What is the Best Business Structure for a Trucking Company?

As an owner-operator, it’s critical to understand the business structure options available to you and when each is most appropriate for your business. The legal form under which you set up your business can have a significant impact on how you run your business, the costs of running your business, and how you are taxed.

Understanding the advantages, and disadvantages, of each entity is critical. The small differences in the way each entity is set up, managed, and taxed can make a huge difference to you and your business.

In this article, we’ll discuss the four most common ways for truck drivers to set up a business:

• Sole Proprietorship

• Partnership

• Corporation

• Limited Liability Company (LLC)

Sole Proprietorship

A sole proprietorship is a business generally owned by one person. Most owner-operators will start with this type of business.

Advantages: A sole proprietorship is the least expensive, easiest, and least regulated type of business structure. There is no formal setup and it begins when you start earning revenue as an owner-operator. In the eyes of the law, the owner of a sole proprietorship is the business, and the business is the owner. Since you and the business are one and the same, the business ends when you quit operating as an owner-operator.

Because of this, income taxes are fairly simple. The income and expenses from the business are included on your personal tax return. This means any business losses you suffer may offset the income you have earned from other sources.

Disadvantages: This form of business does not protect you personally from legal liability. However, carrying the proper insurance should protect you from significant losses in the event of accident liability. It’s important to note that debt incurred by the business is considered debt of the owner.

Sole proprietors also need to calculate how much self-employment tax they owe. They pay both employee and employer portions of employment taxes on your self-employed income, which can add up to a large amount depending on your net profit. In addition to paying annual self-employment taxes, you must make estimated tax payments if you expect to owe at least $1,000 in federal taxes for the year after deducting your withholding and credits.

Partnership

A partnership is similar to a sole proprietorship, but more than one person owns it. The individuals forming the partnership are taxed separately, as they would be if they were sole proprietors.

A partnership is easily formed, but a written operating agreement or partnership is strongly recommended to clearly outline the role of each partner and the distribution of profits and losses. It should also formally spell out how you and your partner/ partners will resolve conflict.

Advantages: Having access to extra start-up capital, gaining assistance or expertise in some aspect of your business, or having a co-driver who can help increase the miles driven.

Disadvantages: Like a sole proprietorship, the partners are not personally protected from legal liability. In addition, it’s important to remember that each partner is held personally liable for the actions of the others in the partnership.

Corporation

The corporate structure is more complex and expensive to set up than most other business structures. A corporation is an independent legal entity, separate from its owners, and requires complying with more regulations and tax requirements.

The biggest benefit for a business owner who decides to incorporate is the liability protection he or she receives. A corporation's debt is not considered that of its owners, so if you organize your business as a corporation, you are not putting your personal assets at risk. A corporation also can retain some of its profits without the owner paying taxes on them.

In a corporation, there are initial formation fees, filing fees, annual state fees (like filing annual reports and paying unemployment insurance), additional costs for filing a corporate tax return along with your personal tax return, and monthly fees for payroll and filing payroll taxes.

There are two main ways a corporation can be taxed at the federal level: C Corporations and S Corporations.

C Corporation

C Corporations are not recommended for owner-operator truck drivers due to the double tax on the business's earnings. Not only are C Corporations subject to corporate income tax, but any earnings distributed to shareholders in the form of dividends are taxed at individual tax rates on their personal income tax returns.

S Corporation

An S Corporation is created through a federal election using Form 2553. In short, an LLC or C Corporation would first be created and the Form 2553, currently filed with the IRS, would allow your business to be federally taxed as an S Corporation.

With an S Corporation, the driver is an employee and receives a salary from the corporation. The difference from a C Corporation is that the profits of the business are not subject to tax at the corporate level. Instead, all corporate profits and losses flow directly to the shareholders of the S Corporation and are included on the shareholder’s personal income tax return. Your corporate profits are taxed at the personal level. The result of all this is that you can distribute the profits of the S Corporation to yourself without having to pay taxes on them again, so there’s no double taxation.

Advantages: S Corporations give you the liability protection of a corporation without double taxation of a C Corporation. You will save money on taxes by not paying self-employment taxes (15.3%) on the net income of the S Corporation. However, you must make sure your net income is high enough to cover the extra costs and fees.

Disadvantages: There’s a lot of talk at the truck stop and on the radio about setting up a corporation, but it’s not as easy as it sounds. If you don’t strictly adhere to managing the corporation “by the rules” then a legal concept called “Piercing The Corporate Veil” can occur and you become personally liable for all activities of the business. This includes all debts, lawsuits, taxes, and penalties. “The Rules” include things like paying yourself payroll (including paying all State and Federal payroll taxes) on a regular and normal basis, maintaining a separate checking account for the business, electing officials, holding regular meetings, etc.

Following all the rules of being incorporated is extremely difficult and cumbersome. For most owner-operators, incorporating is not a good choice because the costs of incorporating are greater than the benefits of incorporating.

Limited Liability Company (LLC)

A limited liability company may offer benefits similar to a corporation. An LLC may offer the limited liability advantages of a corporation but has the tax benefits of a sole proprietor. Taxes for the LLC are prepared using a Schedule C on your personal tax return. This means there is no double taxation.

An LLC is simpler and more flexible than a corporation. Formal meetings, records, and many of the forms needed to create a corporation may not be required when setting up and operating an LLC.

Advantages: Taxes for the LLC may be prepared using a Schedule C on the individual’s personal tax return. This means double taxation is avoided. An LLC may also elect to be taxed as an S Corporation and receive tax benefits. The shareholders will report net income/losses using a Schedule E. However, an LLC generally does not have the same ongoing meeting requirements as corporations.

Disadvantages: Every state treats LLCs differently, which means that an LLC set up in one state may not provide liability protection in another.

What should you choose?

For the vast majority of owner-operators, it makes the most sense to be a sole proprietor. However, if you have a lot of personal assets that you feel you need to protect, the LLC is probably the next best choice.

Once an owner-operator starts making a net profit of around $85,000/year or more, it makes sense to form an LLC and elect to be taxed as an S Corporation so that you can save money on self-employment tax. Every case is unique, but at around $85,000 net income, an owner-operator can save around $4,200 in taxes by filing a corporate return. The additional costs for being incorporated are typically around $1,500 - $2,500.

To learn more about choosing a business structure for your trucking business, please call 866-920-2827 to speak with an ATBS enrollment specialist today or download our FREE ebook on Owner-Operator Incorporation.