How to Start an LLC for a Towing Company? (Practical Advice)

Jon Morgan
Published by Jon Morgan | Co-Founder & Chief Editor
Last updated: June 20, 2024
FACT CHECKED by Lou Viveros, Growth & Transition Advisor
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Steps to Take After Forming an LLC for a Towing Company

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 steps like selecting a business name, registering with the state, and obtaining necessary licenses and permits.
  • Choosing the right LLC structure, whether single-member or multi-member, is critical for the towing business's management and growth.
  • With the global tow truck market projected to grow at a CAGR of 5.1% from 2024 to 2030, reaching a valuation of US$ 1.47 billion, starting an LLC for a towing company now could position you to capitalize on this expanding market.
  • In my opinion, the effort and initial cost of setting up an LLC for a towing company are well worth the legal protections and professional credibility it offers in the long run.


How to Form a Towing LLC

Two people discussing the steps to start a towing business

When you want to start a towing business as a limited liability company, you must take several steps to satisfy legal state compliance.

Successful towing companies have to follow all the local and state laws, so do research before taking any steps [1].

1. Choose the Type of Your LLC (Mandatory)

Choosing the right LLC structure for your towing business is critical, especially considering that there are over 10,000 towing companies in the United States, as reported by Peak Business Valuation, with less than 1% being major players.

Here are two common types:

Single-Member LLC:

Advantages:

  • Simplicity in management and decision-making.
  • Easier tax filing as income is reported on your personal tax return.

Disadvantages:

  • Limited perspectives for decision-making.
  • Personal assets might be at risk if the LLC veil is pierced due to non-compliance.

Multi-Member LLC:

Advantages:

  • Shared responsibility and diverse skill sets from multiple owners.
  • More opportunities for raising capital.

Disadvantages:

  • More complex decision-making process.
  • Requires more comprehensive operating agreements and management structures.

Each structure has its merits and drawbacks, and the choice depends on your business needs, resources, and growth plans.

2. Choose a Name for Your LLC (Mandatory)

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.

3. Select a Registered Agent (Mandatory)

Shaking hands with a newly hired 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.

4. File Articles of Organization (Mandatory)

Woman watching her co-worker file and organize articles

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.

"Preparation doesn’t assure victory, it assures confidence."
– Amit Kalantri, Wealth of Worlds.

Even if you’re the sole 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.

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

You are required to open a bank account for your towing company.

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.

8. File Your LLC Annual Report (Mandatory)

As a seasoned business consultant with extensive experience in helping companies thrive, I cannot stress enough the importance of filing your LLC annual report, particularly for a towing company.

This annual report is a mandatory document that keeps your business compliant with state regulations. It typically includes updates on your company's address, members, and management structure.

For a towing company, this report might also include information about fleet expansion or changes in services. Timely submission is crucial as it helps maintain your LLC's good standing, avoiding penalties or legal complications.

Remember, this report is not just a regulatory formality; it's an opportunity to reflect on your company's growth and plan for future developments.

9. 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.

10. Choosing Your Tax Structure

A person writing signature to a business insurance form

As an experienced business advisor, I recommend careful consideration when choosing a tax structure for your LLC.

The two primary options include:

Disregarded Entity:

  • Pros: Simpler tax filing; profits and losses pass directly to members.
  • Cons: Members pay self-employment taxes on profits.

Corporation (S-Corp/C-Corp):

  • Pros: Potential tax savings on profits (especially with S-Corp); payroll tax savings.
  • Cons: More complex filing; strict operational requirements.

Personally, I lean towards an S-Corp structure for its balance of tax benefits and operational flexibility. However, your specific business needs and financial situation should guide your choice.

To change your tax structure, you must file IRS Form 2553 for S-Corp election by March 15th of the tax year it's to take effect.

For a new LLC, you have 75 days from the date of formation to make this election. Remember, tax structures can significantly impact your financials, so consult with a tax professional to make an informed decision tailored to your towing company's unique needs.

The Benefits and Drawbacks of Towing Companies

A woman holding her head from stress caused by too much paper works

Benefits:

  • Limited Liability Protection: The most significant advantage is the protection of personal assets from business debts and liabilities.
  • Flexibility in Management: LLCs offer flexibility in how the business is managed and operated.
  • Pass-Through Taxation: Profits and losses pass through to the owner's personal tax return, avoiding double taxation.
  • State-Specific Incentives: Some states offer incentives like lower tax rates, grants, or resources specifically for LLCs, which can be a major draw.

Drawbacks:

  • Compliance Requirements: Annual reports and other state-specific compliance requirements can be burdensome.
  • State-Specific Disadvantages: For example, states with higher business taxes or stringent regulations can pose challenges for LLCs.
  • 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.

Related Article: How To Form An LLC For A Family Cabin

DIY vs. Professional LLC Formation

When deciding between DIY and professional LLC formation for a towing company, it's crucial to weigh the pros, cons, and risks of each option.

DIY LLC Formation:

  • Pros: Cost-effective; immediate hands-on learning of the formation process.
  • Cons: Requires significant time and effort; potential for mistakes due to a lack of legal knowledge.
  • Risks: Errors in filing or non-compliance can lead to legal issues or delays.
  • Suitable For: Those with a tight budget and time to research and understand the process.

Professional LLC Formation:

  • Pros: Expert assistance ensures accuracy; saves time; often includes additional compliance assistance.
  • Cons: More expensive than DIY; less direct involvement in the formation process.
  • Risks: Dependency on a third party; service quality varies between providers.
  • Suitable For: Those who prioritize peace of mind, time-saving, and professional guidance.

Your choice should align with your comfort level in handling legal documents, your budget, and the value you place on professional guidance.

If you have the time and confidence to navigate the process, DIY can be a cost-effective option.

However, if you prefer ensuring accuracy and compliance without investing personal time in learning legal intricacies, professional services might be the better choice.

FAQs

How Many Tow Trucks Can Use the Same DOT Number?

Only one tow truck can use the same DOT number, as per the US Department of Transportation. 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?

No, 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.

Do You Need a CDL to Drive a Tow Truck?

No, 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.

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.


References:

  1. https://thetowacademy.com/what-makes-a-towing-company-sellable/
  2. https://www.researchgate.net/publication/317997690_Brief_Remarks_on_the_Contract_of_Towage

About The Author

Co-Founder & Chief Editor
Jon Morgan, MBA, LLM, has over ten years of experience growing startups and currently serves as CEO and Editor-in-Chief of Venture Smarter. Educated at UC Davis and Harvard, he offers deeply informed guidance. Beyond work, he enjoys spending time with family, his poodle Sophie, and learning Spanish.
Learn more about our editorial policy
Growth & Transition Advisor
LJ Viveros has 40 years of experience in founding and scaling businesses, including a significant sale to Logitech. He has led Market Solutions LLC since 1999, focusing on strategic transitions for global brands. A graduate of Saint Mary’s College in Communications, LJ is also a distinguished Matsushita Executive alumnus.
Learn more about our editorial policy

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