When Should I Form an LLC for my Trucking Business?
Have you been in the trucking industry for awhile and are ready to go about starting your own business? Do you already have your own trucking business and want to know how or when you should form an LLC to protect yourself and your family? Have you already formed your own LLC, but you want to make sure you made the right choice?
Owning your own trucking business is rewarding but tough, and it comes with a lot of questions. So we went to Mark Slade at the South Dakota Small Business Development Center to ask for his advice! Keep reading to hear all about what he recommends.
What are my options?
There's a lot of obscure entity choices out there, but Slade said sole proprietorships/partnerships, corporations, and LLCs are the most common choices. He suggested that it is important to talk to a tax professional before you make your final choice. Talking to a professional will ensure that you have a firm understanding of how to do taxes and properly pay yourself; and it will help you understand your liability protection. To help you get started, Slade gave us some insight on what works best.
One option many owner-operators choose is a sole proprietorship, which is the simplest form of a business as it is not legally separate from you as an owner. Therefore you can simply withdraw money rather than issue yourself a paycheck. In a sole proprietorship the IRS taxes you based on your overall business profit.
Partnerships are essentially the same concept, just with multiple owners. And while these can be good ideas in some cases, Slade said they are not necessarily ideal for truckers as they provide no liability protection.
"If someone sues your business, they are in effect suing you personally," he said, "On the other hand, corporations are a separate legal entity which provides liability protection; in corporations, the owner is essentially another employee who gets a paycheck and W-2 for their personal tax returns and requires a 'Board of Directors,'" Slade said.
Limited Liability Corporations (LLC)
LLCs are a relatively new choice for business owners, as they were only invented in 1977; however, despite their novelty, LLCs became the most popular entity choice for new companies when they surpassed corporations in 2010, Slade said.
LLCs are state-created entities, so each individual state has some distinct differences in how they are governed. According to Slade, in South Dakota there can be as few or as many owners—or, if you want the technical term, members—as desired.
For many, the biggest draw to forming an LLC is the way in which they can be taxed. "Since the LLC is a state created entity and the IRS never created a tax return specific to the LLC when Wyoming invented it 41 years ago, the LLC owners can elect to file their company's taxes as either a corporation, as a sole-proprietorship, or as a partnership," Slade said.
Because LLCs provide owners with the same personal liability a corporation does and it also gives you the ability to file taxes in the way that works best for you, they're kind of the best of both worlds!
When should I make the jump?
Ultimately, you are the only one who knows when it is the right time to form an LLC. According to Slade, "Owners should take into account their perceived level of risk within the business as well as the amount of personal assets, such as their savings or equity in a home, that would be in jeopardy if they remain a Sole Proprietorship."
Because semi trucks create more liability risk than many other small business endeavors, Mark said if he were forming a trucking company, he'd form an LLC before actually starting the business. Especially because it might help simplify your taxes when it's time to file again.
A few other things Slade says to keep in mind:
- How many employees do you have or plan on hiring? Risk goes up the more people you have on the road, and unfortunately employees might not be as careful as you are.
- The legal costs are fairly minimal to form an LLC. It can be done for as little as $150, and will likely cost less than $1000 from start to finish if you get legal help. While it might take a while to save up, it's a small price to pay to sleep soundly at night knowing your home and family are safe!
- Remember that even if your form an LLC or corporation, it won't protect you from the bank if you get a loan. When you apply for a loan, lenders usually require a "Personal Guaranty" stating that if the LLC or corporation can't pay off the loan, the bank can pursue the owner for outstanding balances.
- Whatever you choose, don't forget to review your plans with a tax professional. While LLC's generally provide a nice blend of liability protection and ease of maintenance, it's always best to double check specific plans with somebody who works with small businesses, and trucking companies, for a living.
Thanks so much to Mark Slade for all of his helpful information on the best time to form and LLC! If you need extra help and coaching forming your small business in South Dakota , contact the Small Business Development Center.
Not ready to start your own business but still interested in the trucking industry? Click below and let's talk!