Uber and Lyft drivers that hit $50,000 in annual revenue start to consider forming a limited liability company (LLC). This structure is a popular option for ride share business owners because it protects the owners’ personal assets in addition to other advantages. When you’re on the road for potentially 40+ hours per week, this sort of personal asset protection is appealing.
But an LLC isn’t the only choice for a ride sharing business. In fact, most drivers operate as independent contractors for companies like Lyft or Uber. As an independent contractor, you don’t need to form any business entity at all. Generally speaking if you make less than $50,000 per year by offering ride sharing as a side hustle, you won’t see any tax benefit by making this switch. You simply aren’t making enough money at this point to justify filing for an LLC for tax purposes yet.
Learn more about whether or not an LLC is right for your situation below. In general, the more money you make or the more assets you own the more appealing this structure will become.
- Form an LLC with ZenBusiness ($39 + State Fees)
Advantages of an LLC
The advantages of an LLC for Uber or Lyft drivers include tax benefits, personal privacy protection and personal liability protection.
The tax benefits of an LLC for a ride-sharing business are less advantageous than for other startups since it usually has very few assets of its own in the early days. The main assets of this type of business are the vehicles, which will usually be your personal car at first. An LLC’s tax advantages become more obvious when you start leasing additional vehicles to use for the business or start bringing in at least $50,000 in annual revenue. Once you hit the $50,000 threshold, minimizing tax becomes more important to retain profit.
Obviously, expanding a ride-share business will be almost impossible since almost anyone can afford a lease on a car and get paid directly by Uber. This probably isn’t an option unless you decide to start an independent taxi service that isn’t reliant on third-party apps to acquire customers.
Personal Privacy Protection
An LLC can protect your identity as the business owner, depend on the state. Many owners form their LLC in states like New Mexico, where owner anonymity is protected by law. These states don’t maintain records regarding and LLC’s management or ownership, so there’s nothing to disclose.
Owners only need to submit the LLC’s Articles of Organization, which must include the organizer and registered agent. However, neither of these entities needs to be the actual owner of the LLC.
Personal Liability Protection
The protection of personal assets is the biggest benefit of an LLC for ride-sharing businesses. You need this protection whether you’re a full-time ride-share driver or only do so occasionally.
Assume for this example that Lyft or Uber sues you for violating their terms of service. Your personal assets such as your car house or bank account could be at risk if you operate your ride-share business as a sole proprietorship.
However, the scope of the lawsuit would be limited to your business assets if you operate as an LLC, assuming you do so in a legally compliant manner. This benefit alone is enough to form an LLC for your ride-sharing business before you ever pick up a passenger.
The disadvantages of an LLC for ride-sharing business generally relate to the increased costs and effort of maintaining this business structure. An LLC has more administrative overhead than a sole proprietorship, which is an informal business structure that doesn’t require any documentation.
Furthermore, an LLC requires an operating agreement, unlike a corporation that’s regulated by statutory requirements. An LLC is also subject to an additional tax called a capital values or franchise tax in some states.
How to Start an LLC as an Uber or Lyft Driver
The specific process for forming an LLC depends on your state, but it generally consists of the following steps:
- Choosing a name
- Filing the Articles of Organization
- Choosing a registered agent
- Forming an operating agreement
1. Choose a name for your ride sharing LLC.
Selecting a name for your business may appear to be trivial step, but it’s actually one of the most important in creating an LLC. Applications are often rejected on the basis of a name that violates the many laws regarding this issue.
In general, the name of your LLC can’t create confusion between businesses, so it has to be unique for your state. Some states also prohibit a name from being too similar with that of existing businesses, even when the names aren’t completely identical.
Furthermore, your LLC’s name can’t infringe on any copyrights. In addition, the name can’t falsely imply some another business structure. For example, it must include the phrase “limited liability company” or the abbreviation “LLC.” The name of your ride-sharing business can’t include references to other types of businesses, so it can’t include words like “bank,” “hospital” and “lawyer.”
Each state provides a search function for business names, usually on their website. You can use it to determine if your desired name is available, but you may need to put some thought into your name selection if your preferred choices have already been taken.
2. File the Articles of Organization.
The process of filing the Articles of Organization for your ride-sharing business includes gathering the required information, submitting the documentation and paying the filing fees.
