Setting up a corp. questions

[Super 8]

How are you guys set up? S Corp, LLC, Sole Proprietorship? I'm thinking S Corp, but I wanted to get some feedback from the O/O's.
Thanks

[Mackman]

Sole Proprietorship

[no_worries]

90% of one-truck O/O's (and 99% of new) won't benefit from doing something more complicated than a sole-proprietorship.

[Contractor]

I thought that setting up as an LLC gave you alot more protection against getting sued.

[GMAN]

You can always be sued personally. Whether a corporation or LLC will provide much protection depends on how it is set up and how you operate. It doesn't take much to pierce the corporate veil. I have always preferred a corporate structure. There are a number of reasons, taxes being one of them. Again, everyone's situation is different. You should sit down with a good CPA or corporate attorney and follow their advice. I would go to a corporate attorney rather than any other type of lawyer. Most will give you an hour of their time. Even if they charge, it should not be that much. An attorney would be able to tell you what is best in your circumstances. A CPA could advise you on the tax implications.

[no_worries]

You can always be sued personally. Whether a corporation or LLC will provide much protection depends on how it is set up and how you operate. It doesn't take much to pierce the corporate veil. I have always preferred a corporate structure. There are a number of reasons, taxes being one of them.

How does the setup affect the protection? With either of those entities the protection is the same; and if it's a one truck operation (owner driven) that protection is zero. Assuming that everything is done by the book, you have to reach approximately $60,000 net before realizing meaningful tax benefits from incorporating. Sadly, the vast majority of one truck operations aren't making those numbers. Until the operation is consistently hitting that threshold, incorporating is simply throwing money away.

[GMAN]

How does the setup affect the protection? With either of those entities the protection is the same; and if it's a one truck operation (owner driven) that protection is zero. Assuming that everything is done by the book, you have to reach approximately $60,000 net before realizing meaningful tax benefits from incorporating. Sadly, the vast majority of one truck operations aren't making those numbers. Until the operation is consistently hitting that threshold, incorporating is simply throwing money away.

From a personal protection standpoint, I don't know if one is better than the other. There isn't much difference between them. All of the structures will offer some level of protection. I received a call from a guy who works for a company that does Nevada corporations. According to him, a Nevada corporation will not allow the corporate veil to be penetrated. I have not researched it, but I have my doubts. If you mix corporate and personal funds the corporate veil could be penetrated.

It is sad to think that most owners don't net at least $60,000. I don't think that one would need to have that much income in order to have some tax benefits. You could have the corporation set up a 401k for you. You could pay yourself a small salary and have any profits be paid as dividends, avoiding Social Security or self employment tax, since Social Security is paid on wages. If you are a sole proprietor anything left over after expenses will likely be considered income and taxed accordingly.

There is no one size fits all when it comes to taxes, corporations, etc., The best thing to do is consult with a professional who can look at the individual's circumstances and advise them accordingly.

[no_worries]

The piercing of the corporate veil is irrelevant when it comes to a one truck operation. They sue the driver as an individual because he was operating the truck, along with the company. The corporate veil only serves a purpose when it's solely the company being sued. So long as the veil is intact, the owner's personal property is not subject to the suit.

It is indeed sad that most O/O's don't net more. But surely you'd agree that most of them end up making no more than they would as company drivers. ATBS and some others post numbers every once in awhile regarding income levels. A good percentage make less than they would as company drivers. Of course, most think they are doing better than they are because they don't understand proper accounting; they simply look at cash flow.

The analysis has been done many times regarding the threshold where meaningful tax benefits kick in. While they certainly result in a range, $60,000 is the most commonly cited number. Of course, this is assuming that everything complies with IRS guidelines. The biggest issue (and one you and I have argued before) is the salary level. If you gross $200,000 on 90-100,000 miles and try to pay yourself just $20,000 in salary, you'd have a hard time justifying that as reasonable in an audit. Of course, they have to audit you to catch you.

[Super 8]

Does anyone know if there are any advantages to setting up my wife as owner to have it certified as a woman owned business? I know if some fields there are some real advantages to that but I don't know about trucking.

