As a truck owner, you are also a business owner. Federal law requires that you create an EIN for doing business as a truck owner. You’ll use the EIN when you file certain documents for government agencies, such as the tax form 2290 for heavy vehicle road use.
When you create your EIN, you will encounter a question asking what type of “legal structure” is requesting the EIN. Which one should you choose? While you may be a business or lawyer in your spare time when not driving your truck, chances are you may not be entirely familiar with the types of legal structures.
Let’s cover the main ones briefly here. Of course, we aren’t business or tax lawyers either, so if you need help determining which is right for you, please find an attorney or tax professional to help you.
Many owner/operators are sole proprietors. To be a sole proprietor, you do not have to do anything other than obtain your EIN. No paperwork, no legal fees to establish a legal entity, no stress over what type of business to be.
So why wouldn’t everyone do it this way? Sole proprietors remain personally liable for lawsuits files against their businesses. That means if you have an accident with a motorist, and they sue your business, they are really suing you. You may have insurance against that, but the possibility remains.
Also, sole proprietors pay taxes on the earnings from the business on their 1040, or personal tax form. You may find advantages in the other legal structures to minimize some of those taxes.
Limited Liability Company (LLC)
Another popular structure with owner/operators, the LLC creates a legal structure separate from the personal assets of the owner(s). LLCs also allow the debt from the business to be kept separate from personal obligations.
While that reduces the amount of stress you may have from fear of lawsuits or bankruptcy in your business harming your personal situation, the taxation remains similar to a sole proprietorship for a single owner. You may hear the term “disregarded entity” in this context. That means that the IRS “disregards” the LLC as separate from the owner for tax purposes, so the profit or losses of the business are the same as those of the owner.
In the case of partners forming an LLC together, the taxation will resemble that of a partnership (see below).
A partnership can be similar to either of the first two options above. You can enter into a partnership where each partner acts as a sole proprietor, or you can construct the partnership as an LLC.
Unless made under an LLC, a partnership does not provide relief from liability for lawsuits. The taxation of profits or losses goes on the 1040. Benefits of partnership include spreading some of the risk and combining the different skills of two or more owners to provide a better service or product to customers.
An S corporation has shareholders. Like an LLC, an S corporation is an independent legal structure separate from the shareholders to separate personal assets from business assets. Owners must still report their income from the S corporation on their individual taxes, but in this case that eliminates the need to report them at the corporate level, preventing double taxation.
There are also certain requirements to qualify as an S corporation:
- Be a domestic corporation.
- Have only allowable shareholders.
- Have no more than 100 shareholders.
- Have only one class of stock.
- Not be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations).
Additionally, S corporations are more formal in that they must hold annual meetings and report minutes from those meetings.
A C corporation shares similarities with an S corporation, but has a few important differences. There is no limit to the number of shareholders. The corporation also pays tax on the corporate profits, while shareholders pay tax on dividends or capital appreciation, should they sell their stock at a profit. Shareholder also may not deduct a loss based on their ownership of stock in a corporation that posts a loss.
A Word About Business Names
As you complete the process to receive your EIN, and choose the type of business, you will also have the chance to choose a Doing Business As name, also referred to as a DBA name. While this name remains attached to the EIN, it is important to note that it is NOT the legal name of the entity.
Should you create an EIN as a sole proprietor, your name is the legal name of the entity. If you go through an incorporation process, the name on your papers of incorporation is the legal entity name. Be sure to use the legal entity name when filing tax forms, such as the heavy vehicle highway use tax form 2290.
Choosing a type of business and obtaining an EIN are important steps in the formation of your business. Be sure to choose the right type for your situation, and don’t hesitate to seek professional advice or assistance as needed.