Continuing with this series, Part 9 discusses the various ways to structure your business for legal and tax purposes. We will provide brief introductions to each business form so you get an idea of what they are all about.
In part eight of this Business Planning for Successful Expediters series, we introduced something called “business form.” By business form, we do not mean a piece of paper with blanks to fill in. That would be A business form. We mean YOUR business form, the way your business is structured for legal and tax purposes. Here in part nine, we are picking up where we left off. If you missed part eight, it, and all other parts, are online at www.ExpediteNOW.com.
One driver might say her business is a sole proprietorship. Another may tell you he has a corporation. Still others may say they have a partnership or a limited liability company. All of these folks are talking about the kind of business form they have.
When your written business plan is complete, the business description section will state what your business form is. It will say whether your business is a sole proprietorship, partnership, corporation (of one kind or another), or limited liability company. And it will say it in an elegant fashion.
A single sentence might say something like, “ABC Expedite Services is a sole proprietorship based in Cleveland, Ohio, operated by John and Jane Doe.” The sentence is short, sweet and to the point. It also communicates a ton of information to people who will want to know what kind of business form you have.
The question is, what word should you use where “sole proprietorship” appears? Will your business plan say sole proprietorship, partnership, corporation or limited liability company? Which business form is best for you?
Entire books have been written on this topic. Discussions about the different kinds of business forms have helped many truckers pass hours of layover time at truck stops. We will not get that bogged down here. We won’t have to because our sample business plan is for a hypothetical one-truck expedite business.
For a number of reasons, some of them bad, most one-truck expediters, whether they drive team or solo, operate their businesses as sole proprietors. There are others that form partnerships, corporations or limited liability companies, but most run as sole proprietors. (Did you note the conflict? If a business is team operated, how can it be a sole proprietorship? Park that question for now. We will get back to it.)
We will provide brief introductions to each business form so you get an idea of what they are all about. We will also encourage you to consult a truck-smart attorney and accountant to help you through your business form decision.
Of the four types of business forms, the sole proprietorship is most common. This is not because many expediters think that sole proprietorship is the best business form for them. It is because many expediters do not think about business forms at all. Sole proprietorship is the default choice. It is the kind of business form you automatically have if you do not formally establish something else.
That does not mean that sole proprietorship is the wrong choice for you. It may very well be the right choice. But you won’t know for sure until you consider all the options.
So let’s begin there. What is a sole proprietorship anyway?
Imagine yourself sitting in your truck at a truck stop, passing time as you wait for a load offer. You see an expediter truck driving by. The codrivers appear to be a husband/wife team. If someone told you they had not established a partnership, corporation or limited liability company, you could safely conclude you just saw a sole proprietorship drive by.
Notice the difference between the words proprietor and proprietorship. The proprietor will be one of the two people in the truck. The proprietorship is the business itself. The business includes the income these folks produce with the truck, the expenses they must pay and certain assets like the truck they own and the computer they use.
Most proprietors (and all smart ones) establish a business name and accounts that are different than their own. John and Jane Doe might name their company Doe Expedite Services and open a bank account in that name. That helps them keep their business expenses separate from their personal expenses and makes bookkeeping easier.
Now, here’s that pesky problem again. Why do they call it a sole proprietorship when the business that just drove by is clearly a husband/wife endeavor? Does it have to be a SOLE proprietorship with only one person in charge? Or can it be a proprietorship with everything equally shared?
The answer is easy. There is no such thing as a proprietorship. There is only sole proprietorship. If you want to establish a business form with everything equally shared, it is done by forming a partnership, or a corporation or limited liability company where the charter documents spell out who owns what and who is responsible for what.
While there are many husband/wife or same-household teams running around in expediter trucks, and while both team members contribute equally to the business, and while the business income is equally shared, if the business is not otherwise formed, it is, by default, a sole proprietorship. One of the two team members will be recognized as the sole proprietor for tax and legal purposes, and that is that.
Stop here for a moment and check in with yourself. What thoughts are going through your mind? Take out a pen and paper and write them down.
Does what you read above match what you remember reading elsewhere? Did someone you trust tell you different? If you are in the business already, are you trying to remember what your accountant did to divide your sole proprietorship income between husband and wife? And what about those barking lawyers you hear on the radio saying you absolutely must set up a corporation or limited liability company?
