Author Topic: Check my Plan - Hotshot Trucking Partnership  (Read 729 times)

Booma

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Check my Plan - Hotshot Trucking Partnership
« on: October 29, 2018, 02:31:07 PM »
My brother and I are starting a hotshot trucking company.  He has been driving for about ten years and he wants to get out on his own.  I want to diversify my investments.  My plan is to form two LLC entities:

1st Entity: Holding Company (100% Booma owned)
2nd Entity: Operations Company (51% Booma / 49% Brotha)

I'll buy the truck and trailer and the holding company (HC) will own them.  I'll lease them to our operations company (OC) to help protect my capital investment and liability.  I would like to finance the truck and trailer personally and sell them to my HC with the loan intact, but I haven't explored this option and I'm not sure the bank would allow it.  Does anyone have experience?  Any pitfalls (other than leveraging, which I understand and accept) I should worry about?

I'm going to set up both as regular (i.e. passthrough) entities for tax purposes.  My full time job earns enough to avoid self-employment tax.  If things go well and we start adding drivers I'll look at S-Corp election, but I don't think it makes sense for now.  My contributions will be capital and general business knowledge with a little bit of bookkeeping (financial professional/MBA background).  I've looked at the 100/500 hour requirements for passive/active involvement.  Is there an advantage to being passive/active if I plan to work my current gig for the indefinite future?  I can't see this as a full time gig for me unless we have 10 trucks running or something. 

My brother doesn't have the financial footing to take quarterly distributions, so he'll be getting monthly distributions to keep food on his table.  I assume this is easy in quickbooks.  Any recommendations for this process?  Any tips to make sure the taxation side is handled properly?

Ideally I would like the HC to own my 51% stake in the OC, but I'm not sure if this is best for taxes or liability.  I will have a good attorney draft the operating and lease agreements, but I want to get as much info as I can before I start paying for time with the lawyer and CPA. 

Basically, I'm having trouble finding good information about my specific setup since most people starting a business are operating the business too.  This is primarily an investment for me, but I'll have to be involved on a regular basis to keep the wheels turning and make sure all the regulatory and financial boxes are ticked.  I specifically worry if I'm structuring things correctly from a tax and liability perspective.  Can it be done better/cheaper/simpler?

I don't necessarily need advice on whether or not the business is viable or my borrowing money to buy assets is a good idea.  I can determine my own leveraging risks and I'm confident my brother has the contacts and ability to source loads sufficient to at least keep his bills paid and pay the leases.  That being said, any general feedback is welcome. 

I'm sure I missed important details, but I appreciate any feedback or suggestions you might have. 
« Last Edit: October 29, 2018, 02:32:54 PM by Booma »

MMbergmann

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Re: Check my Plan - Hotshot Trucking Partnership
« Reply #1 on: October 30, 2018, 10:21:46 AM »
Why don't you just cosign for a loan and he pays you back + interest on top of the loan interest? What you're suggesting sounds way too complicated for what the end result would be.

CareCPA

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Re: Check my Plan - Hotshot Trucking Partnership
« Reply #2 on: October 30, 2018, 11:17:36 AM »
From a purely tax and accounting perspective, I see no reason to have a holding company. Just own the truck, and rent it to the operating company. I can't imagine that if you own the HC and the truck 100%, that the HC will provide any kind of liability protection.
Either way, it's self rental, and will most likely be active income not subject to self-employment tax.

Booma

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Re: Check my Plan - Hotshot Trucking Partnership
« Reply #3 on: October 30, 2018, 01:58:17 PM »
Why don't you just cosign for a loan and he pays you back + interest on top of the loan interest? What you're suggesting sounds way too complicated for what the end result would be.

I don't want to loan him money.  I want to own the assets.  Loaning him money or owning the truck in the operations company opens up the truck to any claims against the OC.  If the company goes bust or he hits an overpass I want to keep the truck.  It's common to keep assets and operations separate to limit liability and risk.

The truck and trailer are the only assets.  I am buying those assets and I don't want to give him half of them up front.

Booma

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Re: Check my Plan - Hotshot Trucking Partnership
« Reply #4 on: October 30, 2018, 02:01:42 PM »
From a purely tax and accounting perspective, I see no reason to have a holding company. Just own the truck, and rent it to the operating company. I can't imagine that if you own the HC and the truck 100%, that the HC will provide any kind of liability protection.
Either way, it's self rental, and will most likely be active income not subject to self-employment tax.

The holding company is for liability. It will just enter into a lease with the operating company and own the assets.  I'd like to use a holding company so I limit personal liability and keep business/personal separate if we expand to add trucks and drivers.  I understand there is little to no tax advantage.  Why don't you think it would provide liability protection?

My active/passive concern is with the operating company.  If I'm doing some limited bookkeeping I may exceed 100 hours, but how much of that is me doing my due diligence as an investor and how much counts as bookkeeping?  I'll ask my own CPA when I sit down with him.  I doubt it's a straightforward answer.
« Last Edit: October 30, 2018, 02:05:45 PM by Booma »

bwall

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Re: Check my Plan - Hotshot Trucking Partnership
« Reply #5 on: October 30, 2018, 02:21:54 PM »
The trucking business is a really difficult space to operate in. I've met a number of people who got into the business thinking they'd make a ton of money and then went bankrupt.

Once I had a driver on the phone asking me the rate that I'd pay to ship a car from L.A. to NY. He'd been quoted a price that was literally double what I'd paid about two dozen times in the preceding six months. He'd already gone to driver's school to get his license and maybe even already leased a truck, too.