[no_worries]

The only two direct benefits that I know of are SBA loans and bidding on government contracts. In those two situations, it can give you a leg up. If those two things aren't in your future, I wouldn't worry about it.

[GMAN]

The piercing of the corporate veil is irrelevant when it comes to a one truck operation. They sue the driver as an individual because he was operating the truck, along with the company. The corporate veil only serves a purpose when it's solely the company being sued. So long as the veil is intact, the owner's personal property is not subject to the suit.

Most lawyers will go after the easy money. That usually comes down to the insurance company. If negligence can be proven, then they could come after personal assets. While anyone can be sued, they may or may not be able to get a judgment. In any case, the corporate structure can give some personal protection.

It is indeed sad that most O/O's don't net more. But surely you'd agree that most of them end up making no more than they would as company drivers. ATBS and some others post numbers every once in awhile regarding income levels. A good percentage make less than they would as company drivers. Of course, most think they are doing better than they are because they don't understand proper accounting; they simply look at cash flow.

You are correct. Most think that just because they have a lot of cash flow that they are making money. As you and I know, you could be grossing millions of dollars and still be going bankrupt. Owner operators should find a good tax professional to help them do some tax planning and help lower their tax bite. It would be good to find someone who is experienced in this business. I would prefer someone local rather than one of the services such as ATBS, but that is only a personal preference. Having a good accounting program or spreadsheet to keep records up to date can also help. You don't even need to have software as long as you write everything down. I think those who have failed are most likely the ones who have kept poor records. They don't know that they are broke until it is too late.

The analysis has been done many times regarding the threshold where meaningful tax benefits kick in. While they certainly result in a range, $60,000 is the most commonly cited number. Of course, this is assuming that everything complies with IRS guidelines. The biggest issue (and one you and I have argued before) is the salary level. If you gross $200,000 on 90-100,000 miles and try to pay yourself just $20,000 in salary, you'd have a hard time justifying that as reasonable in an audit. Of course, they have to audit you to catch you.

As long as you pay yourself the equivalent of minimum wage, there isn't anything that they can really do. In fact, I am not sure that if you decided to pay yourself $1/yr that they could really do anything about it. They cannot dictate how you divide your income. You can pay yourself mostly in dividends and as long as your records are straight, you should have no trouble passing an audit. I know one guy who had several hundred thousand in annual income in his business. He paid himself $30,000/yr and the rest was either left in the corporation or paid as dividends. He has never had a problem. A low salary could peek their interest, but there is little they could do as long as the numbers add up. With a proprietorship, you have little choice. Everything that is left over after expenses is considered as wages and treated differently than a corporation. Under a corporation you could have the same money, pay yourself a low salary and the rest in dividends so that you will pay less taxes. A proprietor can really get ripped off when it comes to some taxes. Again, it is different with everyone. The best thing is to find a good corporate attorney or CPA that is familiar with this business and you can trust.

[no_worries]

Lawyers do not just go after the easy money; they go after ALL the money. If there is an incident, you, your company, your dog, and your neighbor will be named in the suit. If the jury awards an amount greater than your coverage, your assets are fair game. If the O/O is found negligent, no legal structure is going to protect his personal assets. Most people woefully misunderstand the legal process in these cases.

Was your friend ever audited? The fact is, you are required to pay yourself a REASONABLE salary. That is what the IRS guidelines state. What constitutes reasonable? They aren't going to tell you. If you get audited and they decide your salary is unreasonable, the burden is on you to prove otherwise. If you drive 70,000 miles a year, gross $150,000, and net $90,000, I'd love to hear the justification for a $20,000 salary being reasonable. This has always been the case but just like everything else regarding taxes, until the IRS pops somebody, they assume everything is fine. You're right, if somebody doesn't have the knowledge and experience to handle this stuff, they should find a CPA. This would make a good test question when screening your professional. If they tell you that it's legal to pay yourself a minimum salary...move on. No matter who does your tax filings, YOU are the responsible party.

