Businesses in the automotive industry have the potential to generate profit, grow steadily and carry a moderate amount of risk. 2020 was not the most profitable year for the automotive industry seeing roughly 14.5 million sales, which is 15% below the 2019 total. But this figure is promising for the automotive industry and entrepreneurs seeing that the predicted sales total for 2020 would have been 10 million to 12 million. For entrepreneurs interested in entering the automotive industry, choosing the correct business structure is imperative. When forming a business in the automotive industry, using a limited liability company or an S Corporation would work best.
What is a limited liability company?
A limited liability company (LLC) is a business structure that acts to protect business owners from being personally liable for the debts and/or other liabilities of the business. An LLC, which is a hybrid entity that combines the benefits of a partnership and sole proprietorship structures, is able to be owned by one person, but also by multiple people who are known as LLC members. Single-member LLCs and multi-member LLCs are pass-through entities which means that the profits and losses from the LLC are taxed as personal income by the owner/owners. LLCs also have the option of choosing to be taxed as a C corporation or an S corporation.
LLCs offer a multitude of benefits, as well as a few disadvantages. The main benefits are personal asset protection and pass-through taxation. It also offers simplicity because LLCs are easy to create and maintain, flexibility because of the little restrictions on the structure, ownership and management, as well as credibility because an LLC is a widely recognized business structure that reassures customers and clients. LLC’s additionally allow businesses access to business loans because of credit that is able to be built as well as flexible profit distribution among multiple owners.
Forming an LLC
To successfully form an LLC, entrepreneurs would need to follow the following detailed process. This may seem intimidating, but LLC formation services offer their services to do it for entrepreneurs.
- Selecting a State: Most business owners will decide to start the LLC in the state where they live or where the business is located. The business would need a foreignn register if it has other branches in other states.
- Naming the LLC.
- Choosing a Registered Agent.
- Filing the Articles of Organization: These are the formation documents commonly called “articles of organization”, “certificate of formation” or “certificate of organization.”
- Creating an Operating Agreement: This is a legal document which acts to outline the ownership structure of the LLC as well as the member roles.
- Obtaining an EIN: This would be used on bank accounts as well as income and employment tax filings.
- Starting a business bank account.
What is an S Corporation?
An S corporation, which is also known as an S subchapter, is a corporation that meets specific Internal Revenue Code requirements. Once it does, the S Corporation may pass income, with other credits, deductions and losses, to shareholders, which makes it a pass-through entity. This would be able to be done without having to pay federal corporate taxes. S Corporations provide the business with the benefits of an incorporation with the tax-exempt privileges of a partnership. Partnerships are formed by individuals, and because of this they are taxed in the same way a sole proprietorship is taxed. The partners of a general partnership have to include their business income on their personal tax return. They are also able to deduct business loans on their personal tax returns. This is why general partnerships are known as pass-through entities whereas the profits and tax obligations pass through the business to the partners. Incorporation Rocket is able to assist entrepreneurs interested in forming a general partnership here.
As mentioned, for businesses to become an S Corporation, they would have to meet Internal Revenue Code requirements. These include being incorporated within the US, having only one class of stock, not having more than 100 shareholders and having shareholders who meet certain eligibility requirements.The S corporation shareholders must be individuals, specific trusts and estates, or certain tax-exempt organizations. Individuals and entities not eligible to be shareholders are partnerships, corporations and nonresident aliens.
The benefits of an S Corporation is that it offers similar liability protection, ownership, and management advantages as any other corporation, or C corporation as they’re officially known. S Corporations also have to observe internal practices and formalities, such as having a board of directors, writing corporate bylaws, conducting shareholders’ meetings and keeping minutes of meetings.
Forming an S Corporation
To successfully form an S Corporation, entrepreneurs would need to follow the following detailed process. This may seem intimidating, but S Corporation formation services offer their services to do it for entrepreneurs.
- Become a C Corporation or LLC.
- Make sure the business qualifies for S Corporation status.
- File form 2553: This has to be signed by all of the company’s shareholders.
The bottom line
LLCs and S Corporations both offer fruitful benefits as business entities in the automotive industry. Entrepreneurs would have to assess their needs and goals before selecting a business structure. If neither of the mentioned business entities seem fitting, there are other types of business structures. Types of partnerships, such as limited partnerships or general partnerships may serve as an option as well, depending on the type of business and its owners.