As a trucker choosing a business entity, you have a lot to consider. You may not be familiar with all the choices, but in this blog, we will cover some of the most common options.
The four most common types of business entities for owner-operators are:
- Sole proprietorship
- Limited liability companies (LLC)
- Corporations (C-corps)
The most common business entity that we see owner-operators and independent contractors set up is the LLC. Another common choice is a sole proprietorship.
What Should I Know About LLCs?
LLCs are directed at the state level — all 50 states have their own laws that mandate how LLCs operate.
However, the IRS, for federal tax purposes, does not recognize an LLC. So if you set up an LLC, you will also need to decide how you will be taxed. That can be as a partnership, an S-corp or it can be as a sole proprietor. Once you’ve made that determination, however, you can’t change it.
Since an LLC can be set up as a single-member or multi-member and you can have many members within that LLC, it's important to understand what a “member” means for your LLC. Unlike other types of business entities, truckers don’t have shareholders. You designate yourself a member, then you can also have managers who run or operate within the LLC but are non-owners.
When you set up your LLC, your state will ask questions as you go through their process. Your answers will go into determining how you will elect to file your taxes with the IRS code.
Renewing Your LLC
Once you establish your LLC with the state, you’ll have one year until you need to refile or renew. Sometimes that comes in the form of an annual report, sometimes it’s an actual tax filing, and other times it’s just paying a fee to renew.
At the Trucker CFO, we help owner-operators and independent contractors in any state understand what their responsibilities are in terms of annually refiling or renewing their LLC.
Advantages of Choosing an LLC
Forming an LLC has many advantages — most of them legal — including limited liability. So what does “limited liability” mean and how is it an advantage?
With a limited-liability company, you can separate your business assets from your personal assets. That’s important because if you are involved in an accident, for instance, you can separate your business assets from your personal assets. If there was a lawsuit, the plaintiff would not be able to come after your home, personal cash, and other assets that you might have such as vehicles.
Additionally, an LLC gives you a “continuous existence.” This means you can plan the transfer of your LLC to future generations of your family. You can also transfer the LLC in the form of a business cell. You can do many things with an LLC that you can’t do with a sole proprietorship.
An LLC also has some tax and legal advantages pertaining to raising capital. We always recommend that owner-operators and independent contractors looking to expand their business look into raising capital for the purchase of trucks, trailers, or additional assets that they may need.
The LLC provides a good structure to allow for that and creates some advantages from a tax perspective regarding any capital raised.
Disadvantages of Forming an LLC
The primary disadvantage with an LLC centers around the self-employment tax. Unless you elect for your LLC to file as an S-corp, your LLC will be subject to self-employment tax.
That’s essentially the way that you pay into Social Security and Medicare as an owner of the business entity. If you're a single member, your taxes will be filed on a Schedule C through your 1040. If you are a multi-member LLC, your taxes will be filed on a 1065 form, which is a partnership return. But with both those types of tax filings, you are subject to self-employment tax.
Those who have not been owner-operators or independent contractors before and are used to receiving a paycheck as a company driver have seen Social Security and Medicare deducted from their paychecks through the FICA line item. When you become self-employed, that self-employment tax replaces FICA.
The percentage you pay will be higher, however, because you are covering both the employee and employer. Previously, your employer paid a share of these taxes, but as an LLC, you must pay both parts. Owner-operators and independent contractors will see the self-employment tax as a separate line item on their tax returns. It will also be a consideration for their estimated quarterly taxes.
If you work with us, we’ll let you know what you need to pay to cover both income tax and self-employment tax.
The sole proprietorship is the simplest and most basic business entity. It does not require any state filings or anything specific that you have to do with the IRS, other than perhaps get a federal employment identification number.
Any business earnings you have as a self-employed individual under a sole proprietorship will be reported on your Schedule C and are deductible from your expenses. You will also be subject to the self-employment tax.
A sole proprietorship is the most common business entity because it doesn’t require anything. The important thing to note, however, is there is no liability protection. If you are sued, both your business and personal assets are at risk. This can be frightening, particularly in the trucking industry.
Because we live in a litigious society, we recommend that owner-operators set up a business entity that provides liability protection. Your expensive equipment needs to be protected, but you also have personal assets, and we want to protect them as well.
Does a Sole Proprietor Have to Pay Quarterly Taxes?
Any business that generates a profit is subject to quarterly taxes. As with any job, at the end of the year, if you have paid more than you owe, you will get a refund, and if you have not paid enough, you will have to make up the difference.
Husbands and wives have the option to establish an LLC as a single-member LLC, even though they are technically a partnership.
If they want to file as a partnership, they can, but that partnership means you have zero liability protection. If your operation has multiple individuals coming together to start a business, they will not have the liability protection that they would have from an LLC.
One of the advantages of a partnership is that it allows you to have partners who invest in your business but do not have a say in how it is run. Some states offer a limited liability limited partnership in which you can get some liability protection and still have the advantages that come with a partnership. But most truckers avoid the partnership election and just choose to go with an LLC.
A husband-and-wife partnership works well for separating the assets of the business between the individuals, and you can also include estate planning. However, as a husband and wife, you can also choose a single-member LLC and accomplish much of the same thing while avoiding some of the additional complications that come with needing to file a partnership return.
If you are a husband-and-wife team, we recommend that you talk to us about the advantages and disadvantages of choosing a partnership over an LLC. If you want to bring in multiple nonfamily business partners, talk to us about how to best set that entity up.
We recommend individuals looking to start their own business contact us to find out more about what situation will best set them up for success. We can talk to you about the pros and cons of different entities as they pertain to your specific situation. We want owner-operators and independent contractors to set themselves up for success, and many of these decisions surrounding a business entity play a big role in that.
If you have tax questions, need help deciding on a business entity, or need to file taxes, we are here for you. Click here to schedule a time to talk with a tax professional.