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Incorporation: What an Owner-Operator Needs to Know

Updated: Apr 19

For an owner-operator who wants to grow a successful business, there are benefits to forming a Limited Liability Companies (LLC). An LLC can offer liability protection for the members. By forming an LLC the members may be protected from liabilities or judgments against the LLC, but should seek legal counsel based on their state. An LLC formed with only one member will be taxed as a sole proprietorship while LLCs formed with multiple members will be taxed as a partnership. Both options will avoid the double taxation attributed to a C-Corporation if you elect Corp Status at the state level.

A table showing how an LLC is beneficial

After forming an LLC, the business will have the option to be taxed as a C-Corporation, an S-Corporation, or neither and file as a Disregarded Entity, reported on a personal return Form Schedule C. By electing to be taxed as a C-Corporation the business would be required to pay corporate income taxes and the shareholders would be required to pay individual income taxes on the wages and dividends that are distributed by the business entity. This is known as “double taxation.”

A more common election for a trucking business may be for the owner(s) to elect to have the LLC taxed as an S-Corporation. The S-Corporation is considered a pass-through entity. The income is not taxed at the corporate level and the profits are distributed to the shareholders who pay the taxes at the individual level. The individuals are responsible for paying income taxes but they do not pay self-employment (social security and medicare) taxes on distributions. It’s important to note that S-Corporations are required to run regular payroll and pay themselves a W2 wage. This should be deemed a reasonable salary, which is usually 20-25% of the gross.

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Depending on the level of consistent income, it may be a tax advantage for an LLC to elect to be taxed as an S-Corporation. However, if that income level is not high enough, an LLC electing to be taxed as an S-Corporation may cost more than the savings received in taxes. A general rule of thumb that ATBS suggests is if the business will produce a net income of $80,000/year or more there may be some tax savings being taxed as an S-Corporation. This chart compares the taxes for an LLC taxed as a sole proprietorship and an LLC taxed as an S-Corporation:

A table comparing Sole Proprietor and S Corporation

Please keep in mind that there are additional costs to set up an S-Corporation, so if you are ready to consider incorporation, please give us a call at 866-920-2827. ATBS offers owner-operators Incorporation and Business services. ATBS clients made on average $64,000 net income in the past year, which is 30%+ more than the average driver in the industry. As the number one tax and accounting firm in the industry, ATBS provides turnkey services designed to improve your work and home life.

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