Starting out as an independent contractor or sole proprietor is how many shop owners begin. It is simple and inexpensive, but it can carry real risk. If someone working for you is hurt on the job and sues, a sole proprietor may have to answer with personal assets. Protecting what you have built takes planning.
In episode 10 of Maximum Octane, Kim Hickey talks with Jerry Jankowski, a Tax Resolution Consultant at IRS Assistance Inc. with 28 years of experience helping business owners resolve federal and state tax problems. Jerry explains how different business structures are taxed, how to protect personal assets, and how to avoid the surprises that catch many owners off guard.
This article is for general education only and is not legal or tax advice. Talk with a qualified CPA or attorney about your specific situation.
What You Will Learn
- How most independent contractors start and set up their businesses
- Sole proprietors and taxes. How different corporations pay their taxes
- The differences between C, S, and LLC corporations
- The story of the car dealerships and their company setting choices
- About Jerry’s unproductive habits
Questions Asked in This Episode
- Could you share some of your wisdom with us?
- People own the building that their business is in. And then they put that in the corporation name is as well, is that one of the examples of what you should not do?
- I don’t see anything wrong with speaking to a couple different professionals and saying: what is your opinion? What do you think is the best thing to do regarding what type of entity to create for our company?
How Most Independent Businesses Get Started
Jerry begins with how most independent contractors set up their businesses. Many start as sole proprietors because it requires little paperwork. The business and the owner are legally the same, which keeps things simple but also means there is no separation between business liabilities and personal assets.
That may be fine when it is just you in a one-bay garage. Once you have employees, customers’ vehicles, and significant equipment, the stakes get higher. That is when many owners start looking at forming a corporation or LLC.
For many new owners, the simplicity of a sole proprietorship is the main appeal. There is little paperwork, no separate tax return for the business, and complete control. But as the business grows, the risks grow with it. Customer vehicles worth tens of thousands of dollars sit in the shop. Employees use lifts, jacks, and power tools. A single lawsuit or accident could exceed the value of the business. That is when the protection offered by a separate legal entity becomes worth the extra administrative work.
Sole Proprietors, Corporations, and Taxes
Around the 8 minute mark, Jerry explains how different entity types pay taxes. A sole proprietor reports business income on a personal return. Corporations and LLCs can be taxed in different ways depending on how they are set up and what elections are made. Each option affects how much you pay, when you pay it, and how money moves from the business to you.
The IRS provides an overview of business structures on its Business Structures page, and the SBA explains the legal side in its guide to choosing a business structure.
Taxes are only one part of the decision. Entity choice also affects how easy it is to bring on partners, how ownership can be transferred, how the business is viewed by lenders, and how complicated the bookkeeping becomes. A structure that saves a little tax today might make a future sale or succession more difficult. That is why it is worth looking at the long-term picture, not just this year’s tax bill.
Insurance also plays a role. Even with an LLC or corporation, owners can be personally liable in some situations, such as when personal guarantees are signed on loans or leases, or when business and personal finances are mixed together. Good insurance coverage and clean separation of finances work together with entity structure to protect owners.
C Corporations, S Corporations, and LLCs
Jerry walks through the differences between C corporations, S corporations, and LLCs. In general terms:
- C corporations are taxed as separate entities, and profits distributed to owners can be taxed again at the individual level.
- S corporations generally pass income through to the owners’ personal returns, avoiding entity-level federal income tax, but they come with eligibility rules.
- LLCs offer liability protection and flexibility in how they are taxed, depending on elections made with the IRS.
Which one is right depends on your income, growth plans, number of owners, and long-term goals, such as selling the business. That is why the decision deserves professional input.
One common point of confusion is that an LLC is a legal structure, while S corporation status is a tax election. An LLC can choose to be taxed as an S corporation if it meets the requirements, which some owners use to manage self-employment taxes by paying themselves a reasonable salary plus distributions. The IRS expects that salary to be reasonable for the work performed, so this strategy requires careful planning with a tax professional.
C corporations are less common among small shops but can make sense in certain situations, such as when owners plan to reinvest most profits back into the business or seek outside investors. Each structure has trade-offs, and the right answer depends on the owner’s specific circumstances.
Should Your Building Be Inside Your Business?
Kim raises a common scenario: an owner buys the building their shop operates in and puts it in the same corporation as the business. Jerry discusses why that can be a mistake. If the operating company is sued or runs into financial trouble, the real estate may be exposed too. Many owners hold property in a separate entity and lease it to the operating business, but the right setup depends on your situation and should be decided with an attorney and CPA.