Each state provides its own form for An LLC’s Articles of Organization, and the information they require can vary considerably. However, they typically require the following for your LLC:
- Physical address
- Registered agent’s name and location
- Owner names
- Member names
- Organizer name
- Manager name
Established business owners will typically submit the Articles of Organization for their LLC to their business attorney, who should have expert knowledge of the procedures required to form an LLC. However, this option may be prohibitively expensive for an entrepreneur who doesn’t already have an attorney for their business. In this case, a new business owner will usually hire an LLC formation service to handle the Articles of Organization and other documents needed to maintain the business such as annual reports and franchise taxes.
Each state sets its own fees for filing Articles of Organization, which can vary greatly. Many states charge around $50, but this fee can be as high as $500.
3. Choose a registered agent.
Choosing a registered agent is an essential step in forming an LLC because it provides a single point of contact for all legal matters regarding your business. This legal entity receives documents from the state about your LLC such as tax forms and compliance filing reminders, which it then forwards to you.
Related Reading: Starting an LLC for AirBnB Hosts: Is It Worth It?
A registered agent is a legal requirement for operating an LLC since the government needs somewhere to send time-sensitive documents. Otherwise, you might miss a filing deadline or court appearance. Three types of legal entities may be a registered agent, including yourself, accountant or lawyer, or registered agent service.
It’s legally permissible for the owner of an LLC to also be its registered agent, although it isn’t recommended. It does offer the savings in the cost of hiring someone else to do it, but this benefit is almost always outweighed by the disadvantages. For one thing, it prevents your LLC from expanding beyond your state of residence, since each state in which an LLC operates needs a registered agent for that LLC. Another major disadvantage is that it prevents you from taking vacations or sick days since you must always be available to receive documents.
Accountant or Lawyer
An accountant or lawyer can be a good option for registered agent, assuming your business already has one. However, these professionals are very expensive if you hire one solely for the purpose of being your LLC’s registered agent. Furthermore, accountants and lawyers are often experienced in serving as a registered agent. This option also has the same disadvantage as making yourself the registered agent in that you would only be able to operate your LLC in states where your registered agent has an office.
Registered Agent Service
Hiring a professional registered agent service is usually the best option for a ride-sharing business. These services are almost always much less expensive than hiring an accountant or lawyer, and have the specialized expertise needed to conduct these duties correctly. Furthermore, this option will hinder your plans for expansion, since most registered agent services have offices in all 50 states.
4. Create an LLC operating agreement.
An operating agreement describes how you plan to run your ride-sharing business. It establishes a framework of guidelines for operating the LLC in a way that’s legally compliant and maximizes its chances for success. In addition, an operating agreement defines the structures for owning and managing the company, ensuring that company stakeholders remain on the same page.
It also helps establish the LLC’s legitimacy with third parties like courts and financial institutions. Finally, an operating agreement should draw a clear distinction between business and personal assets, which serves as a safety net in the event of a legal dispute.
The major provisions of an LLC operating agreement include the following:
- Identifying information
- Statement of intent
- Business purpose
- Tax treatment
- Admission of new members
The LLC’s identifying information includes its name, and addresses for its principal business office and initial registered office.
The statement of intent explains that the operating agreement is in accordance with state law. It also specifies that the LLC will come into existence after the proper documentation has been filed with the state.
The LLC’s business purpose specifies that it’s a ride sharing business. It will typically include an additional statement to the effect that the LLC can also serve any other lawful business purpose. This clause allows you to change the business purpose without writing a new operating agreement.
The term of the LLC indicates how long it will last. An LLC typically has an indefinite term, although it can still be dissolved according to state law. However, it can have a fixed term that expires after a specified period of time or when a certain condition is met, although this would be rare for a ride sharing business.
The tax treatment provision of an LLC’s operating agreement specifies the procedure for calculating its taxes. It will generally state whether the LLC is to be taxed as a sole proprietorship, partnership or corporation.
The admission of new members provision describes the process for someone to acquire an interest in the LLC. This provision allows you to add partners without writing a new operating agreement.
Do you need to file the LLC operating agreement?
Very few states require an LLC to have an operating agreement, which is surprising considering its importance. Only California, Delaware, Maine, Missouri and New York have this requirement, and only New York requires a written agreement. The other four states in this list except oral agreements, but you should still keep a written agreement in the event of later legal disputes.
Arizona, Nebraska and New York are the only states that currently have a publication requirement for LLCs. This requirement generally means that the business owner must advertise the formation of the LLC in a local newspaper for certain period of time.
Arizona regulates LLC publication requirements in Section 29-3201 of the Arizona Revised Statutes. This section requires owners to publish notice of their LLC’s formation for three consecutive runs, which usually means at least one ad per week for three weeks.