As an aside; this particular issue has been flagged as being a high priority for auditors.

[rank]

i didn't comment at first because I am Canadian and the tax rules are different, but what the heck...there are similarities also so take these comments for what they are.

God forbid you kill someone but if you do, you can still be sued with an LLC. The purpose of an LLC is to limit the amount you lose when you go bankrupt. You can't lose more than what you put into the LLC.

IIRC, a Nevada corp....or was it a DE corp...not sure. Anyway, it offered protection because you don't have to name your shareholders. In other words, you can't sue people you don't know. I can't imagine this working but who knows.

We are a corp and the tax savings are huge. All taxable income under $300,000 is taxed at 18%. As a sole prop, anything over ~$40,000 gets you taxed at a marginal rate of ~40%. That is an insane amount of tax. But again...this is Canada.

[GMAN]

Lawyers do not just go after the easy money; they go after ALL the money. If there is an incident, you, your company, your dog, and your neighbor will be named in the suit. If the jury awards an amount greater than your coverage, your assets are fair game. If the O/O is found negligent, no legal structure is going to protect his personal assets. Most people woefully misunderstand the legal process in these cases.

Was your friend ever audited? The fact is, you are required to pay yourself a REASONABLE salary. That is what the IRS guidelines state. What constitutes reasonable? They aren't going to tell you. If you get audited and they decide your salary is unreasonable, the burden is on you to prove otherwise. If you drive 70,000 miles a year, gross $150,000, and net $90,000, I'd love to hear the justification for a $20,000 salary being reasonable. This has always been the case but just like everything else regarding taxes, until the IRS pops somebody, they assume everything is fine. You're right, if somebody doesn't have the knowledge and experience to handle this stuff, they should find a CPA. This would make a good test question when screening your professional. If they tell you that it's legal to pay yourself a minimum salary...move on. No matter who does your tax filings, YOU are the responsible party.

As an aside; this particular issue has been flagged as being a high priority for auditors.

You are right about the possibility of everyone and everything getting caught up in a lawsuit. People will sue at the drop of a hat. Still, a corporation does offer some protections.

I don't know if my friend was ever audited or not. Just because the IRS makes a statement or wants you to do something, doesn't necessarily mean that they can get their way. Some people are terrified of the IRS. The can be difficult to deal with on some issues. There are appeals and other remedies available to any abuses by the IRS. They cannot dictate how much you pay yourself or your employees as long as it is at or above the minimum wage. Since the trucking industry is not subject to the fair labor laws, I am not sure how they can determine what is a fair and reasonable wage. The IRS does have the advantage of being able to print their own money. It is always best to have a tax professional when it comes to dealing with the IRS. That is why I suggested that he check with a corporate attorney or CPA before making a decision as to how to best set up his new venture.

There are some things you can do to offset some taxes with a corporation. For instance, you could own your equipment personally and rent or lease it to your corporation. You could set up your own 401k, etc., A friend of mine recently went from a sole proprietorship to a LLC. He is saving some taxes with the new structure. He pays himself $2,000/month salary. Another advantage of having a corporation is that you can change your tax year. That could enable you to take advantage of new tax laws which could lower your tax liability. I don't know if you can change your tax year as a proprietorship. I once had a corporation that had a tax year which ended July 31. It saved some taxes when we made the change. There is no one size fits all. I have found the corporate structure works well for me and I pay lower taxes with that set up. It does offer some protections. You need to do what is best for your situation. There is no need to fear an audit as long as your records are up to date. I remember growing up my mother was audited in her business. They found that she actually over paid on some taxes and had to give her a refund. They never bothered her again.

[no_worries]

You are right about the possibility of everyone and everything getting caught up in a lawsuit. People will sue at the drop of a hat. Still, a corporation does offer some protections.

What protection does a corporation offer a single truck O/O involved in an accident?

