Do you know any truckers whose CPA set up a corporation for them right when they started their business, who then had to close it down a year later because it didn’t make sense for their situation? Or, maybe it made sense to set up the entity - like an S-Corp - but their CPA didn’t tell them they needed to utilize payroll services to take advantage of the tax benefits. Or, maybe their CPA established a partnership for their business without coaching the driver on the importance of a strong operating agreement… and the driver paid the price when their partner left the business and hung them out to dry.
These situations are very common in trucking, but they are also very easy to prevent with a little planning and some trucking-specific knowledge. At ATBS, we speak to owner-operators who paid the price for bad advice about setting up an entity for their business nearly every day.
Today, we’re going to highlight some of the most common mistakes CPAs make for their owner-operator clients and how those mistakes can hurt a driver’s business and income.
We are not lawyers, and so we won’t (and can’t) give any legal advice related to business structure. However, we are a tax company, so we’ll highlight how these mistakes impact the taxes of your business. We’ll also talk about some general, non-legal issues that we tend to see, and we’ll talk about some common solutions for those as well.
If you find yourself falling into any of the categories we’re about to discuss, it might be time to think about vetting a different tax professional for your business. The business structure you choose is incredibly important, and it’s also fairly simple to get it done the right way. If your tax professional made a poor decision about your business structure - before they ever even touched your taxes! - that’s a red flag that shouldn’t be ignored.
Ready to learn more? Let's discuss some common mistakes CPAs make regarding setting up business structures for owner-operators.
First things first, if you are unsure about the differences between LLC’s, Partnerships, C-Corporations, and S-Corporations, please stop reading and go check out our article regarding Owner-Operator Incorporation to learn more about the different structures and which one may be the best fit for your business from a tax standpoint.
Mistake 1: CPA sets up an S-Corporation for a driver as soon as they start their business.
Why is this a mistake? Simple:
You should wait until you get a full 12-months of experience - and 12 months of income - while operating your business before you establish an S-Corporation (or, an LLC elected to be taxed as a Subchapter S-Corporation).
We believe it’s critical that you have a full 12-months of income to review prior to making this switch in your business structure. The reason is, it’s expensive to keep an S-Corporation open each year! You have annual State fees, additional annual tax filing fees, and extra fees related to running payroll for your business each month. Those fees add up quickly.
Every business has a breakeven point where the money they save in taxes by using this business structure is more than the cost to use this business structure in the first place. Until you know for sure that you will save more than you spend, we recommend waiting to choose this structure!
Don’t let a CPA tell you that this structure is right for you unless they can run the numbers based on your actual business income and show you the tax savings! If they push you into this type of business entity without hard data to back it up, that’s a major red flag.
For new owner-operators especially, you have enough on your plate just learning how to run your own business in a profitable manner. You don’t need the added stress of an extra level of business structure complexity. Perhaps a sole proprietorship or LLC will fit your exact needs!
Mistake 2: CPA sets up an S-Corporation for a driver, but doesn’t help them run Payroll.
If you are trying to save money on your taxes by operating your business as an S-Corporation, you must run payroll! If you want to learn more about why, here is an ATBS article that explains why payroll is required.
The single biggest risk you can take as an S Corp owner-employee is to take no salary at all!
It is relatively simple for the IRS to develop a report of 1120S tax returns with no owner’s compensation that also have net profit or distributions, which means it’s hard to hide from the IRS if you aren’t paying yourself a salary. This is a red flag for the IRS and creates an easy court case for the IRS to win if you happen to get audited.
If a CPA recommends a S-Corporation for your business structure but doesn’t educate you on using payroll, it’s another major red flag. They either:
A) Don’t know you need to run payroll (lack of knowledge)
OR
B) Just want you to pay them to setup the S-Corp and aren’t concerned about how you operate it (not concerned with your future success or failure)
If you thought filing income taxes annually was an added layer of stress as a business owner, wait until you file quarterly and annual payroll tax filings such as Form 941 and 940. Not to mention State filing requirements that could be as frequent as monthly for unemployment tax. Additionally, the IRS has more authority to seize business and personal assets when payroll taxes remain unpaid or are considered late.
If a CPA only offers help setting up an S-Corp, but then doesn’t offer to help with the actual payroll services you need to run afterward, that means they’re probably only interested in earning a quick buck by setting up the entity while leaving all the hard work up to you.
At ATBS, we help our clients set up entities (like S-Corps) but we also have payroll services to help our clients stay compliant with the IRS. We’re here to ensure our clients have all the help and resources they need to be successful. We don’t simply disappear after helping our owner-operator clients set up their desired business structure.
Mistake 3: CPA sets up a C-Corporation for a driver, usually in an attempt to avoid paying child support.
First things first, we know child support is a touchy subject for many adults. We also know that many adults - and many truck drivers - try hard to find ways to avoid paying child support. Whether that’s morally acceptable is a topic for a different conversation.
One of the ways people try to avoid paying child support is by setting up a C-Corporation for their business and then paying themselves as an employee of that corporation in an attempt to “shield” some of their income by holding it in the corporation vs. paying it to themselves via payroll.
