LLC or not: A Rideshare Driver’s Dilemma


(Preet) #1

As a rideshare driver, you are now a business. By offering your car and your driving services, you have become a taxable service provider as well as a liable person. This liability is what stands behind the term LLC, Limited Liability Corporation. This article will review the pros and cons of opening an LLC for your rideshare operations.

The title is misleading, what we are going to discuss here are the different types of companies you can open to assure you pay fewer taxes and enjoy more financial options and business expansions.

Choosing your corporate framework

Three kinds of the corporate framework can suit a rideshare driver, and each one offers different levels of security:

  • Sole Proprietorship
  • Limited Liability Corporation (LLC)
  • S-Corporation

Sole Proprietorship
This type of framework is not a legal one, it just refers to you owning, and operating a business and that you are solely and personally responsible for all issues, problems and debts. Sole Proprietorship is the most straightforward entity to set up, but it will not separate your personal assets from your business and is not a stepping stone to increasing your business holdings. Having stated this, before you do decide to set up legal frameworks, you should start off as a sole proprietorship until you have decided to stay as a rideshare driver. Over 50% of all rideshare drivers stop working in this sector within 12 months.

The legal and tax implications of a sole proprietorship are:

  • Sole proprietorships are low cost and easy to set up.
  • You will need to apply for local business licenses; fees are usually low.
  • You will need to file a schedule C&SE in addition to your 1040, and you will be taxed upon filing your tax return on your income and losses.
  • While you may create a fictitious business name, your actual name is what counts.

The major drawbacks of working within a sole proprietorship framework are being held personally responsible for all debts and legal issues (lawsuits).

The upside of a personal proprietorship for the economically challenged individual is if you are poor the chances of being sued to lessen. The probability of this is due to the lawyers due-diligence research before placing a claim, if they don’t see where they can get money from, they will not sue. Although this doesn’t mean you won’t get sued; it just means that if you “hide” your assets wisely or if you don’t have any assets the chances of being sued are low.

LLC Limited Liability Corporation

An LLC is the preferred framework most service, and small to medium business prefer. Its kind of a hybrid, where it protects a corporation with the taxation type of a sole proprietorship.

Even though you will report all your income and losses on your income tax return forms, the LLC framework separates your business assets from your personal assets. Most LLC owners need to concern themselves with business loan debts since LLCs aren’t liable to get a business loan unless the owner offers personal fixed assets as a collateral value. The only way you are, as a rideshare driver protected in an LLC, is against liability claims. When sued during your business hours only your LLC assets will be liable, not your personal ones.

There are three divergences from the above liability rule:

  • Driving under the influence of alcohol or drugs or medication will open you up to personal liability.
  • Not having functioning seat belts when in an accident.
  • Performing any illegal/criminal activity while driving as a rideshare driver. (Don’t be a getaway driver!)

One final tip: don’t expect that once you are a formed LLC you cannot or will not be sued. The chances are that at any given point in time you will face this challenge. Sometimes incorrectly and sometimes rightfully sued, whatever the reason, expect that within every working year you will face legal actions, charges, and threats, its all part of the territory.

S-Corporation

An S-Corporation is similar to an LLC, It has pass-through taxation and is an LLC. Having stated this the real reason you might consider an S-Corporation is the fact that in an S-Corporation you can take a wage, be an employee of yourself which is a major tax benefit issue and here is why.

FICA taxes and all other benefits are applicable only to actual wages paid, so if you earn $90,000 per annum as a rideshare driver, you would best give yourself a $60,000 annual wage. You will only pay income taxes on the $60,000 wage. The remaining $30,000 are company income, and your CPA will teach you how to manage the money to minimize taxes. Business taxes, profit tax, and state taxes are paid on profit, but profit is a fluid amount, Expenses paid during the year, direct and indirect expenditure are all tax deductible, so in the right hands, that $30,000 will become much less for taxation purposes.

Deciding what to pay yourself as a wage and what to enjoy as company money, for fixed asset investments are best decided together with a professional and experienced CPA.

Conclusions

Deciding which corporate framework to pick is an issue of income and vision. How do you see your future? Pick a sole proprietorship if you are only going to be an occasional driver. If you are going to be an active driver, form an LLC. Pick an S-Corporation If you have plans on being a large income driver. Maybe, expanding your business model from driver to fleet owner. Perhaps setting up a car lease service for other drivers, and saving them the need to buy or lease their own car, charging them a monthly flat rate for a car you will own.


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