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Tax Tips
Part 1: Going out on your own? What’s the best way to operate

Are you new to the trucking business? Are you switching from being a company driver to being an owner-operator or a contract driver? Are you an existing trucker who is concerned about how to organinze your business? In the past, we have discussed various operating entities, but we regularly receive questions on the topic.

To determine which is the most favorable company organization for you, a conversation with your tax adviser will usually suffice. To determine whether to incorporate usually entails a verbal consultation along with a tax projection. But the easiest and most common form to operate under is the sole proprietorship.

Now that you have made the decision to operate or are currently operating your own trucking company, you have to decide how to organize your business. 

Are you operating by yourself or are you going to have a partner? 

Do you need to be incorporated or does a sole proprietorship meet your needs? 

What about a limited liability company?

These types of entities are available to you.

Sole proprietorship
A sole proprietorship is the most widely used form of operating entity. It is the simplest and the easiest. You need only one bank account, which means that you can mix your personal and business dollars. However, we recommend that you have a separate business account.

There are no payroll requirements for the owners of a sole proprietorship since they simply write checks to themselves. This is known as owner’s draw. However, you will need to make estimated tax payments in order to prevent penalties and interest. When you purchase your equipment, it is written off through depreciation and is deducted on a Schedule C form.

There are several factors to consider before deciding to operate your own business without a partner. This is true for LLCs and corporations as well.

You could suffer illness or injuries, which could prevent you from bringing in an income. It would be difficult to find someone to take up the slack. You would probably have to hire a driver. To protect yourself against the occurrence of injury or illness, you should take out a disability insurance policy. You should also check out business interruption insurance because all responsibilities rest on your shoulders. As a sole operator, you are responsible for 100 percent of the decisions. You are in control.

Requirements of sole proprietorship
Bookkeeping for a sole proprietorship is simple in that you have to record only your income and expenses. You do not have to account for your assets or liabilities. As far as owner-operators are concerned, they must keep track of the money received and all expenses in connection with the business. The sole proprietor reports all business income and expenses on his/her personal tax return (1040-Individual Tax Return/Schedule C-Profit or Loss from Business.) Income taxes are to be paid quarterly.

Advantage of sole proprietorship
This is the simplest form of business operation with minimum legal restrictions. It’s easy to start up and discontinue.

Disadvantages of sole proprietorship
Unlimited liability. A sole proprietor is liable for all business debts and actions.

Partnership
Another form of business operating entity is the partnership. The partnership has two or more owners. Partners 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 than those of a corporation.

Like the sole proprietorship, there are no payroll requirements for the partners. The money is taken out as needed, which is also known as an owner’s draw. 

You still need to make estimated tax payments on your personal income tax return to prevent penalties and interest.

Operating as a partnership has some advantage over operating as a sole proprietorship, such as in the case of illness and injuries. If you suffer injury or illness, you then have a partner to help run the business. You should still purchase disability insurance. In a partnership, you are sharing the responsibility with someone else, so you don’t have 100 percent 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. This agreement should include details on how the profits are to be divided, the percentage of ownership and buyout provisions. Address the possibilities of long-term absences due to illness and injury.

Problems can also arise when one partner decides to leave the partnership. 

If one partner has a larger ownership interest than another – for example, 60 percent to 40 percent – the one with 60 percent then has the power to make all final decisions. 

It is important that issues be addressed with potential business partners. We recommend having an attorney draft all agreements.

Requirements of partnerships
Depending on the level of income and assets, a balance sheet may be required. Double-entry accounting is usually recommended for partnerships. A partnership tax return is filed. The partners are taxed on their share of partnership earnings on their personal income tax return.

Advantages of partnerships
A partnership can be a good way to combine the abilities of two or more individuals in one venture. You can benefit from the skills and business abilities of several people.

Disadvantages of partnerships
In a partnership, the general partners are liable for the actions of the other partners. Partnerships are often difficult to get out of.

This column is written by Howard Abrams and Barry Horwitz of PBS Tax & Bookkeeping Service. The firm has provided income tax and bookkeeping services to the trucking industry for more than a quarter century. Contributions to this article were made by Shasta May, director of business development for the firm. Visit www.pbstax.com for more information or call 1-800-697-5153.

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.

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