One of the reasons expediters end up with the default business form choice, the sole proprietorship, is they don’t make the effort to think these issue through. And who can blame them? This is the kind of stuff that will make your head swim.
It can be scary too. If you talk to almost any truck driver about business form options, traffic accident and law suit scenarios quickly come up. They don’t mention it to scare you. They mention it because accident-related law suits scare most truck drivers.
Almost every day on the road, we see accidents being cleaned up. Many times a day, we take evasive action to avoid accidents. There is not a trucker out there that does not have a dozen of near-miss horror stories to tell. When truck drivers talk about traffic, they don’t speak of all the good drivers with whom they share the roads. They talk about the thousands of idiot drivers out there who are lucky to be alive, but are so blind to the hazards of driving that they don’t even know it.
Add to that the lawyers on TV seeking accident victims to represent in a law suit against the other party. Also add the billboards truckers see on the road; the ones where lawyers are advertising specifically for people who have been injured in an accident involving a truck.
The abstract concepts of business forms are enough to make your head swim. The liability and law suit issues can make your face tighten and stomach turn.
Troubled? We are not done yet. There is more. In addition to opening you up to or protecting you from liability, the business form you choose determines what kinds of taxes you pay and how you pay them.
Look at what we have touched on in just a few paragraphs: the business owner(s), how they are involved, their access to the income, their liability for expenses, legal liability in an accident, and the tax consequences of the business form decision you make (or don’t make). Remember, if you do not choose a business form for yourself, the choice is made for you.
There is no getting out of it. If you have a business, a business form choice will be made. Who makes the choice and why depends on how much control of the decision you take. Sadly, there are a bunch of expediters out there that have put no more thought into their business forms than some of those four-wheeler drivers put into their driving and the risks of the road.
Let’s go back to the sample sentence presented above. “ABC Expedite Services is a sole proprietorship based in Cleveland, Ohio, operated by John and Jane Doe.”
Can you see the advantages a written business plan provides? If John and Jane have a written business plan, they have probably considered their business form and made a careful choice. If they do not have a written business plan, the default choice of sole proprietorship is automatically made, which may expose them to risks and obligations they would rather do without, and that they may not even know about.
We are running out of space here in part nine. In part ten, we will provide a summary of the different kinds of business forms and explain why a one-truck expedite business owner(s) may choose or decline them.
For now, remember that this is a series of articles. We are taking business planning one step at a time. While it is easy to get distracted and discouraged by abstract concepts that seem to rise all at once, it is nothing you can’t handle.
Just take it one step at a time. You did exactly that a few moments ago. Do you remember the question about a team-driven truck and sole proprietorship? The question came up but we did not answer it right away. We parked it and returned to answer it later.
At another point in your reading, you stopped to check in with yourself. You wrote your thoughts on a piece of paper. When you do that, you are taking total control of your business planning process. When you write down a question or concern, you move it from inside your head onto a piece of paper. Once it is written down, you can park it to deal with it later.
As you write multiple items down, you not only clear your head, you can see on paper the things that matter most to you. With your unanswered questions and concerns written out, you can study and visit with others about the types of business forms. This will lead you toward the business form choice that is right for you.
But that is not the end of it. The next step is to consult a truck-wise attorney and accountant about business forms. There is a lot more to know about business forms than we will present in this series. Also note that as people’s businesses change, their business forms sometimes change too.
Lawyers and accountants meet many people with business form questions. Just as a truck engine mechanic can figure out an engine problem faster than you, lawyers and accountants have the tools and experience to quickly guide you through your business form decision. They know the law. They know the tax rules. They know other truckers and their business form choices. If you tell your attorney and accountant what you are trying to accomplish and what you wish to avoid, they can help you make the right business form choice.
The more familiar you are with the various types of business forms, and the pros and cons of each, the easier it will be to discuss your situation and desires with the professionals. A business form summary for expediters is up next in part ten.
Phil Madsen is the senior field editor with ExpeditersOnline and Expedite NOW. He and his wife Diane are a straight-truck expediting team. In 2003 they left their white collar careers and became expediters to increase their income, simplify their lives, spend more time together, share a business project, and see the country. Phil can be reached at [email protected].
