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Starting an LLC for Car DealershipsIf you own a car dealership, you’ve probably at least considered forming a limited liability company (LLC).

The LLC is a popular option for all sorts of businesses looking for asset protection, and it has a handful of other major advantages as well.

Of course, forming an LLC isn’t the only option for your dealership, so our mission is to help you decide if it’s the best choice for you.

There are many different factors to consider when you’re forming a business entity for your car dealership, so let’s dive into the details of the LLC to figure out if you should form one.

What Is an LLC?

First off, let’s quickly outline what an LLC is. LLCs are formal legal entities that 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.

Why Starting an LLC for a Car Dealership Is Important

The top reason to form an LLC for a car dealership is to gain access to the personal asset protection provided by this business structure. Whether you operate a small used-car lot with only a handful of vehicles or a large dealership with a broad selection of cars, you need the limited liability protections that an LLC can provide.

As an example, let’s say that you sell a customer a car with faulty parts. That customer drives off the lot, and the car breaks down in traffic and causes an accident. If you operate your dealership as a sole proprietorship or general partnership, your personal assets — like your house, car, personal bank accounts, etc. — would be at risk if that customer decides to sue your business.

On the other hand, if you form an LLC for your car dealership, and you operate and maintain that LLC in a compliant fashion, the scope of your customer’s lawsuit will be limited to your business assets. In other words, your personal assets will be protected by the business structure you’ve chosen.

However, this is just the tip of the iceberg when it comes to the advantages of the LLC for a car dealer. Another important aspect is taxation. The LLC actually provides its owners with a selection of options regarding how they want the business to be taxed, which can save you a considerable amount of money compared to simply operating as an informal business entity.

Your car dealership LLC can be taxed as a sole proprietorship (for single-member LLCs) or general partnership (for multi-member LLCs), which is the default option. With this tax structure, your dealership itself does not pay taxes, but rather the profits are passed through the business entity and your owners pay taxes on that money when they file their own personal taxes.

You can also choose for your dealership to be taxed as a C corporation, although this option isn’t very popular because it subjects your business to what’s known as double taxation — meaning that your profits are taxed first on the corporate level and again on the personal level when they’re distributed to your owners.

The other option is S corporation taxation. There are quite a few limitations to electing S corp taxation, but most car dealerships have no trouble meeting these requirements — your business cannot have more than 100 owners, they all must be either residents or citizens of the United States, etc.

S corp taxation can help your car dealership save money by reducing your self-employment tax burden. Instead of paying self-employment taxes (a 15.3% tax that includes the employer and employee portions of Medicare and Social Security) on all of your business income, you can pay yourself and your co-owners a reasonable salary for your roles and only pay self-employment tax on that portion of your income, while you can reinvest the rest of it into your business without paying this tax.

Compared to operating a sole proprietorship or general partnership as a car dealer, the S corp taxation model can save you quite a bit of cash that you can use to buy more cars and expand your operations, rather than writing a big check to Uncle Sam.

Finally, an LLC structure can enhance the credibility of your car dealership business venture. Informal business entities don’t have exclusive assumed business names and typically operate under the personal name(s) of their owner(s). For instance, if your name is Johnny Smith and you operate a sole proprietorship as a car dealer, your company’s name is also “Johnny Smith,” which obviously isn’t a great name for a dealership.

In this scenario, you could register a DBA (doing business as) name to give your business the ability to operate under an assumed business name, but DBAs have no exclusivity regarding their naming rights. This means that if another dealer wants to use your DBA name as their own, they’re not only allowed to do so, but they can actually register a formal business entity with that name, preventing you from continuing to use your own assumed name.

With an LLC, you not only have the rights to exclusive use of a business name, but you will also have either the phrase “limited liability company” or the letters “LLC” in that business name. This provides your business with a jolt of respectability because customers respect the professionalism displayed by an LLC. Also, they typically feel more comfortable writing checks to a business entity rather than to an individual.

How to Start a Car Dealership LLC

The formation process for LLCs varies depending on which state you’re forming one in, but in general, the process has some universal steps that need to be taken no matter what state your business is located in. If you want a comprehensive overview of all the steps required to form an LLC, check out our complete guide on the topic. The basic steps in the LLC formation process in any state are as follows:

The 3 Best LLC Services

When forming an LLC for your 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, many startups can’t 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.

Incfile ($0): 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.

Northwest Registered Agent ($225): 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.

Additional Resources for Starting a Car Dealership

  • Dealer Marketing Magazine: As you might expect, Dealer Marketing Magazine has all kinds of information for car dealers, but the page we’ve linked to is their “Top 10 Online Resources for Dealers” post. On this page, you’ll find training and education tools, along with information on industry regulations, technology and software, blogs, forums, marketing research, and much more.
  • CBT Automotive Network: CBT Automotive Network says they’re a “highly targeted multimedia platform for retail automotive professionals,” and they have an excellent collection of resources for car dealers. We especially like their “Just Starting Out” page which includes five tools that new dealers can use to develop their businesses.
  • Higher Turnover: Do you need a high-performing website for your car dealership? You might want to get in touch with Higher Turnover, as this company specializes in providing websites for car dealerships. They claim that their websites can help you “sell more cars, save time, and save money in the process.” Sounds good to us!
  • National Independent Automobile Dealers Association: Don’t let the outdated interface of the NIADA’s website fool you — there’s still lots of great information to be found. They offer webinars, training programs, and legal information. Plus, for used car dealers, there are few resources as valuable as the NIADA’s official magazine, Used Car Dealer.
  • Edmunds Industry Center: Edmunds has plenty of resources for car buyers and sellers alike, and for dealers, we really appreciate their industry center. They provide tools for online car sales, and their downloadable dealer education resources file is packed with valuable info. Edmunds is one of the biggest names in car sales today, and there’s a good reason for that.