Separating real estate from the operating business also creates financial flexibility. The property entity can lease the building to the shop at a fair rent, which creates a steady income stream for the owner and can make the operating business easier to sell later, since a buyer may want to lease rather than buy the property. It can also simplify estate planning, allowing the building and the business to pass to different heirs if needed.
Lessons From Car Dealership Structures
Jerry shares a story about how car dealerships set up their companies. Larger dealers often separate real estate, operations, and other assets into different entities to protect each one. Independent shop owners can learn from that thinking, scaled to their own size.
Dealership groups often separate entities by function: one for real estate, one for each franchise or store, sometimes one for service operations or finance. That structure isolates risk, so a problem in one area does not threaten everything else. Independent owners do not need a dozen entities, but the principle of not putting all assets in one basket is worth applying at their own scale.
Why a Second Opinion Is Smart
Kim makes a point many owners will appreciate: there is nothing wrong with talking to a couple of different professionals and asking for their opinions on which entity type makes sense. Tax and legal advice can vary, and the cost of a bad decision can last for years. Eric Joern makes the case for working with a CPA in Why Every Auto Repair Shop Should Think of Getting a CPA.
Getting multiple opinions is especially important because tax and legal professionals have different specialties. A general accountant may not be familiar with the particulars of auto repair, such as inventory accounting, core charges, and shop supplies. An attorney who handles real estate may not be the best person to advise on entity structure. Building a small team of advisors, ideally including a CPA who understands the industry, gives owners better advice and helps catch issues one person might miss.
Avoiding Tax Surprises Year-Round
Many tax surprises come from a lack of planning during the year rather than mistakes at tax time. Owners can reduce the risk with a few habits:
- Set aside a percentage of every deposit in a separate tax account.
- Make estimated tax payments on time throughout the year.
- Review profit and loss statements monthly, not just at year-end.
- Keep personal and business expenses completely separate.
- Meet with your CPA mid-year to project your tax bill and adjust.
The IRS outlines estimated tax requirements for business owners on its estimated taxes page. Combined with the right entity structure, these habits help owners keep more of what they earn and avoid the stress of an unexpected bill.
Questions to Bring to Your CPA or Attorney
- Is my current entity structure still the best fit for my revenue and goals?
- Should the building or major equipment be held in a separate entity?
- What tax elections could reduce my liability legally?
- How does my structure affect a future sale or succession plan?
- Am I setting aside enough each quarter to avoid tax surprises?
For more on managing shop finances, read ATI’s A Practical Guide to Financial Planning and Tax Prep for Shop Owners and listen to Ron Saharyan in Bringing Balance in Our Finances’ Force.
Frequently Asked Questions
What is the best business structure for an auto repair shop?
There is no single best answer. Many small shops operate as LLCs or S corporations, while some start as sole proprietors and later change structure as risk grows. The right choice depends on your income, number of owners, growth plans, liability exposure, and whether you plan to sell the business someday. Because the decision affects taxes, legal protection, and future flexibility, it is worth reviewing with a CPA and an attorney, and getting more than one opinion is reasonable.
Should my shop’s building be owned by the business?
Many owners hold real estate in a separate entity and lease it to the operating business. The idea is that if the shop faces a lawsuit or financial trouble, the property may be better protected. Separating them can also simplify a future sale, since a buyer may prefer to lease rather than buy the building, and it can help with estate planning. The right setup depends on your circumstances, so decide it with an attorney and CPA before purchasing.
What is the difference between an LLC and an S corporation?
An LLC is a legal structure that can offer liability protection under state law. S corporation status is a federal tax election, not a type of legal entity. An LLC that meets the requirements can elect to be taxed as an S corporation, which changes how owners are paid and taxed. Owners who make that election generally need to pay themselves a reasonable salary for the work they perform. A tax professional can explain whether the election makes sense for you.
How can shop owners avoid a surprise tax bill?
Most surprises come from not planning during the year. Move a portion of each deposit into a separate account set aside for taxes, make estimated payments on schedule, and keep personal and business spending completely separate. Review your profit and loss statement every month so you know how the year is shaping up. A mid-year meeting with your CPA to project your tax bill gives you time to adjust before the deadline instead of scrambling afterward.
Resources and Links From This Episode
Connect With the Guests
- Jerry: LinkedIn
