One of your choices as an Owner-Operator is whether to lease onto a carrier or have your own operating authority. If you would like your own operating authority, then one of the first decisions you will need to make is how to set up your business.
This article introduces you to the options for business structures that are available to you. It is important to note that each structure comes with many nuances and details that are not described in this article and must be considered during this process - especially as it relates to your individual situation.
The Importance of Business Structure
Choosing a business structure is an important decision that affects every aspect of your business. Your taxes, ability to raise capital, paperwork needed, and personal liability are just a few of the aspects that depend on it.
Below is an introduction to the five primary options for business structures, along with a high-level summary. For additional detail, it is recommended that you spend a considerable amount of time visiting the Small Business Administration's article to learn more about each option, the distinct advantages and disadvantages, and things to consider. It is also recommended you seek professional assistance from an attorney and an accountant throughout this process to ensure you're choosing the best structure for you and your business.
Options for Business Structures
You have several business structures from which to choose. The five primary options include:
- Sole proprietorship
- Partnership
- Limited Liability Corporation (LLC)
- Corporation - C Corp
- Corporation - S Corp
Each structure comes with different legal and financial considerations - things that can impact your liability and income.
1. Sole Proprietorship
With a sole proprietorship, you and your business are considered one entity. It is considered the simplest type of business to set up and operate. All finances -- profit and loss -- are filed as part of your personal taxes.
It can be advantageous in many circumstances because there is no double-taxation, as we'll learn can occur in a C Corp. Expenses can directly lower your taxable income. The primary drawback with this, especially for an owner-operator, involves liability. There is no liability shield to protect your personal assets.
2. Partnership
A partnership structure is an option if you're forming a business with one or more individuals. A partnership can be structured with different levels of liability.
In a partnership, "limiting liability" -- when it exists -- involves not being liable for the other partner's actions. Profits are generally passed through and paid on individual tax returns, which avoids double-taxation.
3. Limited Liability Corporation (LLC)
An LLC is somewhat of a hybrid between a partnership and a corporation. It allows a group of people to work together and have the profits or losses pass through to personal taxes (like a partnership) while shielding the members from having their personal assets at stake for the actions of the business (like a corporation). It involves much more complexity to set up than a sole proprietorship.
An LLC can be favored by those looking to limit their personal liability. It can also have an unlimited number of members (though it may have to be dissolved or reformed as members leave or join). Some states also limit its duration (the amount of time it can exist), although this is typically not a problem unless you pass the business on to your heirs.
4. Corporation - C Corp
The C Corp is the most formal business structure and requires quite a heavy lift to set up. It involves the most paperwork and creates an entity that is independent of its owner(s). The owners can potentially lose whatever they invested in the company, but no more. As a separate entity, it can issue stock, borrow money, and do other things such as pay taxes and file tax returns.
Being a separate entity and protecting personal liability is one advantage of the C Corp. The tax structure is one potential disadvantage because before any money earned is distributed (e.g., as dividends), the corporation first pays taxes. Then the individual who receives the distribution must pay taxes on what is received, thus the term double-taxation. There are ways to minimize this problem, and similar to each structure, your taxes will depend on your individual situation.
5. Corporation - S Corp
An S corp structure is similar to a C Corp in that it operates like a traditional corporation including liability protection. Still, it avoids double-taxation by passing the corporate income, losses, etc., to the owners. Certain criteria must be met to be eligible to set up an S Corp. A link is here.
One thing to note is that not all states treat the S corp the same way. Most states view it (and the associated taxes), as the federal government does. Some, however, make adjustments or treat it as a C corp for state tax purposes.
A Summary
Below is a summary from the Small Business Administration.
Choosing Your Business Structure
To learn more information about each option's individual and business considerations, it is worth spending some time on the Small Business Administration's Choose a Business Structure article. As a reminder, it is also recommended you seek professional assistance from an attorney and an accountant when determining the best structure for your business.
Your business structure will be indicative of many aspects of your business. While in some situations, it is possible to change your business structure as your business grows, it's important to remember the structure that you choose at the inception of your business is one that will set you up for utmost success.
As an Owner-Operator, you are the CEO of your own business. You have independence, control, and flexibility of the key day-to-day decisions, which translates into how much you're able to take home.
Other relevant articles:
Leasing with a Company Vs. Your Own Operating Authority: A Quick Guide for Owner-Ops
An Owner-Operator's Guide to Taxes
How to Become an Owner-Operator Without Going Broke
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