Starting an LLC (limited liability company) as a rideshare driver can grant you certain benefits, like protection against personal liability and the potential for easier tax filing. But before you form your LLC, it’s crucial to understand the legal and financial ramifications of becoming an LLC as an Uber or Lyft driver. Read on for more.
Rideshare LLC Liability Risks
As a rideshare driver, you face a range of liability risks, from accidents and property damage to passenger injuries and theft. While Uber, Lyft and other rideshare companies have insurance coverage for some of these risks, they often do not provide complete protection. In some cases, you may be personally liable for damages or injuries that exceed the insurance coverage provided by the rideshare company.
By forming an LLC, you can protect your personal assets from business-related liabilities, including accidents and lawsuits. An LLC is a separate legal entity from its owner members, which means that any debts, judgments, or legal claims against the business are limited to the assets of the LLC. This means that your personal assets, such as your home, car, or savings, are typically shielded from liability claims against your rideshare business.
However, it’s important to note that an LLC does not provide absolute protection against liability. For example, engaging in illegal or negligent behavior that leads to injury or damage could still leave you being held personally liable, regardless of your LLC status. It’s also important to maintain proper insurance coverage for your rideshare business, as an LLC does not replace the need for insurance.
Tip: Whether you want to start an LLC or just manage your existing rideshare business as a sole proprietor, Northwest can give you the resources and tools you need. Get a free account with Northwest to access the forms you need to maintain your business on your own, or hire us to do it for you. No obligations.
Rideshare LLC Tax Considerations
Another benefit of starting an LLC as a rideshare driver is that it can simplify your tax filing process and potentially reduce your tax liability. As a contractor for a rideshare company, you are considered self-employed for tax purposes, which means that you are responsible for paying both the employer and employee portions of Social Security and Medicare taxes. You may also be able to deduct certain business expenses, such as car maintenance, insurance premiums and phone bills on your tax return.
Tax classifications for your rideshare LLC:
When you form an LLC for your rideshare work, your tax classification options vary. Uber allows a variety of classifications, with LLC options including single-member sole proprietor status, partnerships, and C or S corporations. Lyft meanwhile, only allows individual or Corporation/LLC status. Each option has its own tax implications, so it’s important to consult with a tax professional to determine the best structure for your business.
- As a sole proprietor LLC, you would report all business income and expenses on your personal tax return using Schedule C. This means that you would still be responsible for paying self-employment taxes on your net income, but you may be able to deduct additional business expenses that are not allowed as personal deductions.
- Being classified as a partnership LLC (for example, if you and a spouse both drive for the same rideshare company and want to share your finances), you would need to file a separate tax return for the LLC, but the income and expenses would flow through to the individual partners’ personal tax returns. This structure can be beneficial if you have multiple members in your rideshare LLC, as it allows you to split the tax liability and potentially reduce your overall tax burden.
- You have the option of C corporation classification as a rideshare driver, but as it requires profits to be taxed on both the level of your LLC and on your personal tax return, C corporation status is rarely chosen by drivers.
- Under S corporation classification, you would need to file a separate tax return for the LLC and pay yourself a reasonable salary as an employee of the business. The remaining income would be distributed to you (as well as any other members) as dividends, which are subject to a lower tax rate than self-employment taxes. However, this structure is more complex and requires additional record-keeping and payroll obligations.
Starting an LLC as a Rideshare Driver
Before starting an LLC as a rideshare driver, keep in mind that each state has its own requirements for forming and operating an LLC. Filing fees, annual reports, and registered agent requirements will vary from state to state. Be sure to research the laws in your state and comply with all necessary regulations.
Our guide to starting an LLC goes into more detail, but here’s the short version of the process:
Choose a registered agent
When filing formation paperwork, you’ll need to list a registered agent who can accept state and legal mail on your LLC’s behalf. Because a registered agent needs to be located at a certain address during business hours, being your own registered agent for your LLC isn’t very practical for a rideshare driver. Because of this fact, and other privacy considerations, you might want to consider hiring a professional registered agent service.
Name your LLC
You’ll also need a good business name for your LLC (which isn’t already in use in your state). Because your business name will be needed for your Employer Identification Number registration, and because you’ll need both the name and the EIN correctly entered into your tax information with the rideshare company, having a name is a very important consideration for your LLC.
File formation documents
Your state formation documents officially create your LLC. This is usually a document called Articles of Organization or a Certificate of Formation. Your state will need some basic information about the business in order to authorize its formation.
Get an EIN
The IRS provides an Employer Identification Number that works similarly to a Social Security Number for you business. Uber and Lyft both require EIN information for LLC businesses contracted by them. You can get an EIN through the IRS website.
Write an operating agreement
Operating agreements are internal documents that outline the standard policies and operations of your LLC. A well-planned operating agreement is necessary to help prevent ownership issues and ensure the LLC runs smoothly.
Open an LLC bank account
The rideshare companies will need to deposit your money somewhere, and an LLC needs personal assets separated from company assets to maintain limited liability, so you’ll need a business bank account for your LLC. At a minimum, you’ll need your LLC’s state formation documents, operating agreement and EIN to open an account.
File reports and taxes
Most states require LLCs to provide a regular report to keep information up-to-date in state records. These reports usually come annually, but biennial and even decennial reports may be required instead. Annual reports can come with fees or coincide with state franchise taxes, so be certain to keep track of your obligations to the state.
In addition, your rideshare LLC may need to acquire state or local business licenses to legally operate in your area. If nothing else, you’ll at least need a driver’s license!