Business Organization, Financial Management, and Accounting
Business Organization
The license attaches to an entity, not a person
A Tennessee contractor license is issued to a specific legal entity - sole proprietorship, general partnership, limited partnership, LLC, or corporation - and names a qualifying agent who must satisfy the Board's experience and examination requirements. Every business-organization question on this exam ultimately asks: who holds the license, and who is responsible for the work?
Entity choice drives liability exposure, taxation, bonding capacity, and continuity. A sole proprietorship is simple but exposes personal assets; a partnership exposes each general partner to partnership obligations; an LLC or corporation shields owners but imposes formalities (registered agent, annual reports, separate accounts) that the Board and sureties expect to see respected. S-corporation election affects payroll and self-employment tax treatment but does not change licensing.
What the Board looks for
- The licensed name must match the name used on bids, contracts, permits, and advertising, exactly.
- Ownership, officer, or name changes must be reported; a new entity generally needs its own license.
- The qualifying agent must be actively engaged in day-to-day management, not a paid figurehead.
- Financial statements supporting the license must be prepared consistent with the Board's requirements and updated at renewal.
Traps
Candidates lose points assuming a license 'transfers' when a sole proprietor incorporates, or that one qualifying agent can qualify two unrelated companies. Also watch for questions implying a silent partner or unlicensed officer can run the construction operation.
Rule of thumb
If the taxpayer identification number changes, assume the license does not follow it - apply before you bid.
Financial Management and Accounting
Two statements, two questions
The balance sheet answers 'what do we own and owe as of a date'; the income statement answers 'did we make money over a period.' Contractors fail because these two diverge: a job can show profit on paper while cash drains through retainage, slow pay, and front-loaded costs.
Job cost and revenue recognition
Costs are coded to jobs as direct (labor, material, equipment, subcontract) or indirect (supervision, small tools, insurance, home-office overhead). Revenue is recognized on long-term contracts using percentage of completion, normally cost-to-cost:
Percent complete = cost to date ÷ estimated total cost Revenue earned = percent complete × contract price
Compare revenue earned to amounts billed. Billed exceeds earned → overbilling (a liability). Earned exceeds billed → underbilling (an asset tying up cash).
Ratios worth memorizing
- Current ratio = current assets ÷ current liabilities; 2:1 is a healthy target.
- Working capital = current assets − current liabilities; the Board's monetary limit tiers track this.
- Gross profit margin measures job performance; net margin measures company performance.
Traps
Adding markup as if it were margin; treating retainage receivable as available cash; ignoring the difference between profit and cash flow; expensing equipment purchases instead of depreciating them.
Worked example
Contract $1,000,000; cost to date $300,000; estimated total cost $800,000. Percent complete = 300,000 ÷ 800,000 = 37.5%; revenue earned = $375,000. If you have billed $400,000, you are overbilled $25,000 - cash you have collected for work not yet performed.