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Choosing the best legal structure for a startup trucking business

Cashway Funding - The factoring company for trucking

by Cashway Web Team

November 8, 2024

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Find the best legal structure for your trucking company

Starting a trucking business requires careful consideration and planning, particularly when it comes to choosing the best legal structure to suit your business needs. Choosing the best legal structure can significantly impact your taxes, personal liability, operational flexibility and long-term business planning, so the time and resources you invest into making the right decision can benefit your trucking business for years to come. Here's a guide to help you begin navigating this business-critical decision.

IMPORTANT LEGAL DISCLAIMER- this article is not legal advice:  The materials on this website do not constitute legal advice, do not necessarily reflect the opinions of Cashway Funding or any of its OWNERS, employees AND/OR AFFILIATES, and are not in any way warranted or guaranteed to be LEGALLY ACCURATE, complete, up‐to‐date OR IN ANY WAY APPLICABLE TO A SPECIFIC BUSINESS SITUATION. Please consult with an attorney for legal advice.

Finding the best legal structure:  Evaluate these 5 key questions first

The best legal structure for one business may not be the same for another business, because the needs and objectives of one business may not be the same as another business. When selecting a legal structure for your trucking business, first consider your answers to the following:

Answer these key questions first:

  • To what extent do you need to protect your legal and financial liability?  Consulting with an insurance expert who has experience with trucking businesses can help you decide. 
  • What are the tax implications of the business model?  Do you want business profits & losses to be taxed on your individual tax return(s) or taxed at the corporate level?
  • What level of operational flexibility does the business require and will it change in the future as the business expands?
  • Consider any startup & maintenance expenses or costs and whether or not they will change over time?
  • Are there plans for expansion over time and on what scale?  Account for future growth potential and business succession plans.

Once you have developed clear positions with respect to your desired levels of liability exposure, tax protection, operational needs, expenses and long-term planning, the next step is to evaluate some of the more popular legal structures for trucking businesses. This will make it easier to choose the legal structure that best matches your objectives, and positions your trucking business for long-term success and worry-free compliance with IRS and state regulations.

Popular legal structures for trucking businesses

There are innumerable ways to customize the legal structure your business and the process can become extremely complex for some companies, especially larger ones.  Fortunately, most startup trucking companies are able to function and perform effectively using one of the following 5 structures (Sole Proprietorship, Partnership, Limited Liability Company (LLC), S-Corporation (S-Corp), C-Corporation (C-Corp)):

Sole Proprietorship

A sole proprietorship is the simplest business structure, ideal for smaller-scale and/or part-time owner-operators who have minimal concerns about legal liability or minimizing tax exposure.

  • -  Easy and inexpensive to form
    -  Single person has complete control over all business decisions
    -  Simple tax filing: Business income is reported on your personal tax return
  • -  No personal liability protection
    -  Limited ability to raise capital
    -  Potential risk of identity theft
  • -  Business income is reported on Schedule C of your personal tax return
    -  Owner is responsible for paying self-employment taxes
  • A sole proprietorship could be the best legal structure for an owner-operator with a single truck who is just starting out on a very small scale, or is doing occasional "side jobs" and is not overly concerned about legal or financial liability.  Similarly, a small proprietorship legal structure could be useful for a small or part-time local delivery service with a very small number of customers and minimal operations.

Partnership

Partnerships can be suitable for trucking businesses with multiple owners who want a flexible structure.

  • -  Easy to form and operate
    -  The financial burden is shared between the partners
    -  Pass-through taxation
  • -  Partners are personally liable for repayment of business debts
    -  Conflicts between partners can have detrimental effects on the business
    -  Typically requires a strong and detailed Partnership Agreement
  • -  Partnerships typically file an informational tax return (Form 1065), but profits & losses pass through to the partners' personal tax returns.
  • A Partnership could be the best legal structure for two friends or family members who are starting a trucking business together. Similarly, a small trucking business where one person handles driving/business operations and another handles accounting/administrative tasks could be an ideal candidate to become a legal Partnership.

Limited Liability Company (LLC)

LLCs offer an excellent balance of liability protection and operational flexibility, making them a very popular and common choice for trucking businesses of all sizes.

