What's the best way to structure your delivery business? Should you form an LLC or incorporate, or is it better to remain a sole proprietor as an independent contractor for Doordash, Uber Eats, Instacart, Grubhub or other delivery gigs?
Do you need to form an LLC as a delivery contractor with gig companies like Doordash, Uber Eats, Grubhub, Instacart and others? The answer varies depending on your personal assets, risks, and potential tax benefits. You will have to weigh the benefits of forming an LLC against the extra costs and requirements.
In this article, we'll talk about what it means to create an LLC, what the benefits of creating an LLC would be, and what the disadvantages are of forming an LLC for your delivery business as an independent contractor with gig companies like Grubhub, Uber Eats, Doordash, Instacart and others. Then we'll talk about some questions to ask yourself when evaluating whether to form an LLC.
Before you read any further, please understand this one thing: This article is not meant to be nor should it be taken as professional advice. This is written for informational purposes only.
The goal of this article is to provide information to help you understand how LLC's work. For personal advice related to your situation and your business, you should consult your own professional tax or legal professionals.
What is an LLC and how does that apply to delivery contracting with Doordash, Uber Eats, Grubhub, Instacart, etc.?
LLC stands for Limited Liability Corporation. It's a popular way for business owners of many types to structure their business. An individual, such as a gig economy worker, can structure their business as an LLC, or they can choose to remain as a sole proprietor.
Understanding your business structure.
Before we go any further, let's make sure you understand this:
As an independent contractor, you are a business owner.
When you agreed to the contract terms with Grubhub, Doordash, Uber Eats, Instacart or others, you agreed to this. There was a part of the agreement that said something like “I agree that I am an independent contractor and not an employee.”
That means that you are performing your deliveries as a business. You are not an employee of these companies.
So what kind of business are you? That depends on whether you have created a business stucture.
Most of us, who haven't created a structure, are known as Sole Proprietors.
A sole proprietor is somoene who owns an unincorporated business by himself or herself.IRS definition of a sole proprietor
If you are doing business by yourself without any form of corporation or structure, you are considered a sole proprietor. Your profits are taxed as part of your individual income taxes. There's no official business structure.
This is the norm for most of us in the gig economy.
What is an LLC?
LLC stands for Limited Liability Corporation.
It's sort of a corporation. But it's not. Even though corporation is part of its name.
Which means we should start by understanding what a corporation is.
Put simply, a corporation is an organization that is recognized by law as an entity. Some definitions would say it's legally like a person. The organization exists apart from its owners and members.
When you create a corporation, you create an entity that exists on its own.
A corporation can own things. It can have its own bank accounts. It can own other corporations.
A corporation can also owe money. It can be in debt.
We see corporations in many forms. Non profit organizations are a form of corporation. The companies that we contract for such as Uber, Doordash, etc. are corporations.
And an LLC is a form of corporation. It's a legal structure or entity for a business. When you create an LLC for your business, you are creating something that is separate from you.
As an unincorporated sole proprietor, there's no distinction between yourself and your business. Your business is part of you.
When you create an LLC, you create an entity that is separate and distinct from you as an individual.
How would an LLC relate to your delivery work with Grubhub, Doordash, Uber Eats, Instacart and others?
You have the right to contract with these companies as an individual.
You also have the right to create an LLC and have that organization contract with them. That's part of the ‘personhood' of your LLC.
Here's the thing about that. These companies choose to use independent contractors instead of hiring employees. That means the relationship is a business to business relationship.
Contractor may enter this Agreement either as an individual or as a corporate entity.Doordash Independent Contractor Agreement (US) as of December 13, 2020
Because they are contracting with you as a business, they cannot prevent you from structuring your business as a business entity.
If they try to keep you from operating as a business in that way, that can be evidence that they're actually using employees.
What are the advantages if I form an LLC to deliver for Doordash, Uber Eats, Instacart, Grubhub or other delivery companies?
After all, it's pretty simple to do things as a sole proprietor.
No paperwork or legal hoops to jump through. No incorporation fees, less regulation, fewer headaches.
Why would I go to the trouble and form an LLC?
The main reason you would create an LLC would be to protect yourself if anything goes bad with your business. There may be some tax advantages.
There are four immediate benefits that I can see for forming an LLC if you are a contractor with Grubhub, Doordash, Uber Eats, Instacart or any others.
An LLC can protect your assets if you get sued.
The main reason people form an LLC is tied to what the LLC stands for: Limited Liability Corporation. In other words, you limit your personal liability.
Remember that when you create an LLC, you create a separate entity. When you do the work of the LLC, you are acting as part of the LLC.
Say you caused a bad accident. If you are simply a sole proprietor, the other party can sue you personally. They can go after your bank accounts or your assets. You could lose your car or your home.
If you are operating your business properly, an injured party can only go after the assets that belong to your business. Personal property and funds are separate from that of your business. (We'll talk about exceptions further down).
