Structures for Your Food Truck Business
Long before you open your food truck’s service window, you need to decide which type of business structure best suits your needs. Your options range from sole proprietorships to partnerships and corporations.
At the end of the day, choosing the right business structure for your food truck comes down to several factors, such as your risk of liability, tax obligations, business objectives, and so on.
Your lawyer can help you choose the correct form of business structure, based on factors such as the number of people involved, tax issues, liability concerns, and the business’s financial requirements. Your accountant can also discuss with you the tax implications of the form of business structure you choose.
Sole proprietorships for food truck businesses
A sole proprietorship is an unincorporated business owned by one person — in this case, you — known as a sole proprietor. The most important feature of a sole proprietorship is that the law makes no distinction between the sole proprietor and your business.
Virtually, all the legal and tax consequences associated with sole proprietorships are based around this principle, meaning you keep everything you make; however, you also owe taxes on all your income. A disadvantage to this form of business structure is that if any sort of trouble arises —legal, financial, and so on — your personal property is also up for grabs, including your home, car, personal savings, and so forth.
As a sole proprietor, you’re able to conduct business under your own name or under a trade name associated to your food truck. You can hire any number of employees or independent contractors. Because the law makes no distinction between you and your business, you’re not considered an employee of the business.
A partnership is an unincorporated business owned by more than one person. The two most common types of partnerships are general partnerships and limited partnerships:
General partnerships are made up of two or more partners who manage and are responsible for the business’s debts and operations. Each partner contributes skills, money, and time, and each shares in the company’s profits as well as its losses. The biggest advantage of a general partnership is the tax benefit; businesses structured as partnerships don’t pay income tax. Instead, profits and losses are passed through to the individual partners.
A limited partnership may have both general partners and limited partners. The limited partners in the relationship are investors, and they’re not liable for the same responsibilities as the general partners. The advantage of a limited partnership is that some partners will be silent partners who only invest in the business, allowing you to run the business as you deem necessary.
The disadvantages of both of these partnerships are that because you’re not structuring your business as a corporation, these partnerships bring personal liability for all the business’s obligations and debts.
Partnerships are often formed among friends or colleagues, which can make matters even more delicate. To avoid problems down the road, each partner should consult a separate attorney at the outset, and all partners should agree on set terms and conditions of the partnership.
Have an attorney prepare the partnership agreement (and let each partner’s legal counsel review it); the agreement should include all the important what-if questions in order to avoid problems should the partnership end. If the partnership does go sour, picking up the pieces can severely tax your company’s resources and financial health.
Food trucks as corporations
Incorporating is the forming of a new corporation under the law. The corporation can be a business, a nonprofit organization, a sports club, or a government of a new city or town. In the eyes of the law, a corporation is a person and thus can bring lawsuits, buy, sell, be taxed, and even commit crimes.
Just as in a sole proprietorship, a corporation can be created by an individual without partners. The primary difference between the two is that a corporation is a legal entity that separates your personal liability from the corporation’s debts and obligations.
Here are some of the benefits you can realize if you decide to incorporate your food truck business:
Personal liability protection: An incorporated company affords protection from any personal liability for your business debts and obligations.
Tax benefits: If you incorporate, you may gain tax benefits. Be sure to discuss this area with an accountant because the marginal tax rates for corporations with taxable incomes in some cases can be higher than those for an individual in the same scale.
Raising capital: If your business is incorporated, you have the ability to raise capital through the sale of stock.
Some of the disadvantages of incorporation, particularly for those in the mobile food industry, include the following:
Additional paperwork: Depending on the structure you choose, you may need to file two tax returns — one for you and one for the business — and keep good records.
Cost: The fees associated with initial incorporation and ongoing maintenance can put a strain on start-ups.
Because the needs of every business are different and the laws of incorporation vary from state to state, spending an hour or two with an attorney to investigate all the issues that may affect your decision is worth the time.
You may also want to consult with other food truck owners you know who have gone through the process and get their referrals and recommendations. You can then choose to pursue incorporating your business with an attorney or through an online legal service, such as LegalZoom. Note that you must also file your incorporation with your state government.