A towing LLC company can be a lucrative business venture, but it requires careful planning and execution. One of your most important decisions is what legal structure to use for your business.
As an expert in business formation and legal compliance, I’ve compiled an in-depth guide to walk you through the process of starting an LLC for your towing company.
This article will guide you on starting an LLC for a tow truck business and explain why this might be a good choice for you. We’ll also highlight some potential drawbacks of using an LLC structure.
Quick Summary
- Starting an LLC for a towing company involves several steps, such as choosing a business name, registering the business, obtaining necessary licenses and permits, creating an operating agreement, and getting insurance.
- Research and comply with your towing company's specific state and local regulations and requirements.
- Consulting with a business attorney or a professional service specializing in LLC formation can help ensure that all legal and administrative aspects of starting the towing company are properly addressed.
Steps to Starting a Towing Business
When you want to start a towing business as a limited liability company, you must take several steps to satisfy the legal state compliance.
Successful towing companies have to follow all the local and state laws, so research before taking any steps [1].
Here are the basic steps tow truck businesses must take before registering as a limited liability company.
1. Choose your LLC Name
Towing companies registering as LLCs must follow the state's naming guidelines.
When choosing the name of your LLC, remember it cannot be the same as an existing business, and it must contain the words "Limited Liability Company" or "LLC."
When you choose your LLC's name, make sure to do a trademark search to ensure that no other towing businesses are using a similar name.
Towing companies often use creative names that reflect their services. For example, "AAA Towing" or "Budget Towing." Make sure to avoid restricted words like "Bank" or "Attorney" as part of your LLC name.
Once you have chosen your tow truck business name, you can reserve it by filing a Name Reservation Request form with the state.
This ensures that no other businesses in the state can register a similar name. States require tow truck businesses to file a Name Reservation Request form before filing their LLC Articles of Organization.
2. Hire a Registered Agent
When you start a towing business as an LLC, you must hire a registered agent service.
A registered agent is someone who agrees to receive legal documents and correspondence on behalf of your tow truck business.
For a towing company, a registered agent must:
- Be available during business hours
- Be ready to accept legal documents on behalf of the company
- Reside in the state where the LLC is formed
You can either hire a premium registered agent service or an individual as your company's agent.
If you hire a registered agent service, they will have multiple employees who can act as your company's registered agent. This is often a good choice for many tow truck businesses because it provides more flexibility.
3. Create an Operating Agreement
Even if you’re the only business owner of your towing company, you’ll need an operating agreement to specify the terms and conditions of your business [2].
An LLC operating agreement is a legal document that outlines your LLC's ownership structure, management duties, and financial obligations.
Though not mandatory by law, having an operating agreement may help solve disputes between new business owners. Furthermore, it may help avoid costly legal battles down the road.
Consult an attorney to ensure your agreement is legally binding and covers all the necessary provisions.
4. File Articles of Organization
A new towing truck company registering as an LLC has to file articles of organization with the state.
Although this filing can be done online, some states require it to be mailed in. The forms are typically available on the website of the Secretary of State or business division.
The cost of setting up an LLC varies from state to state but can typically range from $50-$500.
Annual fees may also be associated with maintaining your LLC, even in the automotive towing industry.
The articles of organization will include the company name, address, registered agent, and owner information. Be sure to have this information ready when filing.
Some other items that may be required as part of your application are not limited to a copy of your driver's license or state identification card, the LLC's Operating Agreement, and EIN.
5. Obtain Business Licenses and Permits
A tow truck driver needs a commercial driver's license (CDL) or Class B license, which differs from a regular driver's license.
You’ll need to get a business license for your LLC and any permits your state or city requires. For example, you may need a permit to operate your tow truck on the streets in some areas.
Every business entity providing towing services needs to have a DOT number.
You can obtain a DOT by applying with the Federal Motor Carrier Safety Administration. The application can be found on their website and completed completely and accurately.
After the LLC is registered with the state and the DOT number is obtained, you must get a business license from your local municipality.
Tow vehicles must also display the DOT number on both sides of the truck in a contrasting color.
Make sure to check with your county clerk's office for any other specific permits or licenses that may be needed.
Not obtaining the required permits can cause severe financial and legal penalties or even lead to your LLC getting dissolved by the state.
6. Obtain Business Insurance
Tow truck drivers and tow trucks must be insured against accidents, injuries, and damages that could occur while working.
This commercial property insurance will protect your business in case of an accident or damage to your tow truck.
