Becoming an Owner\Operator
Choosing the Proper Entity
This is part four in a series of articles we are writing to help guide you
through the process of becoming an O\O. In parts one through three we covered
the first six steps. Just to jog your memory here they are again:
1) Decide what kind of operation you want.
2) Choose a carrier.
3) Spec your equipment.
4) Finance your equipment.
5) Choose insurance
6) Sign the contracts
The next topic we want to discuss is choosing the proper business entity.
Basically an entity is just the form under which you decide to operate your
business. There are several different forms or entities to pick from. Choosing
the correct one is important because it will determine many things down the
road. This is a decision that should be carefully thought out and planned.
There are important things to consider for both now and in the future. Many
factors are involved including taxes, legal issues, liability, personal
preferences and type of operation you plan to run. It is crucial for an Owner
Operator to consult with a tax and legal advisor to make sure his or her
business is set up properly. Following are the major forms of business entities
that an Owner Operator can choose from:
A. Sole Proprietorship
B. “C” Corporation
C. “S” Corporation
E. LLC or Limited Liability Company
A. Sole Proprietorship: This is the simplest and most common form of doing
business for an Owner Operator. It is also the form we recommend for most Owner
Operators. Most states have no legal filings to be treated as a sole
proprietorship you simply start doing business. However, if you are going to be
using a fictitious name it should be registered. Since this procedure varies
quite a bit for each state and county, we will just recommend that you start by
contacting your county court house. The main advantage in starting a sole
proprietorship is simplicity. Also, it is very easy to move from a sole
proprietorship to any of the other forms but it is not as easy to move the
other way. This form of business also makes tax reporting much simpler. A basic
federal 1040 return is prepared and attached to it will be a Schedule C which
is used to report your income and expense from the business. The tax return is
filed as usual by April 15th. As a sole propietor, every dollar you earn is
yours to spend as you wish. We do recommend getting a business checking account
just to keep your business expenses separate.
B. “C” Corporation: A corporation is a separate and legal entity that should be
set up and administered by an attorney. ‘C’ corporations have some tax
advantages at the higher income levels but most Owner Operators are not able to
take advantage of them. Most of the time when we question an Owner Operator
about why they are incorporated they really don’t know or sometimes it is for
the liability protection. We don’t think that a “C” corporation has very much
to offer an Owner Operator as far as liability is concerned. Corporations were
designed to protect the stockholders, not the officers, of a corporation from
personal liability. Proper insurance can serve the same purpose. Further note
that if the liability is a result of negligence, the corporate protection will
not be there for you. Most of our clients are leased to a carrier who maintains
more than adequate insurance and therefore may not need the liability
C. “S” Corporation: An “S” corporation is also a separate and legal entity but
has special rules that allow for flow-through taxes to the shareholder level. A
special election is required when forming an “S” corp. These rules may provide
some tax advantages for an Owner Operator by allowing the Owner Operator to
draw dividends as well as salary, thereby reducing self employment tax.
Corporations in general are more complicated entities and require proper set up
and handling. It is our belief that the added cost and paperwork of a
corporation cannot be justified for most Owner Operators. It should be further
noted that the IRS has been watching “S” corps more closely to determine if the
“S” status is being used to avoid self employment taxes.
D. Partnership: This entity is an association of two or more persons who, as
co-owners, intend to carry on a business for profit. This association does not
require a filing at the state level to be treated as a partnership, although
fictitious names should be registered as in the case of the sole
proprietorship. A partnership should be considered anytime there is going to be
more than one person involved in the ownership of the operation. However, it is
not required for a husband and wife situation.
E. Limited Liability Company (LLC): This is a new hybrid entity and all the
rules have not yet been worked out. In general, it combines the pass through
attributes of a partnership with the limited liability of a corporation. Stay
tuned to this issue. We will be hearing a lot more about this entity in the
future and we think this entity holds a lot of promise as a good choice for
Owner Operators. These are very general descriptions of the entities and are
only meant to familiarize you with the different forms of business available.
Every new business is unique and should be treated as such. Before making the
decision on how to structure your company take the time to talk it over with
your tax advisor. It will be worth it in the long run. Be sure to check in next
month as we continue the process with some ideas on putting together a winning
team and keeping good records.
This article has been researched and written by The Alliance, a company which
provides bookkeeping, tax planning and income tax preparation services along
with operating its own small fleet for 13 years. The Alliance deals exclusively
with O\O’s and drivers in the transportation industry. If you would like more
information about anything written here please contact Kevin Rutherford at
866-438-7825 or E-mail me Kevin@trucksuccess.com