Types of Business Ownership
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Let’s dive into each one to determine what might be the best fit for selecting a strong and secure type of business entity.
Sole Proprietorships
The name of this type of business ownership makes it pretty clear. Proprietorship means the state of owning a business. Sole means you are doing so alone. If you have the means and motivation to open a trucking business on your own, this could be a place to begin.
For income tax purposes, a sole proprietorship is the government’s default type of company if you have not taken steps to register in a particular state as one of the other types of business entities.
Partnerships
A partnership is a business relationship and entity formed by two or more individuals who share ownership in the company. In this type of business structure, multiple owners have invested in the business — very helpful for large assets like tractor-trailers — and they share the profits and losses (including lawsuit debts) of the business together, all depending on the type
of partnership they have set in motion.
The two most common types of partners in these entities include:
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General Partners – They manage the partnership and hold responsibility (liability) for the debts of the partnership
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Limited Partners – They invest in the business, but do not manage the business.
Partners in the company must report the profits and losses on each of their personal tax returns that get filed with IRS Form 1065.
Will A Partnership Be A Good Fit For My Trucking Company?
The real value of partnerships typically comes from more investor involvement. Pooling your resources, money, talent and profits and losses can be a real jump start to a major endeavor like starting a trucking company.
However, partnerships have a few glaring setbacks. Like an independent contractor and/or sole proprietor, a partnership does not separate you from your company. So when it comes to liability for unforeseen events like accidents, you are taking on the financial responsibility to pay for company debts, including lawsuits against the company.
And if those money damages cannot be recovered from the company assets, then the structure is set up so that they can collect from your personal assets, including homes in most states.
Although shared, that’s still a lot of risk for a handful of partners to take on.
Should the worst-case scenario come about, the personal lives they have built are not very well protected from loss.
Corporations (U.S.)
Traditional corporations are a real opportunity to separate the personal assets of the owner from the debts incurred by the business. For tax purposes, corporations pay according to their business profits. Corporations also can take on an unlimited number of shareholders who, as the word implies, “share” the profits of the company. By sharing the dividends, this often creates a healthy tax benefit for corporations. Corporations are also well established to receive funding from investors.
Keep in mind that corporations come with some fairly rigid and often costly requirements including:
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Mandatory annual meetings with accurate records of the minutes
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A well documented organizational structure of the company
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Thorough accounting requirements
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Detailed legal requirements
When it comes to the exact kind of corporation, beyond the traditional structure, the options grow into a handful of options including:
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C-Corporations – Profits are taxed separately from owners
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S-Corporations – Typically not subject to income taxes. Instead, profits and losses are passed through to the shareholders who report it on individual tax returns
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Professional Corporations – Professionals in a common field come together for this type of corporation, better thought of as a sub-category. A degree of liability often rests upon the owners for certain losses brought about by professional actions.
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Non-Profit Corporations – Typically tax-exempt on all funding. This is the route of setting up a business for education, or for philanthropy or even for the community.
Will A Corporation Be Right For My Trucking Company?
Though more difficult and expensive to establish, corporations provide significant legal benefits. In a corporation, the owners are the shareholders, and the shareholders of a corporation are separate from the business itself and cannot be directly sued for personal assets. This provides significant protection for a trucking company where a lawsuit could trigger substantial losses. For that reason, it could be a strong option for a trucking company, especially with a large fleet.
Limited Liability Company (LLC)
The LLC — meaning Limited Liability Company — brings together a combination of a corporation, sole proprietorship and partnership. The members of the company — the title given to owners — will file taxes similar to a partnership or sole proprietorship, listing the profits and losses of the business on their personal tax return. LLCs also have the option to tax themselves as a corporation.
Even an individual owner with no other partners can start an LLC. It’s very common for companies that started as sole proprietors to convert into an LLC. There are no annual meeting requirements for LLCs and they do not have shareholders.
Will An LLC. Be Right for My Trucking Company?
An LLC may provide the best initial route forward for a new trucking company.
Why? Well you certainly have a strong degree of flexibility on how you run your company, without the rigid structure of a corporation. But perhaps the greatest benefit that comes along with that flexibility is robust personal protection against losses and lawsuits.
The trucking industry, like all major industries, comes with risk. With all that legislators, truckers and organizations can do to reduce the number of accidents each year, things still do go wrong. And when that happens, protection of your (personal) assets becomes essential.