You'll also need general liability insurance to protect your business from any legal claims from operating your tow truck business.
You can usually get commercial property, emergency roadside assistance, and general liability insurance from the same insurance company.
Be sure to shop around and compare rates before buying any business insurance for your towing company.
Tow vehicles must also be registered and titled in your name. Check with your state's motor vehicle department for more information on registering and titling towing vehicles at your business location.
Most states require that towing companies have a surety bond. This bond protects customers from any losses due to dishonest or incompetent truck drivers.
7. Obtain an EIN and Open a Bank Account
Tow truck companies need an Employer Identification Number (EIN). You can apply for an EIN online, by fax, or by mail through the IRS website.
With an EIN, a towing company can:
- Hire employees
- Apply for a business loan
- Open a business bank account
- File franchise taxes
A business account and a credit card will allow your towing business to separate personal and business expenses. The bank account will help you during taxation and stay organized.
You can open a business bank account online or in person at a bank branch.
The Benefits and Drawbacks of Towing Companies
Starting your own towing company as an LLC has many benefits and a few drawbacks.
Let's take a closer look at some benefits of starting an LLC company for towing companies:
- One of the main benefits of forming an LLC is that it offers personal asset protection.
- LLCs offer several taxing options. By default, LLCs are taxed as pass-through entities or as an S corporation.
- If your towing business were to go bankrupt, your assets would generally be protected by limited liability protection.
- It has a simple management structure and is easier to operate than other business entities.
- Forming an LLC can help give your towing services a sense of credibility in the eyes of potential customers, lenders, and vendors.
Some of the drawbacks may include:
- Set up cost: You may need to pay filing fees, hire a lawyer or accountant, and pay ongoing maintenance fees to keep the LLC in good standing.
- Formalities: While LLCs are relatively easy to manage, you may need to file annual reports, maintain a registered agent, and hold annual meetings of members.
Overall, starting your towing company as an LLC is a good way to get started on the right foot. Providing towing services is a great way to make money, and LLCs protect your assets along the way.
If you're willing to deal with a little extra paperwork, an LLC can be a great option for your business.
Related Article: How To Form An LLC For A Family Cabin
FAQs
How are Towing LLCs Taxed?
Towing LLCs are typically taxed as pass-through entities. This means the company will pay taxes on its net income at the individual tax rate. Towing services can also opt for corporate taxation, which is taxed at the corporate tax rate.
How Many Tow Trucks Can Use the Same DOT Number?
According to the US Department of Transportation, only one tow truck can be associated with a specific DOT number. This ensures accountability and safety, as each tow truck must be registered and inspected individually. It is illegal to use the same DOT number for multiple tow trucks.
Can a Towing Company Have 2 DOT Numbers?
A towing company cannot have 2 DOT numbers. This can only happen when it operates as separate entities or is granted special permission by the Federal Motor Carrier Safety Administration (FMCSA). You might be fined or penalized for failure to comply with the regulations.
How Profitable Is a Towing Business?
Generally, a towing business can be profitable. The average towing company charges $75 per tow. If you towed 30 cars daily, you would make $22,500 monthly. You can also generate additional income by charging storage fees. Storage fees are usually $25 per day.
Do You Need a CDL to Drive a Tow Truck?
You don’t need a CDL to drive a tow truck unless the towed vehicle is considered a commercial motor vehicle. However, some states may have additional licensing requirements or restrictions for tow truck drivers.
Can a Felon Be a Tow Truck Driver?
Whether a felon can become a tow truck driver will depend on the state and the nature of the felony. Some state laws prohibit felons from having a tow truck license. Other states may allow felons to have a truck license depending on the severity of the felony.
How Much Can a Towing Company Charge for Storage?
A towing company can charge a storage fee ranging from $15 to $50 daily. Storage fees should be in your business plan to ensure you are making a profit.
They can be a significant portion of your towing company's income, so it is important to charge a fair price.
Starting an LLC for a Towing Company
An LLC may be the best option if you're considering starting a towing business. This towing company offers many benefits, such as limited liability and tax breaks, to help your small business thrive.
However, there are some things to remember before starting a tow truck company, such as zoning laws and permits.
To avoid costly mistakes, I recommend using ZenBusiness to help you navigate these waters and set up your business for success.
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References:
- http://www.jtexconsumerlaw.com/V8N1pdf/V8N1tow.pdf
- https://www.researchgate.net/publication/317997690_Brief_Remarks_on_the_Contract_of_Towage
