Soon after entering the business, if not before, many expediters wonder if they should incorporate. Parts nine and 10 of this series discussed the various ways expediters can legally set up their businesses. While it may well be that you should establish a corporation or LLC at some point in your career, most expediters are sole proprietors. This part addresses business-form issues from the sole-proprietor's point of view.
Soon after entering the business, if not before, many expediters wonder if they should incorporate. Parts nine and 10 of this series discussed the various ways expediters can legally set up their businesses. While it may well be that you should establish a corporation or LLC at some point in your career, most expediters are sole proprietors. This part addresses business-form issues from the sole-proprietor’s point of view.
When people go into business, they choose one business form over all others because of the advantages that business form provides. If you read part 10, you saw how one form might provide a strong advantage but also carries an offsetting disadvantage. For example, a Subchapter S corporation provides certain liability protections that a sole proprietorship does not, but it is more complex to operate than a sole proprietorship.
Regular readers will recall that if you do not choose a business form, the choice is made for you. That is, if you do not formally establish a partnership, LLC or corporation of one kind or another, you are, by default, a sole proprietor. In that sense, sole proprietorship is the easiest choice. It may not be the best choice but it is the easiest.
The term sole proprietor refers to people who are self-employed. Unlike employees that have taxes deducted from their pay before they receive it, sole proprietors receive their pay before taxes are deducted. They are then responsible for paying estimated taxes on the income they receive. The difference is in how you earn your income and how the taxes are collected.
In expediting, one-truck owner-operators are generally self-employed individuals who contract with carriers and/or customers to transport expedited freight. By default, that makes them sole proprietors, unless they have established a different business form. The business-form issues sole proprietors should consider include the following.
Management
Whatever the business may be, large or small, someone makes the day-to-day management decisions. In a one-truck expedite business, the business owner, sole proprietor and person who makes the day-to-day management decisions are usually one and the same.
Say you wake up one morning in a truck stop and consider two choices. Do you drive across the street to get the truck washed, or get the oil changed first? You decide to change the oil because you know a run offer may come in soon. You know it is better to drive a dirty truck than run an engine with dirty oil.
Say you make a delivery and there are two truck stops, each 50 miles away, in opposite directions. One has good showers but no box or counter help for submitting your run paperwork before that week’s deadline. At the other, you can get your paperwork in but no shower. Do you go for the shower, and wait a week to collect your pay? Do you collect your pay so you can put the money to work sooner? Or do you do you do neither, wait for a run offer to tell you what direction you must go to pick up your next load, and save fuel by doing that?
It may sound funny to call these management decisions, but make no mistake, that is exactly what they are. Just because you do not have an LLC or corporation like some others may have, it makes you no less of a manager and no less responsible for the business decisions you make. No business form provides more freedom and control over the management decisions than the sole proprietorship.
Liability
Now let’s say you are having a great day. The weather is good. You had time to get both the oil change and truck wash done. You are now at a loading dock picking up a good-paying load. You watch the forklift driver load the last skid and return to the truck to pull forward and close your swing doors.
Now in the cab, you do not know the forklift lift driver loaded the wrong skids. Realizing his mistake, he starts to drive into the truck to remove the skids. You pull ahead. At that instant, the forklift driver drives into open space where the truck just was. The forklift crashes to the ground and the driver is critically injured.
The next few hours are hell. You watch the ambulance take the driver away and wonder how he will do. You think about his family. You endure hateful stares from the drivers co-workers. You see other drivers gathering in groups to gossip about what happened. Safety officials from the plant descend on the site with cameras, clipboards and questions you are not sure you should answer. Safety officials from your carrier talk to you on the phone. They order you to do this and that and have some of the same questions. You are sent to a clinic and give a urine and breath sample.
Finally, you get to drive away and be alone in the cab. What are your thoughts? What are your fears? What will you do next? Who do you call? What will you tell your family and friends?
No doubt, you will think about the kind of insurance you have or do not have. And you will wonder who will sue who over this? It is horrible enough that the forklift driver was critically injured. It makes it even worse when you have to worry about being sued, especially when you believe you did nothing wrong.
It is called legal liability. Under the law, how responsible are you for the injuries to the driver and damage to the forklift? How much money, if any, must you pay to make things right? Reducing your legal liability in a case like this is one of the biggest reasons expediters form corporations or limited liability companies (LLC).
Whatever kind of business form you have, the circumstances of the accident are the same. You pulled away from the dock at the same instant the forklift driver was driving ahead to enter the truck. What is different is how the damages from this accident can be assessed.
A sole proprietorship has unlimited liability. If it is determined that you were at fault in this accident and a court orders you to pay financial damages, money you saved in your business account for your new truck may be taken. So too with the money you may have saved for your kids’ college education. That new boat you just bought might be seized and sold to pay the damages. Even your truck may be lost because as a sole proprietor, your legal liability is unlimited.
With a corporation, liability is limited to the assets of the corporation. Your truck would likely be a corporate asset as would the money you have in your business accounts. While those assets may have to be forfeited to pay court-ordered damages, things like your boat or kids’ college funds are not corporate assets.
People who urge forming a corporation are quick to point out the unlimited liability disadvantages of sole proprietorships and the limited liability advantages of corporations. They are not incorrect, but they sometimes fail to tell the rest of the story, which is about something called “piercing the corporate veil.”
Piercing the corporate veil happens when the shareholders are held personally liable for the corporation’s liabilities. This can be especially significant for small business owners that choose a corporate business form.
In the above example, if you were incorporated, it was a corporate employee (you) driving a corporate asset (the truck), and it was a corporate officer (you again) making the business decisions that day. But it may still be you personally, and not the corporation, that is later found to be liable for damages.
Corporations are required to hold shareholder meetings and keep minutes of those meetings. To some small business owners, that seems ridiculous. One might reason that if you are the only shareholder, what difference does it make if you have a meeting with yourself? Why bother with writing corporate minutes since you are the only one who cares what those minutes say?
If a court learned you did not fulfill the corporate meeting obligations and did not keep records, it might rule that you have no corporation. The corporate veil would be pierced and you would be left holding the bag, just as a sole proprietor would.
This gets way more complicated than we can go into here, and we want to keep the focus on sole proprietors. In part 10, we said to discuss with your business form decision with your accountant and attorney. The above example shows why.
We are running out of space and will have to pick this up in the next edition. Yes, sole proprietors have unlimited liability. But there are things they can do to minimize their risks. We will discuss them in part 12.