An LLC can protect your assets from your business debts.
If you run up huge business debts as a sole proprietor, your debtors can sue you individually. Just like if you caused an accident, they can go after your accounts and assets.
Once again, the LLC creates a separate entity. The debts of your business are owed by the business, not by you.
Think of it this way: If you personally go bankrupt, your creditors can't go after your brother or cousin to get their money (unless they were dumb enough to co-sign for your loan). They can only go after whatever you own.
It's the same kind of thing – if the debt is in the name of your LLC, the people your LLC owes money to can't go after you as an individual. That's because your LLC and you are separate from one another.
Certain LLC settings can provide tax advantages.
In most situations, your taxes are not much different with an LLC than they are as a sole proprietor.
If you are a single member LLC, you are taxed the same as a sole proprietor. If you have others who own the LLC with you, you're taxed the same as a partnership.
Both Sole Proprietorship and Partnership taxation are “pass-through”, meaning the bsuiness profits, losses, credits and deductions will flow through to the personal tax return of each member.Pass-through definition from LLC University
In normal circumstances, there's no difference or advantage on your taxes when you form an LLC. Your business's taxes are paid as part of your individual income and self employment taxes.
You do have the option to have your LLC taxed like a corporation. It's a little complicated, but ultimately what happens is you go on payroll as an employee of your company.
The tax advantage comes in that if your company profits are higher than what a reasonable salary would be, you can take the additional profits as a dividend instead of as a salary.
You will pay income tax and FICA on your salary. But the dividend is only subject to income tax. This type of setup would allow you to avoid self employment tax on part of your profits.
This only works if your earnings are more than you would make as a normal employee in this line of work. Speak with a tax pro before you try to go down this path.
Forming an LLC protects your independent contractor status.
There's more and more pressure on the gig economy to use employees than ever before.
Personally, I don't want to be an employee. I chose the independent contractor route intentionally because I want the freedom to run my own business.
Part of the problem here is too many independent contractors blur the lines between being an employee and operating a business. I think that Grubhub, Doordash, Uber Eats, Instacart and all the other gig companies want it that way.
However, creating an LLC is one way of making sure that you are intentional about running a business. When you create a business entity, you truly contract with these companies as a business.
When AB5 was passed in California, I heard many say that if Prop 22 didn't pass, the only way to really work as an independent contractor would be to incorporate in some way.
Are there disadvantages to forming an LLC as a delivery driver with Grubhub, Doordash, Uber Eats, Instacart, etc.?
Disadvantages of forming an LLC may outweigh the advantages. Think about some of these issues:
Forming an LLC can be expensive.
Let's start with the cost of having someone set it up for you.
For most of us, it's better to have a professional set things up. Attorneys and CPA's aren't cheap. Some companies provide a service to walk you through.
Different states charge you differently for setup and taxes. You pay as little as $40 in Kentucky up to $870 in California. Most states have an annual fee or tax.
The cost of keeping up on the requirements can be higher as well. You have to keep better records and report your earnings in more detail, which means spending more on accounting.
Forming an LLC requires more work.
When I was business manager for a nonprofit organization, one thing I noticed is it just costs a lot to be a nonprofit. You report this, write that, ask for money here, do your board meetings. It's a lot of jumping through hoops that keeps you from doing the work you're there to do in the first place.
Running an LLC is much the same.
You have more accounting. There are more requirements. You submit annual reports. There's a lot more involved in just crossing the t's and dotting the i's and dotting the t's and crossing the i's.
You can't mix business and personal as well.
For example: You drive thousands of miles for your delivery business. Your personal insurance allows you to do delivery work.
What happens if you have a bad accident? Will personal insurance be a problem? It might.
Your LLC is a separate entity. That means you need to keep your finances separate as well. If you don't, you risk losing the protections that your LLC was set up to provide.
One of the main reasons courts are able to “pierce the corporate veil” is due to the commingling of assets. This is when the business and personal finances are mixed together.LLC University on the risk of losing liability protection.
If you're sloppy in your bookkeeping, or frequently spending business funds for personal things, you put your corporate protection at risk. If you mix your business and personal finances, you indicate through your actions that your business is NOT separate from your personal.
When you do that, you open the door for creditors to come after your personal assets. Now you've defeated the purpose of creating your LLC in the first place.
Ask some questions when thinking of forming an LLC as a delivery independent contractor
Get a tax pro. Talk to a lawyer. If you're thinking about this at all, speak to someone who can look at your personal situation.
I think the best way to look at it is to ask if the benefits I mentioned above are really benefits worth pursuing. Is there a real value in getting an LLC for your delivery business?
So let's ask questions around those benefits:
1. What is your risk of losing assets in a lawsuit?
I think there are three smaller questions involved:
What is the risk of being sued?
What are your assets?
Are there alternatives to an LLC?
I think a look at all three of these questions help determine if that first benefit is enough to make you go with an LLC.
What is the risk of being sued?
