Dollars & Sense
To Incorporate or Not to Incorporate? A Brief, Incomplete Guide for the Beginning Expediter
The question of whether or not owner/operators should incorporate is a deeply important one to consider, especially when one is reasonably early in his or her trucking career. While itâ€™s certainly not a requirement for owner/operators to incorporate in any way, there are a number of advantages and protections that can be enjoyed when a driver that acts as an independent contractor incorporates, either as an LLC or a Corporation.
i should note that, for the sake of clarity, that in my opinion, itâ€™s pretty close to an imperative that owner/operators incorporate in one way or another--since youâ€™re entering the industry essentially as a business, it only makes sense that you actually are a business, in the legal sense.
The act of incorporation, in and of itself, really isnâ€™t that difficult a process. The nitty gritty details differ somewhat from state to state and, for many companies, are handled by legal representation and/or filing agents, but the central thrust of incorporating your trucking enterprise as a company is to fill out the required paperwork and to pay the required processing and filing fees.
Simply filling out the required forms and paying fees, however, is the thing that you do only after youâ€™ve thought out the whole of the thing. Beyond the decision of whether or not to incorporate in the first place (and again, you should really consider it), youâ€™ve got to consider the advantages/disadvantages of whether or not to incorporate as a sole proprietorship, a Limited Liability Corporation, or an Incorporation. These are the three basic structures youâ€™d be looking at as an owner/operator, and they all offer different features that you might find to be advantageous as an expediter working as an independent contractor.
This is the most popular structure of small businesses in the United States; itâ€™s often suggested that most small businesses, regardless of industry, start out as a sole proprietorship. The central reason for this is partially because thereâ€™s little cost, paperwork, or barrier to entry. Thereâ€™s also the ease with which profits are distributed: the owner gets it all. Simple, right? This isnâ€™t to say that there arenâ€™t disadvantages--especially for expediters.
In a sole proprietorship, the owner is liable for any and all debts against the business--which means that both your business and personal assets would be at stake when you owe on something. It can also be difficult to secure business loans, medical insurance is only partially tax-deductible, and the tax structures mirror that of standard income taxes (where corporate business taxes differ quite a bit). Additionally, it can be kind of a pain to convert your sole proprietorship to a corporation or a LLC if, say, someone wanted to enter into a partnership with you to start a fleet ownership or even a small carrier, for example.
A corporation is, legally speaking, an entity separate from the individual or individuals who own it. This means that a corporation exists separate from ownership and shareholders and still exists in the face of ownership changes.
All this means that there are some disadvantages to becoming a straight corporation for expediters--specifically, thereâ€™s a significant time commitment, as well as a financial one, when compared to other business structures. Along this line, itâ€™s pretty much the diametric opposite of the sole proprietorship. Thereâ€™s also the fact that youâ€™d be looking at shareholders and a board of directors, structurally, in order to be a legitimately constructed corporation. Too, thereâ€™s quite a bit of monitoring by state agencies in particular, and there may be continuing paperwork required in order to comply with your stateâ€™s regulations.
Many of the advantages of a corporation donâ€™t really apply to the life of an expediter; they generally tend towards limiting the liability and accountability of shareholders and offer the option to sell shares of stock in the company. The one appeal, I think, to owner/operators and/or fleet owners, would be that a corporation can deduct the cost of the benefits it offers to employees.
In short, I donâ€™t know that I would personally recommend that an owner/operator seriously consider establishing a straight corporation. Iâ€™m quite a fan of the following structure, warts and all, really.
The Limited Liability Company(LLC)
The LLC has the liability features of a corporation--where ownershipâ€™s personal assets have limited application to business debts--as well as certain flexibility and tax efficiency that looks similar to, say, a partnership.
In an LLC, owners are â€œMembers,â€ and thereâ€™s a limited time duration on the registration that can be renewed when it expires. One rule that extends across states for LLCs is that they canâ€™t feature more than two of the characteristics of a corporation. Those are, in simple terms:
Limited asset liability; Corporate life continuity; Centralized management; and Ownership transferability.
Simply put, the disadvantages for expediters when it comes to registering as an LLC are few, in my humble opinion. The status offers you the flexibility of expansion, should you choose to go that route, as well as the separation of your personal income from the business profits, assets, and whatever potential losses may befall the business.
Too, there are some carriers that require incorporation of some variety for their drivers. The requirements, as far as Iâ€™m aware, vary from carrier to carrier and seem to do so according to size--and truth be told, if a carrier requires drivers to have a form of incorporation under their belts, itâ€™s for the protection of both parties. On the surface, this can seem to complicate a business relationship, but in the end, itâ€™ll only serve both parties well, as I see it.
All this said, the best place for you to go when getting into the deep details of structuring and registering your business as an owner/operator, as well as how your taxes will change--and they will--would be with both a tax professional and your own legal representation. By all means, you should take their advice above mine--but the advantage of using incorporation as a form of protection for your trucking life is definitely one that should be seriously considered.
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