

From service agreements to contractor licenses, both professional services and construction subs need the right paperwork in place before work begins.

3. Use a Solid Service Agreement

Never work without a contract. A service agreement protects you and your client.

Key sections to include:

• Scope of work

• Payment terms and schedule

• Timeline

• Liability and insurance clauses

• Dispute resolution

Tip: Start with a plain-language template reviewed by an attorney; adjust it for each project.

4. Secure the Right Insurance

Just one mistake can ruin a small subcontractor if they don't have insurance.

At a minimum, most primes and agencies require general liability insurance. Depending on your work, you may also need:

• Professional liability insurance (common in consulting or design)

• Workers’ compensation (required if you hire employees in California)

• Commercial auto insurance (if you or your crew drive for business)

Talk to a broker who understands subcontractors in LA/OC. Whether during bidding or before work starts, primes will require a current Certificate of Insurance. Without it, you won’t be part of the team.

5. Understand Your Tax Obligations

 Unlike employees, subcontractors are responsible for their own taxes—and the rules can be confusing.

• EIN (Employer Identification Number): Think of this as your business’s ID number. Using an EIN instead of your Social Security Number protects your privacy and looks more professional on contracts and tax forms. Apply directly on the IRS website—it’s free.

• Estimated Taxes: Many subcontractors must send tax payments to the IRS and California FTB throughout the year, rather than waiting until April 15.

• Self-Employment Tax: Covers Social Security and Medicare contributions that an employer would usually withhold if you were on payroll.

Action Step: Work with a knowledgeable tax advisor or attorney. For example, some S corporations file annually instead of quarterly. A professional can help you avoid costly mistakes.

✅ Wrapping Up the Legal Basics

The structure you choose—sole proprietorship, LLC, or corporation—sets the tone for how your business operates. Each option has trade-offs in terms of liability, credibility, and paperwork. What matters most is that you take the time to set up your business legally, carry the proper insurance, and put solid agreements in place.

These steps aren’t glamorous, but they’re what separate subcontractors who are ready for opportunity from those who miss out. When in doubt, get advice from a CPA or attorney to confirm the best setup for your situation.

Part 2: The Financial Foundation

Once your legal basics are in place, the next step is to ensure your financial system is just as solid. Even profitable subcontractors can run into trouble if their finances aren’t organized—forgetting to submit invoices, unclear rates, or tax surprises can derail growth just as quickly as a missing license.

The good news? You don’t need to be a CPA to get started. By setting up a few simple systems now, you’ll make it easier to stay profitable, prove your readiness to primes, and keep your business running smoothly.

6. Separate Your Business and Personal Finances

 Mixing—or “commingling”—business and personal money creates tax and liability problems. If your business is ever audited, or if you’re involved in a legal dispute, you’ll need a clear record showing which expenses belong to the business.

Action Step: Open a business checking account and credit card. Keep all business income and expenses separate from your personal finances.

7. Determine Your Rates

 To stay profitable, you need to know what your time is worth.

• Many subcontractors calculate project-based rates by starting with hourly rates.

• A fully-burdened labor rate includes:

• Overhead: Office rent, insurance, utilities

• G&A (General & Administrative): Back-office costs like accounting and admin

• Fringe: Benefits, payroll taxes

• Profit: Your margin for growth

Materials: Only add material costs after you calculate the labor rate. And if you bill clients for materials in California, you must have a seller’s permit and pay sales tax on marked-up items.

8. Set Up a Simple Bookkeeping System

Organized books prevent headaches at tax time and demonstrate reliability to prime and agency officials.

Start small:

• Use Excel or Google Sheets when you’re just beginning.

• Upgrade to QuickBooks or FreshBooks when you want automation and invoicing tools.

Saving receipts: Don’t just toss them in a shoebox. Options include:

• Scan them onto your computer

• Snap a quick photo with your phone

• Make photocopies if you need to retain paper files

Free training resources: Many county libraries, including LA and Orange County, offer free digital classes through Gale Courses and similar platforms. Topics include accounting, business, computer applications, legal basics, and technology skills—all at no cost with a library card. Start with a plain-language template reviewed by an attorney, and then adjust it for each project.

Bookkeeping isn’t optional. Whether you’re tracking gas receipts from the field or scanning invoices in the office, organized records keep you compliant and confident.

9. Master the Art of Invoicing

 You can’t get paid if your invoice doesn’t meet requirements.

Primes and agencies must follow prompt payment laws, but the “clock” doesn’t start until your invoice is complete and accepted.

A good invoice should always include:

• Unique invoice number

• Purchase order or contract reference

• Clear description of work performed

• Due date and payment instructions

• Required attachments (e.g., certified payroll, or completed/signed time sheets)

Whether you’re a painter or a consultant, the key is the same: accurate, complete invoices prevent delays.

Accurate, complete invoices prevent payment delays. Whether it’s certified payroll for construction or purchase order numbers for services, details matter.

 10. Start a Tax Savings Account

 Nothing ruins momentum like a surprise tax bill.

The simplest solution: Set aside 25–30% of every payment in a separate savings account. This way, when federal and state taxes come due, the money is already there.

Final Thought

Getting your legal and financial house in order may not feel as exciting as landing your first contract, but it’s what makes those opportunities possible. Choosing the right business structure, carrying proper insurance, separating your finances, and setting up simple systems are the basics that build trust with primes and protect you from costly mistakes.

The good news? You don’t have to master everything overnight. Start with the essentials, get help from a CPA or attorney when needed, and keep moving forward one step at a time.

Let’s get your house in order—because readiness is your best strategy.

– Stephanie

👉 Next Step:

• Check out our Resources Page for two free tools (email sign-up required):

  • The Business Readiness Checklist helps you see if your legal and financial foundation is solid.

  • The 7-Day Plan gives you a step-by-step path to start building government-ready systems.

  Start with one—or use both together—to get your house in order and move toward subcontracting success.

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About Stephanie:
Stephanie Clark-Ochoa is a Government Procurement Strategist and founder of Clark-Ochoa Business Services. Through Help 4 LA Subs, she provides practical tools and insights to help micro and small businesses in the Greater Los Angeles area become government-ready and thrive in public contracting.

Disclaimer: This post is for informational purposes only and does not constitute legal, financial, or professional advice. Please consult a qualified advisor before making decisions specific to your business.

🔜Next Week on the Blog: 
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I’ll be sharing the story of the time I forgot to update a client’s vendor profiles—and how that simple oversight cost us time and nearly cost them the opportunity.

If you’re bidding on government contracts in LA or OC, this is one mistake you can’t afford to make.