I run two different businesses. One is this website, and the other is my delivery business. My risk of being sued for my delivery business is much higher than it is with my website?
Because I'm driving so much. There's more physical activity going on.
There's a reason that most personal insurance companies won't cover you when you are on deliveries. The risk is just higher.
You're in traffic all the time. There's pressure to get deliveries done more quickly. With companies deactivating you for late deliveries, that pressure is increasing.
And oh, by the way, you're dealing with an app on your phone while doing all that driving.
You might be the safest driver I know. However, statistically, your odds of getting sued are still higher than the average person. That's just the nature of the beast when delivering food.
What are your assets?
Do you have anything they could take from you if you did get sued?
For too much of my adult life it never would have made sense to do do something to protect my assets. That's because I didn't HAVE any assets.
There's that old saying that you can't get blood out of a turnip.
This is a real question for a lot of us in the gig economy. The way I always liked to look at it was, it was a ‘bright side of life' kinda thing. The good thing about not having anything is they can't take it away from me.
If you have significant assets, such as equity in your home, or nice enough vehicles that are paid off, or certain savings, you definitely want to sit down with a financial or tax pro and find out what is vulnerable.
Is there any alternative to an LLC?
The more important question is, how well insured are you?
Do you have the right insurance? Have you made sure that your car insurance will cover you while on delivery? As I mentioned above, most personal policies won't.
If you haven't taken care of that issue, do it now.
Will having the right kind of insurance be enough to cover any risk that you might have?
These are all good questions to ask as you sit down with your professional help.
You ARE getting together with a professional on all this, right? You should.
Last thoughts on if you're really at risk of losing your assets in a lawsuit.
It's really a combination of the questions above that matters.
You need to weigh all three questions. Add up your assets, check out your insurance. Sit down with a professional who is there to help you find what's best for you (and not just sell you something).
2. What is your risk of losing everything because of business debts?
Here's the beauty of doing gig work such as delivery with Uber Eats, Doordash, Instacart, Grubhub and others.
There's usually not much need for a business loan that would put you in debt.
You don't have to build inventory or build up a base. The moment you go out and delivery, you're profitable.
On top of that, you're not very likely to get a business loan based on your delivery business. You don't have the customer base or assets to really base a loan on.
Chances are high that if you did get a loan for your delivery business, you'd have to personally guarantee that loan. In that instance, an LLC isn't going to protect you anyway.
There are always exceptions. You're probably aware of any that might exist for you. Once again, sit down with your financial help to figure this one out.
3. Would an LLC actually help you with your taxes?
A normal LLC wouldn't, because nothing changes about your taxes. The only time that it would is if you elected to be taxed like an S-Corporation.
I won't even try to go into the details on how it works. You really need your tax pro for this one.
But here's what I will tell you: When you go this route, you have to pay yourself a reasonable salary first. You also put yourself at a much higher audit risk, because people will abuse this.
So the question is, are you making enough more than a “reasonable wage” to even be able to take advantage of this?
Consider that a “reasonable wage” is going to start at at least minimum wage.
For what we do, that might be kind of rare.
Part of the problem is the 57.5¢ mileage allowance (2020). The good news is it allows most of us to deduct much more than our actual cost.
The flip side is, for a lot of us that taxable income barely comes out much above minimum wage.
Sit down with your tax pro (am I sounding like a broken record yet?) and see what things look like for you. Will you save enough in taxes to make it worth doing this?
Would forming an LLC really do much to protect your independent contractor status?
The problem here is, if anything changes, it will change for everyone.
If a law changes that pushes these gig companies into a corner, they're probably going to go with all employees.
If changing to an LLC will allow a company to continue using contractors, EVERYONE who contracts with them will have to make that change.
You won't get everyone to do that. You probably won't get half of the contractors to make that change.
In fact, that's pretty much why these companies don't require that status in the first place. They know they wouldn't get enough contractors to get their orders delivered if they did that.
I think this remains true for people who work in areas where the scale is a bit smaller. In an industry that requires thousands of contractors, it probably wouldn't make a difference.
Should you form an LLC to deliver for Grubhub, Doordash, Uber Eats, Instacart or any of these other gig companies?
For some of you, yes. It actually makes sense
For others, no.
There's no one answer.
Sit down with your tax pro.
And don't pick a tax pro who is leading with the benefits of making such a change. Don't go with someone who's telling you to do this so you can get this benefit.
Usually, someone like that is more intent on selling you something than they are actually trying to figure out what's best for you.
Find someone who will honestly sit down with you and help you evaluate the benefits and the drawbacks.
Then, you can make an informed business decision.
The best online resource that I found that did a fantastic job of explaingin a lot of LLC details in plain English was LLC University. I found it to be informative, in depth and easy to understand.
I also found Nolo's Quick LLC book to be very helpful in helping me understand the differences between different types of LLC's and other corporate structures. The link below is an affiliate link, I may receive payment for qualifying purchases.