The Arizona Corporation Commission (AZCC) will send you a Notice for Publication form after it approves your LLC. Fill out this form and submit it to a newspaper with a circulation in the County of your statutory agent.
Nebraska Revised Statute 21-193 regulates the requirement for publishing an LLC’s formation in that state. Owners must publish a Notice of Organization for their LLC in a newspaper near the LLC’s designated office address, which typically means the paper must have a circulation that includes the county with the LLC’s office.
The ads must run for three consecutive weeks, after which the newspaper will send you an Affidavit of Publication. Mail a copy of this form to the Nebraska Secretary of State.
New York regulates publication notification with Section 206 of the New York LLC Act. This section requires business owners to publish notice of their LLC’s formation in two newspapers, one with daily circulation and the other with a weekly circulation.
Both newspapers must have a circulation that includes the County for the LLC’s office, and the County Clerk must approve both newspapers. The newspaper ads must run for six consecutive weeks.
How much does an LLC cost for a ride sharing business?
The cost of forming an LLC varies greatly, depending on the specific service. For example, IncFile offers a business formation package that’s free to use, although you must still pay the state filing fee. This package includes a year of service as a registered agent. ZenBusiness ($39 + State Fees) is my top overall choice for LLC formation.
ZenBusiness also provides an LLC formation service that includes a year of registered agent service for $39. This price is for the company’s basic package, but it also offers other packages with more services for a higher cost. ZenBusiness has one of the best reputations in this field based on customer feedback.
Northwest Registered Agent formation service costs $225 in addition to the state filing fee. The primary reason for this higher price is that this company scans every document that it receives on your behalf, instead of just the documents that it’s legally required to scan. Northwest also provides stellar customer support.
Licenses, Permits and Protection You’ll Need Beyond an LLC
Ride sharing businesses operate similarly to a traditional vehicle-for-hire service. However, ride sharing drivers only need a private driver’s license, whereas taxi and limousine services require a commercial driver’s license.
These businesses need to register with their state, typically with the public utilities commission. This process varies between states, as some state regulators are still defining the regulation of ride sharing businesses.
Each state also requires commercial vehicle insurance for a ride sharing business. The most important part of this requirement is the minimum for each type of claim, including death, personal injury and property damage. Most states also require insurance against uninsured motorists that cover passengers for the time they’re in the vehicle.
Frequently Asked Questions
Is an LLC a good option for a ride sharing business?
If you’re only dabbling in ride sharing forming an LLC is not the right choice. If you only intend to test out being an Uber driver to see if you like it then now isn’t the right time. Make sure you’re committed to this business before filing an LLC.
An LLC is a legal entity that’s usually taxed like a sole proprietorship, although it can also be taxed like a corporation in rare cases. For the sole proprietorship option, the LLC doesn’t pay taxes. Instead, its profits and losses pass through to the owners, who report them on their personal tax returns. In addition, an LLC owner usually isn’t personally responsible for the business’s financial obligations, meaning their personal assets aren’t at risk from litigation against the LLC.
What are the disadvantages of LLC for ride sharing?
The obvious disadvantages of an LLC for ride sharing business is the additional cost and administrative overhead. Furthermore, the liability protection of LLC’s doesn’t apply to certain types of wrongdoing or negligence, including driving while drunk or failing to make repairs related to safety.
Do you need an LLC for ride sharing?
An LLC isn’t a legal requirement for ride-sharing business, although the potential liability issues make it a very good idea in most cases. However, the likelihood of getting sued is less if you have few assets.
Ride sharing Sole Proprietorship vs. LLCs
A ride-sharing business may start out as a sole proprietorship, but it should become an LLC before taking its first passenger in most cases. The personal liability protection that an LLC offers is almost always worth the additional cost.
Ride sharing LLC vs. Corporation
It may make sense for an LLC to transition to an S Corporation over time, typically as the business expands. An S Corporation’s ability to treat a business owner as an employee can reduce taxes when the business structure becomes sufficiently complex.
Ready to Form an LLC?
If you’re committed to building a ride-sharing business and want to better protect personal assets, forming an LLC could be the right choice for you. Based on my review of more than half a dozen LLC formation companies, the top rated service is ZenBusiness.
I gave this company a score of 37 out of 40 because of the unique combination of customer service and low-cost for entrepreneurs. You can file an LLC with ZenBusiness for only $39 per year.