Jeff Welch of Portales, N.M., incorporated on the advice of his accountant. “I can’t really tell that it has helped me, but my accountant says it helps taxwise, and I know it takes some of the liability off you,” Welch says.
Brooks Mack of Cantonment, Fla., incorporated when he became an owner-operator in 2000. “My lawyer talked me into it. He said I should do it for tax reasons,” Mack says.
As Welch and Mack learned, liability and taxes are the two big issues that come up in discussions about incorporating your trucking business. Most lawyers and accountants specializing in trucking agree that the decision to incorporate depends on your individual case – particularly the size and type of your operation, your personal assets, and how much hassle you can handle. Before you choose to incorporate, you should talk to a lawyer, accountant, financial planner or business consultant – preferably more than one. Generally, the bigger and more successful your operation, the higher the likelihood that you could benefit from incorporating.
One-truck owner-operator or team
Chad Betland of Anoka, Minn., never looked into incorporating. “I probably should do it for certain purposes. I just haven’t had a chance to talk to my tax guy,” says Betland, who owns and operates one truck.
When Betland takes the time, he might find not all tax guys say the same thing. Rick Bell, president of Harvard Business Services, a Lewes, Del., company that helps people incorporate, says that a one-truck owner-operator should check whether he has substantial personal assets. “If you drive one truck and you’re breaking even, and you don’t own anything, you don’t really need to incorporate,” Bell says. “If you’re not making any money, you’re not going to save any on taxes.”
But Bell says there are other reasons to incorporate. “You get to pick a name, and that’s a benefit,” he says. “And there are some things that companies can deduct that individuals can’t.”
Kevin Rutherford, vice president of Whiteline Business & Financial Services in Orlando, Fla., says, “If there is only one truck and one driver, there is almost never a reason to incorporate.” That is, unless you’re bringing home more than $60,000 a year after expenses. “You might be able to save on self-employment taxes, but there are no clear guidelines on exactly how much you’ll save,” says Rutherford, who also operates a small fleet.
Rutherford also points out that the tax code eliminates the per diem meal allowance for corporation owners, meaning an owner-operator would have to save meal receipts and end up deducting the actual meal expense instead of the more generous per diem amount.
Bell says incorporation is a smart move because it shields your personal liability when you are at fault in an accident. “If you are an owner-operator who has not incorporated, you’re risking everything you’ve worked for every time you get behind the wheel,” Bell says.
Russell Fullingim of Truckers Financial Services in Corning, Calif., disagrees. “It doesn’t make a difference if you’re incorporated or not – you’re still going to lose everything.” He says there are only three reasons to incorporate: “Lawyers make more money, accountants make more money, and you have bragging rights in the truck stop.”
If you are in an accident and pulled into a lawsuit as a corporation, most of the time lawyers find reasons to throw the corporation out of court anyway, Rutherford says.
Another consideration is if you are leased or running on your own authority. If you are leased to a carrier, that carrier probably has $2 million in insurance on you, so if you are in an accident and someone sues you, the carrier’s insurance should cover that, Rutherford says. If you’re independent and you have the proper amount of insurance for your operation, incorporation probably won’t add much more protection.
Rutherford also warns that some companies specializing in incorporating owner-operators will say that incorporating protects from a credit liability. “They tell you that if you business starts to go bad, you won’t be held liable for the credit. But nobody will issue credit to a corporation that is that small,” Rutherford says. “You are going to have to sign for it personally, which makes you personally liable. Even after 10 years of establishing credit, no one would let me get away without signing personally.”
“Being incorporated may save $1,000 in taxes,” he says. “But how much does it cost to start the corporation, including state fees and paperwork; to run the corporation, including time and effort; and to file as a corporation, including the cost of your accountant?” Rutherford asks. “The increased cost of operating as a corporation may wipe out the money you saved. It changes on a case-by-case basis.”
You have multiple trucks, employees or subcontractors
B.J. McCabe, who has 10 trucks leased to Road Scholar Transport in Lynchburg, Va., and Dunmore, Pa., was told that incorporating was in his best interest. “I basically did it to protect myself,” McCabe says. “I was told that if a driver messed up, I was protected. If you didn’t have it, you would wish that you did.”
As with a one-truck operation, the carrier’s insurance is going to cover the truck you’re driving and any drivers or owner-operators who are subleased to you as long as they’re leased to any company. But if it’s your truck, you’re not driving it and it’s not leased, you are responsible for the insurance and the liability.
Ruben Wilson, who owns R.L.W. Trucking and has five trucks leased to West Coast Trucking, incorporated primarily for liability reasons. “I think it’s a good thing. I’m sorry I didn’t do it earlier,” Wilson says.
Fullingim says incorporating is the first thing you should do if you have more than one truck for liability and tax reasons. “I wouldn’t come close to having drivers and not incorporating.”
But Rutherford, who owns three trucks, isn’t incorporated. “I’ve studied this issue for years and years, and I haven’t found enough benefits to do it.”
Bell offers a creative way to incorporate if you have more than one truck. “You can form an entity, maybe an LLC [limited liability company], for each vehicle and create an operating company, maybe an S corporation, that each vehicle leases to,” Bell suggests. “That way, if one truck gets into an accident, that entity will be sued, but all the other trucks will be owned by other entities that have no connection with the lawsuit.”
Rutherford warns against taking this approach. “That sounds like an accounting and paperwork nightmare,” Rutherford says. “It might help on paper but not in the real world.”
Tina Ayres-Carr of Knoxville, Tenn., who used to have six trucks, suggests that everyone, small fleets and owner-operators, incorporate. “I didn’t incorporate, but I wish I had,” she says. “My personal assets weren’t protected, and I had to sell all of my trucks because I couldn’t afford them with fuel prices so high. My bills overwhelmed me, and I might be facing bankruptcy.”
But Rutherford says being incorporated would not have helped her. “She still would have had to sign for things personally. It wouldn’t have mattered either way,” Rutherford says. “If you can’t make enough money on your own, incorporating is not going to change anything.”
Choosing the right type of corporation
Basically, there are two kinds of corporation: limited liability company and C corporation.
Every company that incorporates at the state level is a C corporation. Because C corporations produce double taxation – after the corporation is taxed, owners are taxed on dividends and salary – you next fill out IRS Form 2553 to be taxed as an S corporation. That offers the limited liability of a C corporation without the double taxation. The owners are taxed only on personal income; net income is available for distribution among the shareholders. In a C corporation, dividend payments are taxed, but in an S corporation, they are not.
In other words, as an S corporation, you can split the company’s profits between your income and distribution. Out of your income, you have to take Social Security, Medicare and income taxes, but only income taxes come out of the distribution part.
So if your S corporation nets $60,000, you can pay yourself $30,000, from which you take out all the taxes, and distribute $30,000, from which you take out only income tax, saving yourself the Social Security and Medicare cuts.
What makes the most sense is to minimize your salary and maximize your distribution payments, thereby keeping taxes as low as possible. But Kevin Rutherford, with Whiteline Business & Financial Services, warns that what you declare as income has to be realistic. “You can’t work 250 days a year and only pay yourself $10,000,” he says. “About $30,000 is reasonable, and if your company only nets $30,000, then you can’t distribute any.”
Taking a broader view, make sure that the cost of incorporating, such as fees and paperwork, doesn’t eat up your tax savings.
An LLC offers benefits similar to those of an S corporation, such as liability protection for owners and no double taxation because profits pass through the owner’s personal income tax returns.