So, what did you want to haul? Routes?

Booma

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Re: Check my Plan - Hotshot Trucking Partnership
« Reply #6 on: October 30, 2018, 02:27:53 PM »
The trucking business is a really difficult space to operate in. I've met a number of people who got into the business thinking they'd make a ton of money and then went bankrupt.

Once I had a driver on the phone asking me the rate that I'd pay to ship a car from L.A. to NY. He'd been quoted a price that was literally double what I'd paid about two dozen times in the preceding six months. He'd already gone to driver's school to get his license and maybe even already leased a truck, too.

So, what did you want to haul? Routes?

Like I said, he's been working for a while and has connections to provide us with routes.  We'll be hauling oil field equipment in the OK/TX area.  We have a dispatcher lined up to feed us routes once we get going and he's going to hedge by driving for his current company for a few months while we transition.  Fortunately, the price of oil and economic cycle means that, at least for now, prices are pretty lucrative driving parts in and out of west Texas.  Obviously things can change quickly, but we want to get established and start to diversify while the going is good.  He's going to be driving one way or another, so he may as well get paid for it.

The risk is part of the reason I want to own the assets.  He can always go back to driving for his company, but if I sink $40-50k into the deal and it goes belly up I want to be able to sell the assets and recover a big slice of the investment.

bwall

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Re: Check my Plan - Hotshot Trucking Partnership
« Reply #7 on: October 31, 2018, 05:24:01 AM »
Keep in mind that your business model is 100% dependent on the price of oil. If the oil price is high, there will be plenty of fracking and need to haul oil field equipment. If the price drops, so does activity and therefore demand for your services due to no fault of your own. You could offer amazing prices and services and have great customer satisfaction, but if there is no demand due to low oil prices then you are out of business.

If the business goes belly up due to low oil prices, then everyone else in the oil patch will also be looking to fire-sale assets. It'll be a buyer's market and the prices for used hauling equipment will be very very low. 

I think the last time this happened was 2014-15? Oil price dropped from $100/bbl to $35/bbl. Lots of frackers went out of business.

Booma

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Re: Check my Plan - Hotshot Trucking Partnership
« Reply #8 on: October 31, 2018, 08:41:13 AM »
I recognize the oil market is cyclical and we may be entering at a peak.  The prices have only just recovered and we hope to have time to exploit the upturn for a few years.  We plan to diversify into some counter-cyclical markets at our earliest opportunity.  My brother has weathered the ups and downs of the oil market and knows the risks.  I plan to recoup my investment as early as possible and recycle profits in the business if we are lucky enough to grow. 

Luckily, the type of truck and trailer we are using is perfectly well suited to farm and heavy equipment work, so the asset value shouldn't be wholly dependent on oil prices.  Of course, there is always the possibility of selling at a significant loss, but we wouldn't be entering into business if we weren't open to risk.

I appreciate all the great feedback so far!

bwall

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Re: Check my Plan - Hotshot Trucking Partnership
« Reply #9 on: October 31, 2018, 10:12:43 AM »
It sounds like you've considered all angles, which is great. I know that things very rarely happen as we think they will, so it's important to  have contingency plans in place. Having experience in the market you're entering is very valuable.

Good luck!

CareCPA

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Re: Check my Plan - Hotshot Trucking Partnership
« Reply #10 on: October 31, 2018, 10:34:37 AM »
...
Why don't you think it would provide liability protection?
...
The truck is ultimately in your name. By selling it to a company 100% owned by you, which then leases it to a company 51% owned by you, it's still you. The HC may offer some liability protection, but I think a good lawyer would probably bypass those entities and say they lack economic substance. Your experience may differ. I always advise clients to carry sufficient insurance to assume their single-member LLC will be ignored (single-member LLCs, anecdotally, provide less protection than multi-member LLCs).

My active/passive concern is with the operating company.  If I'm doing some limited bookkeeping I may exceed 100 hours, but how much of that is me doing my due diligence as an investor and how much counts as bookkeeping?  I'll ask my own CPA when I sit down with him.  I doubt it's a straightforward answer.
If you're self-renting, that income will be active no matter what.
Your OC activity may be active or passive, that's the part you'll need to discuss with your CPA.

Booma

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Re: Check my Plan - Hotshot Trucking Partnership
« Reply #11 on: October 31, 2018, 11:01:50 AM »
...
Why don't you think it would provide liability protection?
...
The truck is ultimately in your name. By selling it to a company 100% owned by you, which then leases it to a company 51% owned by you, it's still you. The HC may offer some liability protection, but I think a good lawyer would probably bypass those entities and say they lack economic substance. Your experience may differ. I always advise clients to carry sufficient insurance to assume their single-member LLC will be ignored (single-member LLCs, anecdotally, provide less protection than multi-member LLCs).

My active/passive concern is with the operating company.  If I'm doing some limited bookkeeping I may exceed 100 hours, but how much of that is me doing my due diligence as an investor and how much counts as bookkeeping?  I'll ask my own CPA when I sit down with him.  I doubt it's a straightforward answer.
If you're self-renting, that income will be active no matter what.
Your OC activity may be active or passive, that's the part you'll need to discuss with your CPA.


Thanks for this.  I plan to have as much liability insurance as we can reasonably afford, but the cost to add another LLC is negligible if it gives me any liability protection.  I may talk to my attorney about adding my wife in the HC to avoid the single member problem you anticipate. 

The OC activity is the only real tax concern.  The self-rent amounts are not significant in my overall tax situation.  Thanks again!