Owner Operators - Tax Tips

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Business Entities

By PBS Tax & Bookkeeping Service

There are several different types of business entities: Sole Proprietor, Partnership, Limited Liability Company, S Corporation and C Corporation. Owning your own trucking company--whether you operate as an owner-operator, operate with your own authority, or have one truck or a small fleet--entails making numerous business decisions. One of those decisions is choosing the right operating entity for your particular business situation, whether you're just starting out or meeting the needs of your changing operation. Here is a review of each business entity.

Sole Proprietor
A sole proprietorship is the most widely used form of operating entity in business. It is the simplest to form and operate. You need only one bank account, which means that you can mix your personal and business monies. However, we do not suggest that you do. We recommend that you maintain a separate bank account for the business. Bookkeeping is simple in that you only have to record your income and expenses. You do not have to account for your assets or liabilities. As far as the owner-operator is concerned, he must keep track of the money received and all of his expenses in connection with the business. Only one income tax return is required when operating as a sole proprietor. The income from your business is reported on your personal tax return Form 1040 on a Schedule C - Profit or Loss of Business. There are no payroll requirements for the owners of a sole proprietorship since they simply write checks or withdraw money as needed. However, you will need to make estimated tax payments in order to prevent penalties and interest.

Partnership
Another form of business operating entity is the partnership. The partnership has two or more owners. They do not have to be equal nor do they have to share equally in the profits. The partnership is a separate entity and needs its own bank account. The bookkeeping requirements are more complex than those of a sole proprietorship but less stringent that those of a corporation. The partnership is required to file its own tax return, Form 1065. The income from a partnership is reported on a Schedule K-1 - Partner's Share of Income, Credits, Deductions, etc., and the information from that goes onto your individual return. There are no payroll requirements for the partners. The money is taken out as needed, which is known as partnership draw. Since there are no payroll requirements, you need to make estimated tax payments to prevent penalties and interest.

In a partnership, you are sharing the responsibility with someone else so you don't have 100% of the burden on your shoulders. Remember, you do have a partner and there can be differences of opinion concerning methods of operation. You should have a written partnership agreement.

LLC's - Limited Liability Companies
The LLC or Limited Liability Company is the newest type of business entity. It is referred to as a hybrid entity, offering the pass-through qualities of a partnership with the limited liability of a corporation. LLC's are formed under individual state law. In many states an LLC must have at least two members. A limited liability company with two or more members is treated like a partnership for IRS purposes. Like a partnership, the profit or loss from an LLC flows through to the members who report the profit or loss on their individual tax returns. The one person LLC may be treated like a sole proprietorship for tax purposes and file a Schedule C - Profit and Loss Statement as part of their individual tax return. The LLC can also elect to be taxed as a C Corporation by making a special election with the IRS. Unlike corporations, the LLC is not subject to the strict record keeping requirements corporations are.

Corporations
A corporation is a business entity that has its own legal status, separate from its owners. There are two types of corporations: the C Corporation and the S Corporation. The C Corporation pays tax on its profits. When shareholders take profits from the corporation, the distributions are taxed as dividends, which results in double taxation. A corporation may elect to be taxed as an S corporation by filing Form 2553 - Sub S Election. This election is only available to small domestic corporations with 75 or less shareholders and one class of stock. An S corporation is taxed in the same way as a partnership with the income and expenses flowing through to the shareholders. The employee/shareholders of an S or C corporation receive wages for services and these wages are subject to payroll tax and withholding. However, with an S corporation, additional profits are passed through to the shareholder and are taxable for income tax purposes but not for self-employment tax. Thus the S corporation avoids double taxation. For the average owner-operator or independent contractor, we feel the S corporation is a much better choice over the C Corporation.

A corporation is the most expensive, complex form of business operation with many mandatory legal requirements such as formal payroll, annual meetings and elections, strict record and bookkeeping requirements, and year-end corporate tax return. However, the additional costs of operating a corporation can be more than offset by its benefits if you meet the criteria.

With the many tax and legal implications of each type of business entity everyone should discuss the matter with both their accountant and attorney.

Everyone's financial situation is different. This article does not give and is not intended to give specific accounting and/or tax advice. Please consult with your own tax or accounting professional.

This article has been presented by PBS Tax & Bookkeeping Service, a company that has been providing income tax and bookkeeping services to the trucking industry for over a quarter century. Contributions to this article were made by Shasta May, Director Business Development for PBS. If you would like further information, please contact us at 800-697-5153. See our website at www.pbstax.com.