Identifying the best business structure is crucial if you’re looking to start a trucking business. Whether you’re planning to venture out as an independent owner-operator or a fleet owner, a good business structure provides the framework under which your trucking business should operate.

Below, we discuss the most common business structures for trucking companies and their advantages and disadvantages to help you choose the perfect setup for the type of trucking company you wish to start.

Common Business Structures for Trucking Companies

Some business structures are designed for small businesses, while others work well for established trucking companies with their own fleet. Here are the four most preferred business structures in the trucking industry:

Sole Proprietor

As a sole proprietor, you own and manage your trucking business entirely. This means you receive all profits but also bear full responsibility for debts and losses, as there’s no legal separation between you and the business.

Starting as a sole proprietorship is the simplest, quickest, and most cost-effective way to establish a trucking company with minimal government involvement. Typically, trucking businesses begin this way before considering other structures.

Setting up a sole proprietorship involves minimal paperwork and fees, often only requiring an operating license in some states. Tax obligations are straightforward, as you report income and expenses on personal tax returns and pay taxes on business profits.

Advantages Of A Sole Proprietorship

There are four primary advantages to sole proprietorships:

• Tax benefits: Sole proprietors are subject to one layer of income taxes. Some qualify for a 20% tax reduction following the tax break regulations outlined under 2017’s Tax Cuts And Jobs Act (TCJA). If qualified, you can deduct up to 20% of your taxable business income, helping you save your business profits.
• Simple tax process: With a sole proprietorship, filing your taxes is straightforward. Unlike other structures, where business entities need an Employer Identification Number (EIN), you can use your Social Security Number (SSN) to pay taxes.
• Easier banking: You don’t require a business checking account and can also use your personal bank account for business purposes.
• Easy to set up, run, and dismantle: Getting started with a sole proprietorship business structure is faster. You don’t have to handle a lot of paperwork. It’s also easier to manage your business as there are no ongoing official requirements, such as holding shareholder meetings or an election to vote for directors.
• Complete control: As the only owner, you have full authority over all decisions and processes. You don’t have to consult any other party as required in other business structure.

Disadvantages Of A Sole Proprietorship

• The business isn’t registered as a separate legal entity in a sole proprietorship. So, you don’t qualify for the legal protections registered businesses enjoy. And because you and your business operate as a single entity, creditors can seize your private assets to recover their money if you face serious business cash flow issues.
• Raising capital for a sole proprietorship can be challenging.

Partnerships

A partnership is an unincorporated business with two or more business owners. Parties sign a formal agreement to operate the trucking business as a team and split the profits. Since the business is unincorporated, it’s not a separate legal entity, so all owners and the business entity operate as one.

Two partnership types exist:

1. General partnership: All owners share financial and legal liability equally. Each partner is personally liable for debts and decisions made by others.
2. 2. Limited partnership: Comprising general partners who manage operations and limited partners, often investors, who have limited liability and minimal involvement in management.

Partnerships don’t pay income taxes; instead, partners report profits and losses on Form 1065 and pay taxes individually, including self-employment taxes based on their share of profits.

Advantages Of Partnerships

• The biggest advantage of partnerships is resource pooling. Partners can pool their capital and split purchase and overhead costs, thus reducing the financial load of starting a trucking company. They can also combine their knowledge and expertise to ensure the company succeeds.
• Few tax forms. Filing taxes in a partnership business structure is simple, as each partner reports the business’s profits and losses through their personal income tax returns. There’s no need to file business taxes.

Disadvantages Of Partnerships

• A partner who doesn’t pull their weight may bring additional liabilities and company debts, which all partners must pay.
• Business decisions require consensus, and the chances of disagreeing are high.
• Selling the business in the future might be difficult because it’ll require all partners to agree.

Corporations

Corporations differ from partnerships as they are legally distinct entities from their shareholders, offering government protection but with stringent regulation, making them complex to manage.