Look, we aren’t lawyers. We aren’t here to talk about the specifics of this or give legal advice, but in practice, we have seen driver... after driver... after driver... fail to make this approach work to avoid paying child support. There are many reasons why this approach fails, and any CPA who would recommend a strategy like this is either misinformed or they’re just trying to get extra money out of you.
And, to make this even worse for drivers who are conned into trying it out, it’s extremely expensive. You have annual State fees, additional tax filing fees, payroll fees, and finally, a C-Corporation means you’ll face double taxation!!
Any CPA who would recommend a C-Corporation for an owner-operator as a business structure - especially as a way to avoid paying child support - isn’t doing you any favors. In nearly every situation, it’s a waste of time, money, and mental effort. This is another big red flag if you have a CPA recommending using a C-Corporation!
Mistake 4: CPA sets up an LLC for an owner-operator in a State they don’t live and file taxes in.
A single member, disregarded LLC is what’s called a “pass through” entity. This means the income you earn in the LLC passes through to you on your 1040 (tax return).
LLC’s can help offer you legal protection - again, we aren’t lawyers, so talk to an attorney if you need help with risk/liability management! - but they offer no taxable benefit, because they’re a pass through entity.
Sometimes - and it can be hard to believe that a tax professional would make this mistake, but they do - a CPA will set up an LLC for an owner-operator in a State that has no State income tax, thinking their client will then avoid paying income taxes.
Sadly, this doesn’t provide any benefit because your income passes through to you and you end up paying taxes in the State you live and file taxes in anyway!
So, instead, you now have:
No taxable benefits
Extra costs!
Every year you’re going to file an annual fee to the State you have your LLC in, you’ll pay EXTRA fees because it’s considered a “foreign” business entity in that State, and you’ll most likely pay extra fees for someone in that State to be an “agent” for your foreign business entity as well.
In the vast majority of situations, this decision by your CPA will result in extra costs with no benefits for your business. Unless your CPA can articulate a solid, beneficial reason for setting up an LLC for your business in a different State, we would recommend avoiding this from a tax standpoint since it provides you no benefit! If they can’t give you a clear explanation for doing this, it’s another red flag!
Mistake 5: CPA sets up a partnership for an owner-operator, but doesn’t tell them about operating agreements.
Many times, owner-operators want to go into business with another person as they get their business off the ground. This is perfectly reasonable and many people do this! However, there is one core mistake that CPAs make all the time with owner-operators when setting up partnerships for their clients:
They don’t explain the importance of Operating Agreements.
Again, we aren’t lawyers, but it’s common knowledge that an operating agreement is extremely important for your partnership or S-Corp.
An operating agreement outlines roles, responsibilities, and rights of the owners and manager of the partnership. It defines rules and regulations for governing the business, explains voting powers, and also outlines profit and loss distribution. Most important of all, it dictates the terms for a member exiting the business in the event a partner or shareholder wishes or is forced to exit the business.
You can do a simple Google search about the dangers of partnerships to learn about why so many of them fail - here are just a few of the common issues partners deal with on a daily basis:
One partner works hard, while the other is a ghost and does little to no work at all.
One partner tries to keep the business afloat, while the other starts a new venture with someone new and lets the existing business rot.
One person takes great care to keep their personal affairs in order, while the other has personal problems that ruin their ability to focus on the business at all.
One person is highly professional, while the other doesn’t care about professional image or the business’ brand whatsoever.
Beyond some of the things outlined above, which are “interpersonal” issues, there are more structural issues related to partnerships without an operating agreement as well, and these can have huge implications for your business finances.
For example, if there’s no operating agreement place, we’ve seen situations where one partner may remove all the funds from a business - without giving any funds to the other partner - and technically be within their rights to do so since it wasn’t explicitly laid out in legal terms how the profits would be shared via the operating agreement.
Again, we aren’t lawyers, so we can’t give you advice about how to establish the appropriate operating agreement. Just be sure to discuss this with your CPA and your attorney before you go the route of setting up a partnership. There’s an old phrase that’s a little tongue in cheek “The only ship that won’t sail is a partnership”. Challenges are bound to come up at some point and your rulebook for disputes and disagreements is the operating agreement.
If your CPA never mentions the importance of an operating agreement, that means they probably don’t understand the challenges of partnerships very well, which means they might be signing you up for a business structure that isn’t always a great fit. Do your research, this is another red flag!
Summary
At the end of the day, choosing the right business structure is obviously very important and is specific to a driver’s individual situation. But really, it’s not that hard to get it right! Do your research upfront, find a reliable source for legal and tax advice, and then find someone who knows trucking to set up the entity itself.
If your CPA steers you in the wrong direction regarding your business entity, that’s a sign of things to come. If they haven’t taken the time to understand the basics of business structure, that means they probably haven’t taken the time to understand the basics - and the complexities! - of taxes for your business either.
Check out our website to learn more about ATBS and how we help owner-operators manage their business and stay compliant with the IRS at the same time. We’d love to help you and your business if there’s a need!