For Newly Licensed Contractors
You Passed the CSLB Exam. Here Are the 5 Things That Sink Contractors in Year One
Christopher Scott-Dixon, Esq. · State Bar of California No. 236027
Passing the CSLB exam is the hard part that everyone talks about. The year that follows is the hard part nobody warns you about, and it is where most first-year contractors quietly take on risk they did not know they were signing up for.
You know your trade. That was never the question. What the exam did not cover is the business you now have to run around it: who the license actually belongs to, who is legally working for you, what your contract has to say, and how you get paid when a client decides not to pay. Here are the five that cost new license holders the most, in the order they usually show up.
1 · The license belongs to whoever you named on the application
This is the one that surprises people. A California contractor license is issued to a specific legal person: you as an individual, or a specific corporation, LLC, or partnership. Those are not interchangeable. If you tested and licensed as a sole owner and later decide to run the business through an LLC or a corporation, that entity generally needs its own license. You do not simply move the license over, and you do not get to operate under the new company on the strength of the old license.
That matters most in the moment you are least likely to think about it: the day you form an entity for tax or liability reasons, six months after the license came through, and keep bidding work exactly as you were. The fix is cheap if you sequence it correctly from the start. It is expensive if you find out during a payment dispute.
Practical version: decide sole prop, LLC, or S-corp before you build the license around it, not after.
2 · Your first hire is probably not a 1099
Almost every new contractor makes the same call. Bring on a hand, call him a sub, pay him on a 1099, move on to the next job. That is how a lot of crews get built, and California does not care what you called it.
The state runs the relationship through the ABC test. The prong that catches trades every time is B: the work has to be outside your usual course of business. If he is on your jobsite doing the work you are licensed to do, he is not outside your business. He is the business. Which generally means, in the state’s eyes, he is an employee, whatever the paperwork says. Cal. Lab. Code § 2775
Some exemptions exist, and a genuine sub with his own license, his own crew, and his own contracts is a different situation. That distinction is worth checking before you rely on it, not after.
$5,000 to $25,000 per workerCivil penalties for willful misclassification, on a business that may not have cleared $25,000 yet. Add back wages, unpaid payroll taxes, and workers’ compensation exposure if he gets hurt. Cal. Lab. Code § 226.8
3 · Your contract has requirements you cannot negotiate away
If you do residential work, your contract is not just a business document. California tells you what has to be in it. Home improvement contracts have mandatory elements down to typeface size and required notices. Cal. Bus. & Prof. Code § 7159
The one that catches new contractors hardest: your down payment cannot exceed $1,000 or 10 percent of the contract price, whichever is less. Not whichever is more. On a $60,000 remodel, your legal maximum before you start work is $1,000, not $6,000. There is no exception for special-order materials. Renaming it a mobilization fee or a materials deposit does not change the answer, and violations are grounds for CSLB discipline. Cal. Bus. & Prof. Code § 7159.5
That rule is a cash flow problem, not a paperwork problem. It means you need working capital or supplier credit before you take the job, and it means your progress payment schedule has to be tied to real, defined milestones. Build the contract around that and it stops being a trap.
4 · You are probably not using your lien rights
This is the tool most new contractors never touch, and it is the one that gets them paid.
California gives you mechanics lien rights, but they run on deadlines, and the clock starts before you know you have a problem. The preliminary notice is the front door: serve it early in the job, on the owner and the lender, and you preserve rights you cannot get back later. Miss the window, and you can do everything else right and still end up with nothing but a lawsuit.
The mistake is thinking of liens as what you do when a client goes bad. By then it is usually late. Preliminary notices are routine paperwork you send on every job, on schedule, the way you pull a permit.
5 · Taking work you cannot legally take
Two versions of this, and both are avoidable.
The first is scope. Your license classification defines what you can contract for. Taking a job that reaches into a trade you are not licensed for is a problem even when you subcontract the actual work, if the contract itself is outside your classification.
The second is the threshold. As of January 1, 2025, the minor work exemption rose from $500 to $1,000, but with conditions that did not exist before: the work cannot require a building permit of any kind, and the person doing it cannot hire anyone to assist. Plenty of guidance still in circulation prints the old $500 figure. More to the point, if you are licensed, this exemption is not your concern. Your concern is the unlicensed operator underbidding you on jobs he cannot legally take, and what happens when a client tries the same logic on you. AB 2622, Cal. Bus. & Prof. Code § 7048
Why it matters that you stay inside the line: an unlicensed contractor generally cannot sue to collect on the work, and may have to give back what was already paid. That statute exists to protect consumers, and it is unforgiving. Cal. Bus. & Prof. Code § 7031
The insurance and bond layer
Two things that are conditions of holding the license, not optional business decisions. The contractor bond is $25,000, and it has been since January 1, 2023. Workers’ compensation is required once you have employees, full stop.
The bottom line
None of this is complicated. All of it is cheap and fast to set up correctly at the start, and expensive to unwind after a labor complaint, a jobsite injury, or a client who stops paying. That is the whole argument for doing it right rather than doing it cheap: the cost of getting it right is known and budgetable, and the cost of getting it wrong is not.
Just got licensed? Set it up once, correctly.
The Contractor Launch Package covers entity formation and your operating agreement, a California-compliant contractor agreement with lien language and dispute clauses, and a 30-minute strategy call. Flat fee, no surprises.