If you are a rideshare driver or considering becoming one, then you must understand that you are a self-employed individual, which means you must report the end of the year taxes and maintain accounts accordingly. Since you are a self-employed individual, you can decide which tax bracket best suits your business model. Choosing the correct model is dependent on your business vision. For instance, if you are going to drive for Uber or Lyft only part-time to supplement your income as an employee of another company, then you would consider maintaining your status as an employee. If, however, you intend to work longer hours, or even make ridesharing your main source of income, then you would consider setting up a sole proprietorship or LLC. Another level would be whether you decide to make ridesharing a full business operation, or a section of several services you provide, then you would consider becoming a C-Corp or S-Corp.
You must discuss the issue with a certified accountant before deciding on the type of company to set up.
There are seven types of business structures available in the US, but only four are relevant to rideshare drivers, and they are:
| Sole Proprietorship | C Corporation | S Corporation | Limited Liability Company (LLC)
|
|
| State filing (& filing fee) required for creation | X | X | X | |
| Ongoing state filings and fees | X | X | X | |
| Limited liability protection | X | X | X | |
| Perpetual duration of the business | X | X | X | |
| Strict ongoing corporate formalities | X | X | ||
| Flexibility in who manages the business | X | |||
| Business taxed at entity level | X | |||
| Pass-through income/loss | X | X | X | |
| Double taxation | X | |||
| Ease of raising capital | X | X | ||
| Ease of adding owners/ transferring ownership interest | X | X |
Now let’s make sense of this table.
As a driver for Uber or Lyft, you will sign a contract designating yourself as a self-employed private contractor. This means you are a business. Now you must decide what kind of business you are going to be and how to maximize your profit through reducing taxes.
- Limited liability protection. Company owners are not personally responsible for business debts and liabilities.
- Separate entities. LLC’s and S Corps are legal entities created by a state filing.
- Pass-through taxation. Both companies have pass-through tax rights. S corps should file a business tax return while LLCs only file business tax returns if they have more than one owner.
- Ongoing state requirements. Both companies have state-mandated formalities, including filing annual reports and paying state taxes and fees.
Ownership
- The IRS designates that S corps have ownership limitations, while limited liability companies are unrestricted.
- LLCs are unlimited in the number of owners/members; S corps are limited to 100 shareholders (owners).
- LLC’s can have non-U.S. citizens/residents; S corps cannot have non-U.S. citizens/residents as shareholders.
- S corporations are not allowed to be owned by C corporations, other S corporations, LLCs, partnerships or many trusts. LLC’s can have various ownerships.
- LLCs can have unrestricted subsidiaries.
Ongoing Formalities
- S corporations have extensive internal formalities. LLCs do not have to follow internal formalities.
- S corporation’s formalities include: Adopting bylaws, issuing stock, holding initial and annual director and shareholder meetings, and keeping meeting minutes with corporate records.
Owners
- An LLC can decide to have owners or managers to manage the LLC. If members manage an LLC, then it is like a partnership. If run an LLC is run by managers, then it closely resembles a corporation, where members do not get involved daily management
- S corps have directors and officers. The board of directors only oversees corporate affairs and handles major decisions but not daily operations. The board of directors elects executives to handle the
- Just for comparison, a C company has no shareholders limit. However, when the company reaches $10 million in assets and 500 shareholders, it is must register with the SEC under the Securities Exchange Act of 1934.
Existence
- An S corporation’s existence is perpetual, or until it liquidates. LLC’s can be required to have dissolution dates; this is State dependent.
Transferability of Ownership
- S corporation stock is tradeable, and there are different types of stock and trade exchanges. LLC membership (ownership) is not freely transferable; it is dependent on the approval of the other members if it is not a sole ownership LLC.
Self-Employment Taxes
- S corporations have self-employment taxes like the LLC where the owner can be treated as an employee and receive a salary. FICA taxes are paid on that amount.
Bottom Line
A Sole Proprietorship is a perfect solution for a self-employed part-time rideshare driver that either has income from another company as an employee or is just working a few hours a day to supplement income without working a full-time job.
An LLC is a perfect solution for a full-time self-employed individual that has either one source of income such as rideshare driving or from several income sources but not as an employee of another company.
An S Corporation is a perfect tool for a company that operates a fleet of cars, or a rideshare driver that owns more than one car and wants to become a fleet owner.
A C Corporation is best suited for companies that want to go public or intend to attract a lot of investors.
Most certified accountants consider an LLC to be the preferred medium for rideshare drivers since they are by default similar sole proprietorships when owned by one person but have the added benefit of limiting the owner’s liability when certain issues arise. The same CPA will consider transferring an Uber driver to an S-Corporation only for taxation purposes, and only if the income levels warrant this.