I don't know if my friend was ever audited or not. Just because the IRS makes a statement or wants you to do something, doesn't necessarily mean that they can get their way. Some people are terrified of the IRS. The can be difficult to deal with on some issues. There are appeals and other remedies available to any abuses by the IRS. They cannot dictate how much you pay yourself or your employees as long as it is at or above the minimum wage. Since the trucking industry is not subject to the fair labor laws, I am not sure how they can determine what is a fair and reasonable wage.

That information is not hard to find:
The number one audit risk for S-Corporations and LLCs is salary and wages paid to officers or members...You don't have to pay yourself a high salary, but it must be a "reasonable amount" according to the IRS...Compensation of shareholder-employees should be based on the same criteria as salary for non-shareholders. Factors would include prevailing market rates; the individual's knowledge, skills, and abilities; amount of hours worked; and so forth. Salary is reasonable if a non-shareholder would be willing to accept the job at the proposed salary level.

The IRS does have the advantage of being able to print their own money.

How so? I think you've been listening to too much talk radio.

It is always best to have a tax professional when it comes to dealing with the IRS. That is why I suggested that he check with a corporate attorney or CPA before making a decision as to how to best set up his new venture.

Best leave it at that because the information that you're adding is incorrect.

There are some things you can do to offset some taxes with a corporation. For instance, you could own your equipment personally and rent or lease it to your corporation.

In which case you would have to pay personal income tax on the lease/rent income.

You could set up your own 401k, etc.,

Is that what you do? A 401(k) is generally the worst retirement vehicle for a small business or the self-employed. It has the highest fees and least flexibility of the available options.

A friend of mine recently went from a sole proprietorship to a LLC. He is saving some taxes with the new structure. He pays himself $2,000/month salary.

I would submit that if he is making substantially less than $60,000/year, either his tax savings are negligible or he was overpaying his taxes as a sole proprietor. These things have been worked out numerous times in the tax world. It's not a difficult analysis to do. Of course unscupulous tax professionals will tell you to incorporate. They make more on tax prep fees to prepare those documents and the average person has little chance of understanding all the details. Once the client has bought in, he's expecting to see some benefit. The pro starts massaging the numbers, like salary and dividends, to show a tax advantage. It's no risk to him, it's the client that is responsible in an audit. Besides, if there is an audit, the tax pro is likely to collect even more fees when the client hires him for the audit defense. I've seen dozens of situations just like this over the years.

Another advantage of having a corporation is that you can change your tax year. That could enable you to take advantage of new tax laws which could lower your tax liability. I don't know if you can change your tax year as a proprietorship. I once had a corporation that had a tax year which ended July 31. It saved some taxes when we made the change.

A sole proprietor can also choose a fiscal tax year; the advantage is negligible. You might plan the switch in a year that benefits you, but you can't go changing your tax year willy-nilly. A tax strategy built around this item would be faulty.

There is no one size fits all. I have found the corporate structure works well for me and I pay lower taxes with that set up.

Are you a one-truck O/O?

It does offer some protections. You need to do what is best for your situation.

Outside of the aforementioned BK protection (which is when the corporate veil is relevant) a corporation or LLC offers no tangible protections to a one-truck O/O.

There is no need to fear an audit as long as your records are up to date.

And you have correctly filed in the first place. If you are declaring items you aren't entitled to or understating your income your audit won't be pleasant.

I remember growing up my mother was audited in her business. They found that she actually over paid on some taxes and had to give her a refund. They never bothered her again.

We've all heard similar stories. Why do you think it's these kind of anecdotes that get told? Because they are not the norm. What this story proves is that your mother correctly filed her taxes. An audit doesn't mean you've done something wrong, it just means something doesn't look right. So long as everything is in order, it's nothing more than a nuisance; just like a DOT audit.

