Starting a new job as an Uber or Lyft driver can be an exciting time, whether you’re driving full-time or as a profitable side hustle. However, many rideshare drivers can overlook the fact that they are now the owners of small businesses, and therefore they have some additional responsibilities beyond just signing up for Uber or Lyft.
One of the things you’ll need to figure out before you hit the road is which type of business structure you want to use to operate your rideshare. By default, every Lyft and Uber driver is a sole proprietor, but there are some distinct advantages to forming a limited liability company (LLC) that you should at least consider.
What is the difference between operating your rideshare business as a sole proprietor or an LLC? Which one is the preferred option for our readers? In this article, we’ll iron out all the details of rideshare LLC formation to determine whether it’s a good idea for you.
What Is a Sole Proprietorship?
To begin with, let’s briefly discuss the sole proprietorship and the LLC. Unlike most other American business structures ― like corporations, LLCs, etc. ― a sole proprietorship is not a legal entity or an incorporated business. In fact, a sole proprietor isn’t even a distinct entity from its owner as an individual, and it can be operated under the owner’s name.
The main reason sole proprietorships are so popular is the fact that there is no setup process, and there are no fees involved with starting or operating one. All you need to do to become a sole proprietor is merely start working!
With a sole proprietorship, there’s no need to file a business tax return, as any profits or losses are claimed on your personal return. As the sole proprietor, you can sign contracts using your own name, and customers can pay you by writing a check in your name too. Sole proprietors can also mix their personal and business assets as much as they want.
What Is an LLC?
A limited liability company mixes elements of sole proprietorships, general partnerships, and corporations, essentially giving entrepreneurs the best of these worlds. LLCs are typically taxed similarly to sole proprietorships and general partnerships, in that the owners include any company profits or losses into their personal returns — the LLC itself does not owe income taxes. An LLC may also elect to be taxed like a corporation, although this is not a very common option.
There are similarities to corporations too, especially when it comes to financial responsibilities. In an LLC, the owners or members are not usually personally accountable for the financial status of the business. This means that if someone sues your LLC, your personal assets are not at risk.
Should I Form an LLC or Operate as a Sole Proprietor?
There are advantages and disadvantages to either option, so we’ll do our best job to summarize the pros and cons that come with both of these business entity types. The advantages of the sole proprietorship start with the convenience factor.
The sole proprietorship doesn’t require any paperwork for formation or maintenance, and there are also no fees of any kind associated with operating one. You also won’t need to designate a registered agent for your business, and you’ll never need to file an annual report. You don’t even need to open a business bank account!
There’s definitely something to be said for the ease of operation that comes with a sole proprietorship, and for rideshare drivers without much money, the lack of formation fees is also a welcome attribute. However, this is where the advantages of a sole proprietorship end.
In our opinion, the best option for most of our readers will be to form an LLC for your rideshare business. If you are sued by a passenger — or if Lyft or Uber sued you for violating their terms of service — the LLC’s corporate veil would protect your personal assets.
This means that if your rideshare business is sued, your house, car, personal bank accounts, and other personal possessions would be safe, and your creditors could not pursue these assets. Instead, they would be limited to only the assets of your business.
A Word of Caution Regarding LLCs
Some resources on this topic (in fact, a very popular resource that will pop up near the top of any search result on rideshare LLCs) will tell you that you should opt for S corporation-style taxation for your rideshare LLCs. In theory, this allows you to save money on taxes by paying yourself only a portion of your business income, while leaving the rest of it in your business.
The reason this could theoretically help you lower your tax burden is that S corporations are partially exempt from self-employment taxes. This is the 15.3% tax rate that all self-employed Americans must pay in addition to their income taxes, as it encompasses both the employer and employee portions of Social Security and Medicare.
For example, let’s say that you earn $50,000 in a year driving for Uber or Lyft. You could pay yourself a $40,000 salary, and choose to leave the other $10,000 in your business bank account. In this scenario, that $10,000 would be exempt from self-employment tax.
