Do you wonder about the kind of impact an LLC business structure may have on your future trucking company?
After years of operation, an LLC still works fine for most truckers.
It is the most popular choice among trucking small business owners.
Below, I'll share what an LLC is and its advantages and disadvantages for truckers.
What is an LLC?
An LLC stands for "limited liability company".
In the US, this is a form of business structure for companies.
The main advantage for the trucking business is its limited liability feature that protects the owner's personal assets.
How much does an LLC cost for a trucking company?
The cost of an LLC depends on which state you form your LLC in. The primary cost of forming an LLC for your trucking company is the state filing fee. This fee ranges from $40 to $500 depending on your state.
For who an LLC is ideal?
The LLC benefit for truckers is its simplicity of operation.
An LLC formation doesn't have to host an annual meeting of stockholders, nor must they issue stock.
That is an ideal solution for many small trucking companies that count from 1 to 6 trucks in their fleet.
So, truckers who are independent contractors should consider registering themselves as an LLC.
LLC benefits for a trucking company
By starting an LLC for your trucking company, you can:
- Protect your savings, car, and house with limited liability protection
- Have more tax benefits and options
- Increase your business’s credibility
1. Limited Liability Protection
LLCs provide truckers owner-operators or independent contractors with limited liability protection.
What does that mean? You may ask.
In case your trucking business is sued or it defaults on a debt, your personal assets such as your car, house, or bank account remain protected.
In case of a lawsuit, due to injuring an employee who was doing his job or due to an accident where the company driver has hurt someone else or someone else's property.
Structuring your trucking company as an LLC limits the scope of the lawsuit to its business assets.
2. LLC tax benefits and options for a trucking company
By choosing an LLC for your business, a few specific situations impact how much money you pay IRS through taxes.
That doesn't mean that an LLC is a tax loophole.
LLCs have nothing to do with taxes in general.
As we mentioned above, LLCs are legal entities that protect you from personal liability in the event of a lawsuit.
For tax purposes, your LLC is viewed as a Sole Proprietorship or a Partnership.
In either case, it doesn't necessarily mean that you are evading taxes.
However, when stacked up against other entity types, there are ways that you can look at an LLC as a tax advantage.
With that said, let's have a look at the benefit of an LLC business structure.
2.1. Pass-through taxation
There are two types of taxes - pass-through taxation and double taxation.
Pass-through taxation means that all the money that your business receives is subject to taxation. Even if you did not pay yourself a dime from your business income, you will still be taxed on it.
Double taxation means that you are taxed twice.
First, your business is taxed on all income.
Secondly, when you are paid, you are also taxed on income that you take out of your business.
With that being said, a major benefit of LLCs is that it is taxed only once with pass-through taxation.
Let's say that you made $100,000 as an LLC. Your tax rate is 25%. Then you'd only pay $25,000 in taxes as an LLC.
On the other hand, let's say that you are a C Corporation and you made $100,000. In the case of C Corporation, your business will be taxed on that income first. Let's say the tax rate is 20%, which ends up being $20,000 in taxes.
But after that, you also pay taxes from what you pay yourself from your corporation.
So, let's say that you decided to pay yourself $50,000 in W2 Wages. And this puts you in a 20% tax bracket. This means that you'd have to pay an additional $10,000 in taxes from your personal income that you've taken out of your business.
In total, as a C Corporation, you'd have paid $30,000 in taxes whereas in an LLC, you'd pay $25,000 in taxes.
2.2. S-Corporation Election
Another tax benefit of LLCs is that you can elect to be taxed as an S-Corporation. S-Corporations are unique in that you don't have to pay self-employment taxes.
However, you have to pay yourself a reasonable salary AKA W2 Wage for the work that you perform.
Now, the taxes you pay on your W2 wages would typically be the same as you'd typically be about the same as you'd have paid a self-employment tax.
However, if your business earns over a reasonable salary for your own work then electing to file as an S-Corporation may be worth considering.
2.3. Tax Write-Offs
The next benefit of an LLC is the tax write-off.
This is a benefit for self-employed individuals who may not be writing-off everything related to their business like their home office expenses, business travel expenses, and other business-related expenses.
An LLC is typically considered separate from the owner as an individual. This means that your business finances are separate from personal expenses making it much easier to keep track of business expenses to deduct them from your tax return.
If you have a business bank account, you can categorize all of your business transactions so you can easily start deducting eligible expenses from your tax return.
2.4. Pass-through Tax Deductions
Generally, there is no difference in tax write-offs for an LLC versus another entity like a corporation.
However, LLCs are eligible for the 20% Pass-through Tax Deduction that was passed through the Jobs Act.
All Pass-through entity types, sole proprietors, partnerships, LLCs, and so on, can deduct up to 20% of their taxable income.
If you were preparing to file a tax return that would report a $100,000 in income, then this deduction would reduce your taxable income to $80,000.
If applicable, the $20,000 in savings makes up for thousands of dollars saved on your business tax return.
To better understand how the taxes work in the case of an LLC, I recommend you to watching the below video from the Business Finance Coach.
3. Credibility and name uniqueness
In trucking, credibility and trust play a key role in maintaining a business successful.
By simply forming an LLC, the trucking businesses gain consumer trust.
Informal business entities don’t have exclusive assumed business names and typically operate under the personal name(s) of their owner(s). That's why many consider an LLC being the best business structure for a trucking company.
For instance, if your name is Johnny Smith and you’re a trucker, your company’s name is also “Johnny Smith,” which isn’t a great name for a trucking business.
In this scenario, you could register a DBA (doing business as) name to give your business the ability to operate under an assumed business name, but DBAs have no exclusivity regarding their naming rights in many states.
This means that if another truck driver wants to use your DBA name as their own, they’re not only allowed to do so, but they can register a formal business entity with that name, preventing you from continuing to use your own assumed name.
With an LLC, you not only have the rights to exclusive use of a business name, but you will also have either the phrase “limited liability company” or the letters “LLC” in that business name.
This provides your business with a jolt of respectability because customers respect the professionalism displayed by an LLC. Also, they typically feel more comfortable writing checks to a business entity rather than to an individual.