Operating a corporation entails extensive paperwork, record-keeping, tax compliance, and annual reporting, making it costly and less suitable for small businesses.

There are two main types of corporations: C corporations and S corporations.

C corporations can be closed or open, with limited liability and publicly traded stock.

S corporations are limited to 100 shareholders, issue only common stock, and offer liability protection with additional tax benefits. Profits and losses pass through to shareholders’ personal tax returns, avoiding double taxation associated with C corporations.

Advantages

• Liability protection. Because the company is an independent business entity, owners or shareholders aren’t liable for the company’s debts or wrongdoings. So you don’t risk your private assets. You won’t, for example, lose your private property if a company driver causes a fatal accident and the business cannot compensate victims.
• Quick capital. Corporations can raise funds fast by selling company stock or offering shares to employees. It’s easy for them to raise funds when in need.
• Business continuity. Both types of corporations allow simple ownership transfers. Shareholders can sell their shares if they want to leave the company, and business will continue without disruption.

Disadvantages

• Getting started is expensive
• There are strict regulations to follow. including holding annual meetings with properly recorded minutes, establishing a formal organizational structure, and conducting extensive accounting activities. These almost always require a tax professional.

Limited Liability Company

A Limited Liability Company (LLC) structure is one of the best business structures for independent contractors and small trucking companies. It combines the advantages of corporations and partnerships, offering business owners adequate liability protection, tax benefits, and operational flexibility.

An LLC protects your personal assets from the liabilities incurred by the company the same way a corporation does. But there are no strict rules to follow to run the business lawfully, as is the case for corporations. Also, unlike S corporations, LLCs can have more than 100 shareholders.

To set up an LLC correctly, you must file articles of your business’s associations in the Secretary of State office of the region you plan to operate in.

The Different LLCs for Transportation Businesses

Several types of LLCs exist to cater to various niches and operational models in the transportation industry, including:

1. Freight and logistics LLCs – specialize in moving goods and managing shipping, warehousing, and distribution logistics.
2. Passenger transport LLCs include companies involved in transporting people, such as taxis, ride-sharing services, and charter buses.
3. Specialty Transport LLCs cover trucking companies hauling specialized goods, including heavy equipment and hazardous materials
4. Vehicle rental and leasing. These LLCs include companies that rent or lease commercial vehicles to other entities, such as truck leasing businesses and car rental agencies.

Advantages Of LLCs

• Limited liability. Shareholders aren’t liable for the business’s shortcomings.
• Increased stakeholder participation. There’s no limit to the number of stakeholders who join an LLC.
• Pass-through taxation. Owners report the business’s profits and losses through their individual returns. There’s no paying corporate taxes.
• Flexible distribution of business profits. Profit distribution in an LLC can follow a shareholder’s contribution. Shareholders who contributed the most during the startup process can get more profits.

Disadvantages Of LLCs

• There’s lots of paperwork to fill out when starting, although it’s not as much as the paperwork required for setting up a corporation

Are You Required To Create a Business Entity for a Trucking Company?

You don’t need to set up a separate business entity to start your trucking company in several states.

However, without registering a business entity, the state automatically assumes you’re a sole proprietor, and there’s no distinction between you and the trucking business. As a result, you forfeit legal protection and put your private assets at risk.

It’s advisable to consider all the unexpected threats trucking businesses face when their trucks are on the road. So, you can carefully weigh whether you want to create a business entity to protect your personal assets or leave everything to chance.

Final Thoughts

If you’re thinking of starting a trucking company, it pays to invest enough time and effort in choosing the perfect business structure. It’ll make a difference in your business profits.

A few factors to consider when choosing a business structure include capital for investment, liabilities, tax obligations, flexibility, and the complexity of managing your business.

Once you’ve identified your business structure and are ready to execute your business plan, reach out to us. We’ll customize our commercial loans to your needs to help you purchase your first truck hassle-free.