If you’re an Uber or Lyft driver, you’ve probably at least considered forming a limited liability company (LLC) for your business. 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 rideshare business, 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 Uber or Lyft business, 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 Rideshare Business Is Important
The top reason to form an LLC for an Uber or Lyft business is to gain access to the personal asset protection provided by this business structure. Whether you work as a full-time rideshare driver or you only occasionally work on these platforms, you need the limited liability protections that an LLC can provide.
For example, let’s say you are sued by a passenger for endangering them by driving recklessly, or Lyft or Uber sues you for violating their terms of service. In either circumstance, if you operate your rideshare business as a sole proprietorship, your personal assets — like your house, car, personal bank accounts, etc. — would be at risk if you are sued.
On the other hand, if you form an LLC for your Uber or Lyft business before you ever pick up your first passenger, and you operate and maintain that LLC in a compliant fashion, the scope of the lawsuit will be limited to your business assets. In other words, your personal assets will be protected by the business structure you’ve chosen.
Typically, we would say that the LLC’s options for taxation are another major advantage, but that’s not as much the case with rideshare businesses. Your rideshare LLC can be taxed as a sole proprietorship, which is the default option. With this tax structure, your business itself does not pay taxes, but rather the profits are passed through the business entity and you pay taxes on that money when you file your own personal taxes.
You can also choose for your rideshare business 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 you.
The other option is S corporation taxation. There are quite a few limitations to electing S corp taxation, but most Uber or Lyft businesses 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.
In theory, S corp taxation can help your rideshare business 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 a reasonable salary for your role 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.
The problem with electing S corp taxation for Uber and Lyft drivers is that you simply don’t have many business expenses to invest that extra money into. Sure, there are routine repairs and other expenses, but it’s not like you’re going to buy a new car every year, so the IRS might (rightfully) have some questions if it sees you leaving lots of money in your business structure.
How to Start a Rideshare 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.
- 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.
- 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.
Additional Resources for Starting an Uber or Lyft Business
- The Rideshare Guy: The Rideshare Guy’s website is stuffed with valuable information for Uber and Lyft drivers, but our favorite part might be the resources section. Here, you’ll find information about insurance issues, maximizing your rideshare profits, background checks, legal representation for accidents, taxes, tools and analytics, and more.
- The Rideshare Guru: Not to be confused with The Rideshare Guy, The Rideshare Guru has a wide variety of resources and tools for Uber and Lyft drivers. This site has advice about the gig economy, insurance, taxation, vehicles, apps, dashcams, and more. They also have a broad selection of articles and videos on topics that affect every rideshare driver’s bottom line.
- RapidGo Driver: This useful website splits up its resources into some intriguing categories. You can learn more about traditional rideshare driving, pantry and grocery delivery, parcel and package delivery, meal delivery, etc. — for those of you in states with legalized marijuana, RapidGo Driver even has resources for cannabis delivery.
- Gridwise: Gridwise is an app that runs in tandem with your Uber or Lyft app and helps you streamline your rideshare business. Gridwise automatically keeps track of your mileage, helps you analyze your earnings, compares your earnings per mile or per hour with other drivers in your area, helps you pick the right time to make airport runs, and more.
- Ridester: Ridester has a two-pronged approach to helping rideshare drivers achieve their goals. They provide valuable content about the rideshare industry, with plenty of news and resources to help drivers maximize their profits. Ridester also curates transportation-based work opportunities, so you’ll never have a shortage of gigs.