Starting an LLC for Uber and Lyft (Free Guide)
This article will look at the benefits and protections that are offered by Uber and Lyft, explain how an LLC can add an extra layer of security and walk you through the formation process.
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Uber and Lyft drivers have the ability to set their own hours, work where they want, and build a successful and flexible business. As tempting as this sounds, you should take steps to protect your income and personal assets. To do this, we recommend forming a Limited Liability Company.
Why drive for Uber and Lyft
While the temptation may be to start your own taxi business, driving for Uber and Lyft offers tempting advantages.
- Flexibility and independence: As an Uber or Lyft driver, you can set your own schedule, choose which areas you serve, and control your workload. You have complete control over your work-life balance, which might not be the case if you started your own taxi business.
- Low barriers to entry: Compared to starting a traditional business, becoming a rideshare driver has next to no startup costs. All you need is a car, or even without a card Uber and Lyft offer programs to save you money on getting hold of one. This can get you earning without much of an upfront investment.
- Ready-made market: Both Uber and Lyft are well established. This gives you direct access to a huge pool of customers and saves you the time and effort of marketing yourself and establishing a customer base.
Protections provided by Uber and Lyft
Both Lyft and Uber drivers benefit from protection and support to ensure safety whilst on the road.
Insurance
Lyft and Uber provide insurance for their drivers.
- Uber maintains at least $1,000,000 in liability coverage for property damage and injuries to riders and third parties if you’re at fault. This means that if you’re involved in an accident while on a trip, Uber’s insurance will cover the cost of property damage and injury up to $1,000,000.
- Lyft offers liability insurance for drivers and additional coverage for your car if you already have comprehensive and collision insurance. However, Lyft’s coverage is secondary, meaning it only kicks in after your own insurance and has a $2,500 deductible. It’s important to have your own comprehensive car insurance for full protection when driving for Lyft.
Safety features
They both have various safety features to protect drivers.
- Uber offers an emergency button that will quickly connect you with emergency services. GPS tracking is also available to help locate you if needed.
- Lyft provides “Smart Trip Check-In,” which monitors your rides for unusual activity, like long stops (we’ve all seen the movie Collateral) or route deviations. Lyft proactively reaches out if anything seems amiss. Location-sharing options are also available to share your real-time location with trusted contacts.
Driver support
When you need help, Uber and Lyft have your back.
- Uber offers 24/7 support, so you can always reach out to someone if you have questions or concerns.
- Lyft offers specialized support from professionals with expertise in handling sensitive situations.
Why form an LLC for Uber and Lyft
Working for Uber and Lyft makes you an independent contractor and sole proprietor. This means that there is no legal distinction between you and your business. LLCs are popular with small businesses and entrepreneurs who want to transition to a more formal business structure. Forming an LLC also provides benefits and protections.
Personal liability protection
The main advantage is the asset protection that LLCs offer. If you face a lawsuit from an injured passenger, your personal assets (like your home and car) would be shielded from potential claims. This protection is crucial as the nature of the business can expose you to a higher risk of accidents.
Imagine that you are involved in an accident while driving for Uber, and the passenger sues for damages greater than Uber’s insurance. If you are operating as a sole proprietor, your personal assets could be at risk. However, if you have formed an LLC, only business assets would be vulnerable, protecting your property.
Tax benefits
One of the appealing aspects of forming an LLC as an Uber driver is the flexibility it offers in how you file taxes. This can potentially lead to significant tax savings.
Default Taxation: By default, if you’re the sole owner of your LLC, it’s treated like a sole proprietorship for tax purposes. This means you’ll report all profits and losses on your personal income tax return. This “pass-through” taxation is simpler and eliminates the “double taxation” issue that corporations face (where both the company and its owner are taxed separately).
Let’s say you’re just starting out as a rideshare driver with your newly formed LLC. You earn $30,000 in fares and spend $10,000 on gas, maintenance, and other running costs. With pass-through taxation, that $20,000 profit is reported directly on your personal tax return (Schedule C), just like any other income. This eliminates the need for separate business tax filings and simplifies your tax situation.
S Corporation Election: Many Uber drivers find it even more advantageous to be taxed as an S corporation. This can reduce your self-employment taxes. As an S corp, you can split your income into two parts: a reasonable salary and distributions (or profits). Only your salary is subject to self-employment taxes.