  • -  Personal asset protection
    -  Flexible and adaptable management structure
    -  Pass-through taxation (by default)
  • -  Can be more complex to form than sole proprietorships
    -  Cost to form a limited liability company (LLC) & maintain it can be higher than others
  • -  Single-member LLCs are taxed as sole proprietorships by default
    -  Multi-member LLCs can typically elect to be taxed as partnerships or corporations
  • A Limited Liability Company (LLC) could be the best legal structure for virtually any type of privately-owned, for-hire contract carrier trucking business.  The LLC has been the 'go-to' choice for thousands of small to mid-sized trucking companies for many years.  Family-owned trucking businesses who operate in multiple states with multiple trucks and/or drivers typically prefer to create an LLC, as well as owner-operator business owners who prefer the legal liability protection a Limited Liability Company offers.

S-Corporation (S-Corp)

S-Corporations can be advantageous for trucking businesses looking to minimize self-employment taxes.

  • - Limited liability protection
    - Pass-through taxation
    - Potential tax savings on self-employment taxes
  • - Rules and operational requirements for an S-Corp can be strict
    - Potential legal limitations on ownership structure
  • - S Corporations file a corporate tax return (Form 1120S), but income passes through to shareholders' personal tax returns.
    -  Owners can receive both salary and dividend distributions, potentially reducing self-employment tax liability.
  • An S-Corporation could be the best legal structure for a growing trucking business that is looking to minimize self-employment tax obligations.  Trucking companies with multiple shareholders who would prefer pass-through tax treatment and pay personal income taxes on only the distributions they receive from the business could also potentially benefit from the S-corp legal structure.

C-Corporation (C-Corp)

C-Corporations offer the strongest liability protection and are suitable for larger trucking operations or those planning significant growth.

  • - Limited liability protection
    - Easier to raise business capital
    - Unlimited growth potential
  • -  Potential for double taxation (corporate and personal level)
    -  Can be more complex and expensive to form and maintain
  • -  C-Corporations pay corporate income tax on profits. Shareholders also pay taxes on dividends received, resulting in potential double taxation for owners.
  • A C-Corporation (C-corp) could be the best legal structure for a trucking business that is planning for large-scale expansion and/or expects to seek significant outside investment. Companies who plan to operate internationally, solicit international customers and/or consider offering freight forwarding, customs brokerage or freight brokerage services could also consider using a C-corp legal structure for their business.

Legal and tax implications for your business can vary by State

The legal and tax implications of business structures can vary by state. Here are some key differences and considerations to keep in mind:

Formation costs

Some states are well-known for having business-friendly laws and lower formation costs, while others can be much more challenging for business owners. If you are starting a trucking business in a state that is less business-friendly, consider speaking with a business attorney about the potential benefits (and pitfalls) of registering your legal entity in a more business-friendly state.

Asset protection

States like Nevada and Wyoming have historically offered stronger asset protection laws for LLCs.

Ongoing fees

Some states have higher annual fees for maintaining certain business structures.

Tax rates

State corporate tax rates vary significantly. For example, while several states have no corporate income tax, others have historically imposed business tax rates approaching 10%.

Reporting requirements

Some states have more stringent reporting and compliance requirements for certain business structures.

Consult with a business attorney before making your decision

The best legal structure for any business will always depend on your individual needs and circumstances. Factors like size, liability concerns, tax implications, and growth plans all play a role in determining the optimal legal structure for a trucking business. Consult with a legal professional to determine the best legal structure for your circumstances.

Before speaking with a lawyer, take some time and prepare a few notes you can share during your consultation.  While it is true that you can always change your business structure as your trucking company grows and evolves, investing the time and effort to choose the right structure from the start can save you time, money, and potential legal and taxation headaches down the road.

By carefully considering these factors and consulting with professionals, you can select the legal structure that best positions your trucking business for long-term success and worry-free compliance with IRS and state regulations. 

Factoring invoices with Cashway Funding can help

Trucking business owners love factoring invoices with Cashway Funding.  If you are looking for a factoring company that understands the importance of legal compliance, asset protection and sound corporate governance, Cashway is for you!

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