However, there are a couple of major problems with this perspective. First off, if you pay fewer Social Security taxes today, then you will decrease the amount of Social Security payouts that you have access to in your retirement years.
Beyond that, there’s another issue, which is the matter of leaving that $10,000 as unearned income. If you’re operating a rideshare LLC, what expenses and business development plans do you actually have? What reason other than tax avoidance would you possibly have for leaving $10,000 in a separate business bank account?
In many LLCs, there is plenty of expansion potential and lots of business expenses, so investing $10,000 back into your business makes lots of sense. But in a rideshare LLC business, your only expense is your car, and unless you’re buying a new car for your Uber/Lyft career every year, there’s no logical reason not to pay yourself this money.
Furthermore, when you eventually pay yourself that other $10,000, you’ll need to pay self-employment taxes on it anyway. In our opinion, there’s not nearly enough upside to this option, especially because it will be patently obvious to the IRS that you’re trying to weasel your way out of paying your taxes, rather than investing in any legitimate business expenses.
In short, some other sites will tell you that this is a great idea that can save you thousands of dollars per year with very little risk. However, we strongly suggest that you talk to an accountant before you even consider decreasing your tax burden by electing S corporation tax status.
In addition, you should also keep in mind that the LLC won’t protect your personal assets in every possible situation. Specifically, if you commit negligent or fraudulent acts while operating your rideshare LLC, you can’t expect the corporate veil to protect your personal assets.
This means that if your car has broken parts that you fail to fix, and those parts result in an injury to a passenger, you will lose your limited liability protection. The same applies if you drive drunk or under the influence of drugs while working for Lyft or Uber.
The corporate veil does provide quite a robust safety net for LLC owners, but it’s certainly not foolproof.
Can I Hire Someone to Form My Rideshare LLC?
When forming an LLC for your Uber or Lyft business, you generally have three main options. You can form your own LLC using the DIY method, you can hire an attorney, or you can hire an online business formation service.
The DIY route can require quite a bit of effort, and if you’re not comfortable with the process, it can cause some undue stress. As for hiring a lawyer, we doubt many rideshare drivers can afford to spend the thousands of dollars it can cost for an attorney to form your business entity.
This leads us to the third option, hiring an online LLC service. There are dozens of reputable companies offering this service these days, and they can all save you a tremendous amount of money compared to an attorney. In addition, while these companies may not have as much expertise as an attorney does, they still provide a considerable amount of peace of mind compared to the DIY route.
If you want to take a look at the top options for online business formation services, head on over to our guide to the seven best LLC formation services available. In addition, we’ll briefly break down our top three options on this page. These are, in our opinion, the best options for business formation service:
- ZenBusiness ($39): ZenBusiness truly has it all. They provide complete LLC formation service along with a full year of registered agent service for one incredibly low rate, and they also have stellar customer feedback. It’s hard to go wrong with an offer like this.
- Northwest Registered Agent ($79): Northwest is a bit more expensive than ZenBusiness, but their industry-best registered agent service (included at no extra charge) includes local scanning of every document they receive on your behalf. They also have the best customer support available for LLC formation services. If you’re looking for more of a premium service, Northwest is an excellent choice.
- Incfile (FREE): Incfile has a business formation package that is free of charge, as long as you pay your own state fee. That’s obviously an enticing offer, especially when you consider that they also provide a year of registered agent. Throw in their strong customer feedback, and Incfile is an excellent choice for LLC formations.
Whether or not to form an LLC for your rideshare business isn’t an entirely black-and-white question. As with most business matters, there is some gray area with this question, and it’s hard for us to say that all of our readers should operate as LLCs or as sole proprietors.
However, for most of our readers, forming an LLC is the way to go. The way it limits your personal liability is more than enough to make it worthwhile, in our opinion. Operating as a sole proprietor puts your entire livelihood in jeopardy, and that’s just not worth it to us.
We hope this article helped you enhance your understanding of forming an LLC for rideshare businesses!