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.
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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
Personal Asset Protection
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.
Taxation
The LLC’s options for taxation are another major advantage, although not all of these options are typically applicable to rideshare businesses. Still, the LLC can save you a considerable amount of money compared to simply operating as an informal business entity.
Sole Proprietorship
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.
C Corporation
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.
S Corporation
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:
1) Choose an LLC name
Coming up with the perfect name for your new LLC is an important step. You’ll need to choose a name that represents your company and describes what you do, and you’ll also have to make sure it isn’t already in use by checking your state’s business database.
2) Designate a registered agent
Your LLC’s registered agent (which can be an individual or a professional service) is responsible for receiving important document deliveries from the state — like service of process, annual report reminders, etc. — and forwarding them to you. The registered agent ensures that the state always has a reliable point of contact for your business.
3) File your formation documents with the state
The form used to create an LLC is usually called the Articles of Organization, although the name can vary (some states call it the Certificate of Formation or something similar). You’ll need to provide the state with some basic information about your business and its owners. In exchange, the state will formally create your LLC.
4) Acquire an EIN
The Employer Identification Number (EIN) is a federal tax ID number that essentially functions as a Social Security number for a business. The EIN allows your business to hire employees, pay taxes, apply for bank loans, and more. You can easily obtain an EIN from the Internal Revenue Service free of charge.
5) Create an LLC operating agreement
Most states don’t require operating agreements but every LLC should have one regardless. This is an internal document that outlines several key operational aspects of your LLC. The value of the operating agreement is how it can help prevent ownership disputes down the line by clearly explaining how the LLC will be run.
6) Create a financial infrastructure
You will need a business bank account for your LLC, and you’ll probably want a business credit card for work-related expenses as well. It’s also a good idea to use accounting software like QuickBooks or even hire an accountant to handle your bookkeeping for you.
7) Handle taxes, licenses, and permits
Depending on your state, you may need a general business license to operate your LLC in compliance with state requirements. Other than having your driver’s license, there aren’t any widely applicable industry-specific licenses or permits for rideshare drivers, but that doesn’t mean you won’t need any. Don’t forget to check with your state to see if there are franchise or privilege taxes assessed on LLCs, and also see if your municipal and/or county government entities have any further licensing requirements.
8) Understand maintenance requirements (annual reports, franchise taxes, etc.)
Again, these requirements can vary by state, but most states require some sort of regular report to ensure that your LLC’s info is up-to-date in the state’s business database. Some states require reports each year, while others only require them biannually or not at all. No matter what your state requires, you’ll need to stay on top of it to keep your LLC in good standing.
The 3 Best LLC Websites
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 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 – Best Overall Value
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 the best LLC service online.
IncFile – Cheapest LLC Service
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 service. Throw in their strong customer feedback, and IncFile is an excellent choice for LLC formations.
Northwest – Premium Support
Northwest is a bit more expensive, but their industry-best registered agent service includes local scanning of every document they receive on your behalf. They also have the best customer support for LLC services. If you’re looking for a premium service, Northwest is excellent.
Additional Resources for Starting an Uber or Lyft Business
1) 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.
2) 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.
3) 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.
4) 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.
5) 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.
Frequently Asked Questions
What liability risks do Uber and Lyft drivers face?
The biggest liability risk for a rideshare driver is an at-fault accident. If you cause a traffic collision, you could be on the hook for extensive expenses, especially because Uber and Lyft consider their drivers to be independent contractors rather than employees.
In addition, Uber and Lyft both have comprehensive terms of service for all contractors to follow, and failing to do so could lead to being kicked off their platforms or even sued.
Why should I form an LLC instead of a corporation?
Everyone’s situation is different, and we are not here to provide legal advice. That said, the limited liability company has some concrete advantages over the corporation that makes it the preferred option for most small businesses. Corporations tend to have more complex formation and maintenance requirements, and they don’t have the taxation advantages of an LLC.
The corporation has some advantages of its own (for example, it’s easier to attract investors to a corporation) that make it worth a look but the LLC is a simpler and more flexible business structure.
Can I serve as my LLC’s registered agent?
You certainly can! Every state allows entrepreneurs to serve as their own registered agents. However, while the role of the registered agent can seem like that of an unnecessary middleman, there is more complexity to this position than some people realize.
For instance, you would need to be present and available at your business location during all standard business hours. In addition, if you serve as your LLC’s registered agent, you may need to make your home address a matter of public record. Not only does this have privacy concerns, but there’s also the matter of unwanted junk mail as well.
Why should I hire an LLC service when I can form my own LLC?
The DIY route is always an option for LLC formation. However, LLC services are so affordable that there’s really no good reason not to use one these days. IncFile will even form your LLC for free! In addition, these companies often throw in free bonus features like a year of registered agent service that make them an even better bargain.
Should I form my LLC in my home state, or choose a state like Delaware or Wyoming?
Some people like to form their LLCs in states with favorable legal settings. For instance, Delaware is often seen as the most business-friendly state, as it has an entire court system that’s dedicated solely to business matters. As for Wyoming, this state has some of the most generous anonymity laws for LLC ownership.
However, for most people, your best option is to simply form your business in your home state. Forming in a different state can be a tremendous hassle, and it can add some unnecessary complexity to tax issues as well.
How much does it cost to form an LLC?
The costs of LLC formation can vary quite a bit depending on which state you’re forming one in. For in-depth information about LLC formation costs in your specific state, take a look at our comprehensive guide to state-by-state expenses.