[wrongwayTommy]

I am set up as an S corp
that way I save thousands each year on self employment taxes
I pay myself 1000 each month salary which I pay payroll taxes on
then I write myself a check for shareholder distribution and do not pay taxes on it untill yrs end
I meet my accountant each march and file end of yr corp,company and personel taxes and usually have to pay a little but it saves me a lot

I used to be sole propietor and paid way too much self employment taxes-this is much better

a good slick lawyer will get around how you are set up and nail you anyway in all probability in case of a lawsuit so set it up to make all you can

[moe]

I was involved in a major lawsuit several years ago and was provided with a top notch law firm by my insurance co. I by way of soepena had to supply a complete list of my assets at the time of the accident(for the plaintiffs) My lawyers told me it didn't matter if I was a corp. or s/p the plaintiffs could take everything I owned, and that being incorporated offered protection under these circumstances was a common misnomer. Also, if I tried changing ownership or putting something in my children's name they would still take it if it was in my name at the time of the accident. Not only was I named in the suit, but my wife and the driver were also named. I don't want to drag this out but maybe I can enlighten others as to what can happen. Our truck was hit head on and the occupants of the other vehicle were killed. The Texas DPS found the other vehicles driver at fault, our drivers logs were good, the truck and driver were inspected the day before in a roadside insp. with no violations being found, all the marks left on the road indicated they crossed into my drivers lane. The report said they probably fell asleep, (DPS) had proof they had been driving all night, and still we were sued. Even the Texas State Police were our star witness. When plaintiff lawyers go after you it's not about right or wrong, it's about money and if they can make you look bad in front of a jury they can take your money. If they can show you run a loose or shoddy business or as they tried to do in my case, paint me as an outlaw, even if you are in the right they can get a jury to award money. Let me tell you,it's very scary when your looking at losing everything you ever worked for when you didn't even do anything wrong. Some time in the future if anyone is interested, I'll do a post about the court case, it would be long but maybe helpful as to what to do and not do to help protect yourself in the event of a major lawsuit.

[GMAN]

You should have filed suit against the plaintiffs. One reason we have so much litigation in this country is because insurance companies will often settle a case, even if they or their client are in the right, because it is less expensive to settle than litigate or defend themselves. I believe that if they stopped settling cases that they would eventually have fewer litigants.

[moe]

First of all I agree 100% with the fact that if insurance companies didn't settle so easily there wouldn't be as many lawsuits. These slimy ambulance chasers count on that. It's basically extortion. The insurance companies look at the numbers and go with the lowest. If that means selling you down the river so be it. Many times they can settle for far less than the cost of even preparing a court case. going to court is very expensive. Wrongful death is different though. The numbers run very high, in the millions, therefor it's cheaper to go to court unless you have no chance of winning and even then it maybe cheaper to let a jury decide, depending on what the plaintiffs are asking for. I have to say My insurance company was outstanding, giving me choices and deciding to fight the case based on the fact that we didn't do anything wrong and they thought they could win, or at least keep the numbers down. They go by not only the facts of the accident, but also things like your safety record(my saferstat record was excellent) and in office records. Things like a documented yearly safety meeting go a long way in front of a jury. I said before the plaintiff wanted to make us look like an outlaw outfit. Well our lawyers wanted us to come across as a mom and pop type operation, which we were, following all the rules and concerned with safety, We were operating 7 trucks at the time.(my wife and I). They also had not only our full cooperation, but also our desire to go to court and fight. ------As far as counter sueing goes, this is the tricky part. The two killed were Mexican citizens living in The USA. Working in the USA. Their car was registered and insured in the USA, they had the minimum insurance, which was depleted before the day was over. I tried to counter sue the plaintiffs(their family) but no lawyer would take the case, saying it would be impossible to collect therefor they wouldn't get their share and even if I paid the legal fees out of pocket I would be throwing my money away because they would just go back down into Mexico and I would never be able to collect anyway. When cross border trucking becomes a reality we are in for a very big surprise. Forget about them hurting rates or taking our jobs. Wait until you get hit by one of them and can't collect. Even if you got hit by a rich Mexican you couldn't touch them. I don't mean to sound prejudice, I'm not, that's just the way it is. IT's time our country stops worrying about everyone else in the world and pays a little more attention to her own people. Ron Paul

[GMAN]

It is good to hear that your insurance company was willing to fight rather than settle. I wish more insurance companies would do the same. I expect some major problems with the border is opened to Mexican carriers.