So you’ve been driving for a company for a while and are looking at branching out and becoming an owner operator. There will be many decisions to make when you start out on your own including if you will be operating as a sole proprietor/LLC or under the S-Corp business classification.
We are going to go over what each of them is, what some of their differences are, and what some of the pros and cons are for each one, to try and help you make the most informed and best decision for your business.
Please keep in mind that while we are working hard to provide you with the best information for your business it is important to consult with your trusted legal representative before making any final decisions on your business. Owning and operating a big rig comes with a very high amount of risk and liability and while there might be some basic information that works for everyone, each owner operator has unique needs, resources readily available to them, as well as demographically-specific rules for their business, and each of these needs to be considered when deciding how to run your business successfully.
What is the Difference Between a Sole Proprietorship/LLC and an S-Corp?
Before you can decide which option is best for you, it’s important to understand what each one is.
- Sole Proprietorship/LLC: Operating on your own as a sole proprietor or forming an LLC in a business name is one route you can take when becoming an owner operator. It is the easiest type of business to start, has the simplest paperwork, but carries the highest risk when things go wrong. However, it is imperative that you do form an LLC name to at least partially separate your personal name from your business name. LLCs can have as few or as many members as you want and they don’t have to be U.S Citizens.
- S-Corporation: An S-Corporation (the S stands for subchapter) is actually not a business entity but a tax classification that you can file under if you meet certain requirements. You would need to be making (on average) more than $70,000 a year, can not have more than 100 members, and every member must be a legal U.S. Citizen. The S-Corp comes with some great tax benefits, but also carries a lot of paperwork and specific rules to follow.
Pros and Cons of a Sole Proprietorship/LLC
- Simple. While there will always be paperwork involved in running a business when you form a sole proprietorship or LLC for your business it will come with the simplest paperwork and the least amount of restrictions.
- You can skip corporate business taxes.
- Your overall business costs will be lower.
- Some Owner Operators can file their taxes with their personal tax return by using 1099 instead of having to complete a separate one.
- If you happen to have a large claim under your LLC your personal assets could be included in the lawsuit as a member. (although not as exposed as if you run under your own personal name)
- Not able to have as many tax deductions.
- Having fewer restrictions also comes with fewer protections.
Pros and Cons of an S-Corp
- Typically not subject to income taxes.
- The owners are shareholders and separate from the business itself. (Can’t be directly sued for personal assets)
- Several options for different tax write-offs. Can also avoid double taxation.
- Can contribute more to retirement plans.
- Offers a higher level of protection.
- Very rigid rules to classify as an S-Corp and a lot of legal hoops to jump through.
- Higher overall costs for legal representation, paperwork, and accounting requirements.
- Must hold annual meetings (with a record of your minutes), have an organized structure of your company documented and all of your owners must be U.S. Citizens.
Which Type of Business Structure Should You Choose?
This is the part where you have to sit down and answer some questions about your personal situation to decide what type of business structure will work the best for you.
The simplistic design and low costs make the Sole Proprietorship/LLC a great starting point for your business. You do need to get with a tax professional that is familiar with the trucking industry to make sure that you are set up in the best way possible and that understands the best ways to help you throughout the year to set you up the best during tax season. Many drivers who have worked for a company and have always had that part taken care of by someone else can really get themselves into a bad situation by not investing in a professional. If you are a member of your LLC you have to pay self-employment taxes on all of your next profits, and if you haven’t prepared for that it could end up hitting you hard come tax season.
If you are looking at growing quickly in your business and know that you will be over that $70,000 average mark it could be worthwhile to look into the S-Corp business option. This gives a lot of options for putting back more money towards future retirement and although it does require more tax forms and set payroll systems, it could set you up in a good position going forward in your business.
It is also important to be familiar with your state rules as well as the other states you operate in when setting up your business to make sure you are set in all areas. This again is where a trained tax professional could really be worth their weight in gold for you and your business’s success.
No matter where you are in your trucking journey, Truckbase can help keep you organized, reduce office time and allow you to spend more of your time where it matters the most. Check out why Truckbase is the preferred lightweight TMS for owner operators by signing up for a trial today!