While being in the process of starting a trucking company, you have to choose the business structure for it.
Choosing the best business model for the trucking company serves as a foundation in place for future taxes and business liability.
The legal form under which you set up your business has a significant impact on:
- The way you run your operation.
- The cost of running the business.
- The way you pay taxes.
Each business structure model comes with different tax consequences. That's why you want to make your selection wisely when choosing the structure that matches your business needs.
Find below the what is the best business structure for a trucking company.
4 types of business structures
There are four main types of business structures and each with its tax implications and legal consideration:
In trucking, a sole-proprietorship is a business structure model that applies to an individual who runs his own business alone by owning and operating a truck.
In many states, if you drive solo on your own truck without going through the process of creating a business entity, the US Government by default classifies your business structure as sole-proprietorship.
The core characteristic of the sole proprietorship business model is that the owner is the business entity, which means that there is no separation between the individual and the business itself.
What does that mean for you as a trucker?
In a sole proprietorship, your liability is unlimited.
If you operate a commercial truck on your own then you put your assets at risk. The risk comes from satisfying a claim against you.
If your truck is involved in an accident, the company that you own might be sued.
And, if your company is found guilty of the accident, you may need to pay to cover the damage to the injured parties.
That means that your company and personal assets may be exposed to satisfy the settlement against your company.
Considering how many unfortunate events such as truck accidents happen, the sole proprietorship business model is not the best option to start a trucking company.
The tax aspects of a sole proprietorship are pleasing because the expenses and your income from the business are included on your income tax return.
An advantage of the sole proprietorship is that your business earnings are taxed only once, unlike other business structures.
When starting a trucking company, most owners choose the LLC business structure because it provides them with personal protection against financial losses and lawsuits by separating their personal assets from the actual business assets.
If the company is sued or declares bankruptcy, the business owner doesn't have to use their money or assets to fix the damages of the injured parties.
This is an essential advantage in an industry where a lot of things can go wrong.
In comparison with corporations, which also benefit from the limited liability feature, the LLCs are not subject to double taxation.
That means that if there is only one member/owner in the LLC then he is taxed the same way as a sole proprietorship unless he elects to be taxed as a Corporation.
For LLCs, there are no annual meeting requirements and they do not have shareholders.
A partnership is a business entity formed by two or more individuals who share ownership in a company.
The main benefit of a partnership is that you can partner with someone who can invest a significant amount of money into the business, which can be a real jump start for the business.
In a partnership business structure, the investors of the company share the profits and losses of the business altogether.
Partnerships don't pay income tax, each of the partners has to file with IRS and pay tax from profits depending on their agreement.
In a corporation, the owners are the shareholders. And the shareholders of a corporation are separate from the business itself and cannot be directly sued for personal assets.
This provides significant protection for a trucking company where a lawsuit could trigger substantial losses.
For that reason, it could be a strong option for a trucking company, especially with a large fleet.
It is also complex and expensive to set up, and it requires the owners to comply with more tax requirements and regulations.
Corporations come with rigid and costly requirements including:
- Mandatory annual meetings with accurate records of the minutes.
- A well-documented organizational structure of the company.
- Thorough accounting requirements.
- Detailed legal requirements.
The main types of corporations are C-corporations and S-corporations.
- A C-corporation exists as a separate legal entity from its owners.
- A S-corporation may consist of up to 100 shareholders and functions in the same way as a partnership.
One of the advantages of a corporate structure is the ability to raise capital.
The entity can raise large amounts of capital by selling shares of stock to the public.
Also, the business structure comes with limited personal liability, offering the owners protection against debts, liabilities, and obligations of the business.