What are the most common business structures in trucking? What business structure should I choose? What’s the difference between business structures?
Types of business operations and business structure will determine how owners pay taxes, their ability to raise money, the types of paperwork they need to file, and the personal liability owners will have. Prior to registering a business with the state, or gaining a tax ID number, you will need to establish a business structure. It is important to choose a business structure carefully as there may be penalties or restrictions to changing structures.
Sole Proprietorships are easy to form and give owners complete control of their businesses. If owners do not register their business under any other structure, then it is assumed that the business is operating as a sole proprietor. Under a sole proprietor structure, business assets and liabilities are not separated from personal assets and liabilities, meaning that owners can be held liable for the debts and obligations of the business. Raising money can be difficult when operating a sole proprietorship because the owner cannot simply sell stock. Additionally, banks are reluctant to lend to sole proprietorships because there is no separation of business and personal liability. Sole Proprietorships are good options for business owners that want to test out their business idea before becoming a more formal business, or for businesses that are low risk.
Limited Liability Company
Limited Liability Company (LLC) business structures are flexible in allowing you to take advantage of both the corporation and partnership business structures. LLCs are hybrid entities that combine the characteristics of a corporation with those of a sole proprietorship or partnership. Typically, the IRS will treat an LLC as either a corporation, partnership, or as part of the LLC’s owner’s tax return, referring to it as a “disregarded entity”. An LLC with at least two members, for example, is classified as a partnership for federal income tax purposes. Profits and losses are “passed through” to members, who report them on their individual tax returns. Owners of an LLC are called members. An LLC business structure will protect its owners from personal responsibility for the LLC’s debts and liabilities. In short, your personal assets like cars, homes, or savings are at limited risk should your LLC face bankruptcy or any lawsuits.
LLC businesses have limited lifespans in most states. In instances where a new member of the LLC is added or leaves, it is sometimes required that the LLC is dissolved entirely and reformed with the new membership. This can be bypassed if there is already an agreement in place within the LLC for buying, selling, and transferring ownership. The LLC business structure is optimal for medium to high-risk businesses, or in cases where owners have great amounts of personal assets they want to be protected. This option is also preferable to owners that want to pay a lower tax rate than corporations.
Partnership business structures are simple options for two or more people going into business together. The two types of partnerships are limited partnerships (LP) and limited liability partnerships (LLP or LLC). Under the Limited Partnership structure, there is one partner with unlimited liability, meaning they’re on the hook for all liability, and all other partners have limited liability. Partners with limited liability have less control over the business as part of the partnership agreement that all members signs. The primary difference between a partnership and an LLP or LLC is that an LLP separates the business assets of the company from the personal assets of the owners, insulating the owners from the LLP's debts and liabilities. In other words, LLPs are similar to limited partnerships; however, the LLP structure allows every owner to have limited liability. This means that, under an LLP, each owner is protected from debts against the LLP. They won’t be held personally responsible for the actions of the other owners. Partnership business structures are generally great options for businesses with multiple owners, professional groups (lawyers), and whenever a group wants to test their business idea before formalizing anything.
A Corporation, sometimes referred to as a C Corp, is a legal entity that is separate from its owners. Thus, Corporations can make a profit, be taxed, and be held liable for any legal issues. Corporations offer the highest protection from personal liability for owners, but the costs to start a corporation can be much higher than other business structures. Due to corporations having status as separate entities, extensive record keeping, standard operating practices, and regular reporting will be required to properly run the organization.
Corporations pay taxes on the income of their profits, unlike sole proprietorships, partnerships, and LLCs. There are cases where corporations can be taxed twice – when the company first makes a profit, and again when the corporation pays dividends to shareholders. Corporations also differ from other business structures because they have an independent life from their shareholders, meaning if a shareholder sells their shares or decides to leave, the corporation can continue to operate uninterrupted.
Corporations can take advantage of the ability to sell stock to quickly raise capital for funding operations, which is an added attraction for some employees. Corporations, like LLCs, are optimal for medium-to-high-risk businesses because of the personal liability protections they provide. Additionally, corporations make great choices for organizations that need to raise money or businesses that plan to go public and eventually be sold.
An S corporation, or S Corp, is a specific type of corporation that looks to avoid the double taxation of regular C corporations. S Corps allow profits, and some losses, to pass directly to the owner’s personal income without being subject to corporate tax rates.
Each State does not tax S Corps equally, but most states will recognize an S Corp the same way the federal government would and will tax the shareholders accordingly. Some states will tax S Corps on profits above a specified amount, however, there are some states that will not recognize an S corp at all, and will treat the organization as a C corp.
S Corps will have to file with the IRS to gain S corp status, which is a different process than registering with the state like with a C corp. There are limitations and eligibility requirements for S Corps that can be detailed further on the IRS website. Many of the strict filing requirements and operational processes of a C corp will be similar when developing an S corp. Similarly, S Corps are also viewed as having independent lives from shareholders, allowing the entity to operate uninterrupted when shareholders leave or sell shares. S Corps are good options for businesses that could otherwise be a C corp, but meet the criteria of becoming an S corp.
Benefit corporations, also known as B Corps, are for-profit corporations recognized by most states. B Corps differ from C Corps in their purpose, transparency, and accountability, but are still taxed in the same way. B Corps are social enterprises that maintain a clear social objective that serves as their primary mission or purpose. B Corps are held accountable by its stakeholders to produce a form of public benefit in addition to generating a profit. B Corps balance profit and purpose. They maximize profits while maximizing benefits to society and the environment. Profits are then used to support its operations as well as social programs that align with its primary mission and purpose. In some states, B Corps will be required to distribute annual reports that detail the public benefit they have created or their contribution to the public good. B Corp certifications are not required in states where the legal status is available, however, there are third-party services that will also certify B Corps.
There are two major choices when it comes to starting your professional driving career – starting your own trucking business or working as a company driver. There are multiple ways to start your trucking business with different levels of investment, risk, pay, and support. It should be clear by now that it takes a definitive plan.
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Soshaul Logistics LLC and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. It is meant to serve as a guide and information only and Soshaul Logistics, LLC - Copyright 2023 - does not assume responsibility for any omissions, errors, or ambiguity contained herein. You should consult your own tax, legal and accounting advisors before engaging in any transaction or operation.