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Choosing the right entity structure for your transportation business

One of the most important decisions you make for your transportation business is determining the legal entity structure because it directly impacts taxes and other liabilities. Choosing the right type of entity structure for your transportation business can be a complicated process. There are numerous factors going into making this decision.

It is critical to understand the business structure options available to you, the tax implications of each option and when each is most appropriate for your business. We provided a summary of the most common business structures a transportation business and the tax advantages and disadvantages of each.

Sole Proprietorship

This is one of the most common types of business entity structures. It is also the easiest to form and maintain, and offers complete managerial control to the owner. However, the owner is also personally liable for all financial obligations of the business.

  • Tax Advantages
    • Income and expenses are included on the 1040 so there is no separate form to file.
    • Business losses may offset other income earned on the 1040.
  • Tax Disadvantages
    • You pay both the employee and employer portions of employment taxes on your self-employed income. This is typically 15.3%.
    • It is unincorporated, which means there is no legal separation between you and your business. Since you are personally responsible for your business’ liabilities, your personal assets may be at risk.

Corporation

A corporation receives a certificate of incorporation and is considered legally separate from owners. It is the most complex and expensive entity to create and maintain, but it offers the most protection of all entities.

  • Tax Advantages
    • Owners avoid any personal liability and personal assets are not at risk.
    • Currently, corporations have a flat tax rate of 21%. This tax is paid at the corporate level, with no corporate tax paid by owners.
  • Tax Disadvantages
    • Any earnings distributed to shareholders are taxed at individual tax rates on the shareholder’s individual tax return. This leads to double taxation of the same earnings – once at the corporate level and again at the individual level.

S Corporation

One way to avoid the double taxation of a corporation is to elect to be taxed as an S Corporation.  An S Corporation has several appealing tax benefits and provides business owners with the liability protection of a corporation.

  • Tax Advantages
    • Income and losses are passed through to shareholders and included on their individual tax returns.  There is no tax paid at the corporate level.
    • An S Corporation may be eligible for a qualified business income deduction of up to 20% of qualified business income.
  • Tax Disadvantages
    • Since income is taxed at the individual level, the tax rate may be higher than the flat corporate tax rate of 21%.
    • S Corporation shareholders must be paid reasonable wages, which generally means wages are comparable to what would be paid to someone else to do the same job. This results in additional taxable income to the individual, plus an additional expense in the form of wages and payroll taxes for the corporation.

Limited Liability Company (LLC)

An LLC is a popular entity structure for small to medium-sized transportation businesses. It is a form of a partnership allowing owners to limit personal liabilities. LLCs were created to provide business owners with the liability protection that corporations benefit from, without the burden of double taxation.

  • Tax Advantages
    • Income and losses are passed through to the partners and included on their individual tax returns. There is no tax paid at the entity level.
    • An LLC may be eligible for a qualified business income deduction of up to 20% of qualified business income.
  • Tax Disadvantages
    • You pay BOTH the employee and employer portions of employment taxes on your self-employed income. This is typically 15.3%.

Questions?

There are several factors you should consider when selecting an entity structure for your transportation business – liability, tax implications, cost of formation and ongoing administration, flexibility and control. With the recent Tax Reform, taxation has been brought to the forefront in making and rethinking this decision for transportation business owners.

If you are planning to start a new transportation business, you will need to decide what type of entity structure you want. As discussed, there are several advantages and disadvantages to each entity so it is important you do your research and contact a professional with experience. If you are an established transportation business, the Smith Schafer team can analyze your situation, advise you on the advantages and disadvantages of each option and provide a structure analysis.

Partner with an experienced team of cpas to help you create saving opportunities both now and in the future. Contact us today to schedule a consultation about your transportation business.

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