Now, imagine your rideshare business is thriving, and you’re earning $80,000 in fares annually. By electing S corp status, you could pay yourself a reasonable salary of $40,000. This salary would be subject to self-employment tax, but the remaining $40,000 would be seen as profits. This could result in significant savings compared to paying self-employment taxes on the full $80,000.
Common tax deductibles
As an Uber or Lyft driver, you rack up various expenses throughout the year. Here are some common deductions you might be able to claim:
- Vehicle expenses: This includes mileage (using the standard mileage rate or actual expenses), gas, oil changes, tire rotations, repairs, and depreciation. For example, if you drove 15,000 miles for rideshare purposes in a year, you could deduct $9,825 (at the 2023 rate of $0.655 per mile).
- Tolls and parking: If you use toll roads or have to pay for parking while waiting for passengers, these expenses can add up and be deducted.
- Phone: A portion of your phone bill can be deducted if you use it for rideshare purposes, such as navigation and communicating with passengers.
- Dashcam: Expenses for equipment that adds to your safety, like a dashcam, can also be deducted.
- Amenities: If you go above and beyond for your passengers and provide snacks or phone chargers for your passengers, these costs can be included in your deductions.
- Platform fees: Don’t forget to deduct the fees you pay to Uber, Lyft, or other rideshare platforms from your earnings.
Step-by-step guide to forming an LLC for Uber and Lyft drivers
1
Choose a business name
Select a memorable name that reflects your business. Check with your state’s secretary of state website if the name is available. Consider using words like “cars” or “rides” in your name to clearly show the nature of your business.
2
Select a registered agent
A registered agent is an individual or company that receives legal documents on behalf of your LLC. They serve as your main point of contact with the state. You can act as your own registered agent if you have a physical address in the state where you are forming your LLC. Using a registered agent service can add a layer of privacy as your personal address will be kept off public records.
3
File formation documents
To officially establish your LLC, you’ll need to file articles of organization with your state. These documents include your LLC name, registered agent information, and a description of the business.
4
Obtain an Employer Identification Number (EIN)
An EIN is essentially a Social Security Number (SSN) for your LLC. It is used for tax purposes and is required to open a business bank account. You can obtain an EIN for free by applying on the IRS website.
5
Open a business bank account
Keeping your personal and rideshare business finances separate is important for maintaining the benefits of an LLC. Open a business bank account using your LLC name and EIN. This dedicated account will make it easier to track your rideshare income and expenses. This will be crucial for tax purposes and monitoring your business’s financial health.
Potential drawbacks of forming an LLC
While forming an LLC offers many benefits, it’s important to consider potential challenges.
- Costs: There are upfront costs to form an LLC, including state filing fees and potentially legal fees if you seek professional assistance. Some states also require annual fees or taxes to maintain your LLC status.
- Increased paperwork: LLCs require more record-keeping and paperwork than operating as a sole proprietorship. You’ll need to maintain separate financial records and file additional tax forms as well as annual reports.
- Complexity: Managing an LLC can be more complex than operating as a sole proprietor. You may need to learn new business management skills or seek professional help, which can add to your costs.
- No guarantee of complete protection: While LLCs offer personal asset protection, this protection isn’t absolute. In cases of fraud or if you don’t maintain your LLC properly, you could still be held personally liable.
For most Uber and Lyft drivers, an LLC offers the best balance of benefits and simplicity. It provides the liability protection that a sole proprietorship lacks without the complexity and requirements of an S corporation.
FAQs
Do I need a business license to drive for Uber or Lyft?
Business license requirements vary by city and state. Check with your local government to determine if a business license is necessary for rideshare drivers in your area.
Is my car tax deductible?
If you use your car for rideshare purposes, you may be able to deduct vehicle-related expenses on your taxes. Consult with a tax professional to determine which expenses are deductible and how to properly claim them.
Can I form an LLC if I drive for both Uber and Lyft?
Yes, you can form an LLC even if you drive for multiple rideshare platforms. An LLC can cover all your rideshare activities, regardless of the platform.
How much does it cost to form an LLC for rideshare drivers?
The cost of forming an LLC varies by state but typically ranges from $50 to $500. Some states also require ongoing annual fees to maintain your LLC.
Do I need separate insurance if I form an LLC for my rideshare business?
Forming an LLC does not require you to obtain separate insurance.
Can I deduct my LLC formation costs on my taxes?
Yes, the costs associated with forming your LLC, such as state filing fees and legal expenses, are generally considered business startup costs and may be deductible on your taxes.
Do I need an operating agreement?
Operating agreements are highly recommended, but not mandatory.
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