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What is the Best Business Entity for a Food Truck?

When you closely study the different business entities, you will come to the conclusion that a limited liability company is most suitable. If you want to start a business, the business entity you choose will go a long way to determine how far and how successful your business will be.

ome food truck businesses design their business for regional/community markets, some for the national market, and others for the international market via franchising. If you want to start a food truck business in the United States, there are several options to choose from as regards business entities.

Before we go through the various business entities available for a food truck business in the United States of America, it will be fair to state what a business entity is.

A business entity is a legal framework needed to operate a business. It is the structure that defines how a business should be run, the expectation of the business, and everything that has to do with the who, where, how, and when of the business.

In the United States of America, there are five types of business entities a food truck business can choose from. We have liability companies (LLCs), S corporations, C corporations, partnerships, or sole proprietorships and these entities have their pros and cons.

Having said that, let us go through all the business entities available to a food truck business before giving our opinion on the business entity that is suitable for a food truck business in the United States of America.

Business Entities Available to a Food Truck Business

1. Sole Proprietorship

The sole proprietorship is one of the options that are available to a food truck business. A sole proprietorship is considered the easiest and simplest business entity anyone can form. A sole proprietorship is a business entity that is owned and operated by just the owner.

With a sole proprietorship, you don’t need any formal paperwork to start and run the business. Literally, the business is you and you are the business because all the legal liability and financial liabilities are all on you. If the business is sued, it means you are sued and if the business suffers financial loss, it means you have suffered financial loss.

In fact, at the end of every year, all your losses and profits for the business will be recorded on your personal tax documents. An example of a sole proprietor is a food truck business that operates solo without any staff.

2. Partnership

A partnership is another form of business entity that a food truck can operate on. A partnership business is a form of business that is similar to a sole proprietorship but it involves two or more partners coming together to form a business.

One good thing about a partnership business is that both partners can easily generate cash for the business. So also, they can put their heads together to move the business forward and also to share the loss and liabilities of the business. We have two types of partnerships:

  • Limited partnerships (LP)
  • General partnerships

3. C corporation

C corporation is yet another option when it comes to the legal business entity of a food truck business. C corporation is a business entity that is independent of its founder(s) and the implication is that with this type of business structure, the founder(s) and the owner(s) of the business are legally regarded as separate entities from the business while the business is liable for any legal action.

This business structure requires annual filing and before you file as a C corporation, you are expected to strictly comply with government requirements such as hosting board meetings and making your company bylaws.

Taxation happens two times for C corporation owners. For example, after taxing the business, your personal earnings from company dividends will also be taxed. One major drawback with this type of business entity is that you will have to deal with double taxation.

4. S Corporation

Another option that is available for a food truck business is an S corporation. An S corporation is a business entity that passes corporate income, credits, deductions, and losses to its shareholders for federal tax purposes. S corporations can only have a maximum of 100 shareholders.

One drawback of forming your food truck as an S corporation is that it will place a cap on your potential to grow the business. So also, S corporations are only allowed to operate legally in the state indicated in the corporate charter of the company except if you apply and obtain the required permission from the state you want to operate from.

5. Limited Liability Company

Lastly, a limited liability company (an LLC) is another business entity you can choose if you want to start a food truck business in the United States of America. A limited liability company is a business structure that gives the owners of the business the required flexibility to decide how they want the business to be taxed.

One good thing about limited liability companies is that they are free from organizing board meetings and having bylaws. This is why most people who want to start their business small but with a formidable structure usually go for a limited liability company (LLC).

Our Verdict

You can either choose a general partnership or a limited liability company for your food truck business. Here are some of the reasons you should consider before choosing a legal entity for your food truck business; tax issues, limitation of personal liability, investors’ expectations, ease of transferability, and of course admission of new owners.

Ordinarily, sole proprietorship or general partnership should have been the ideal business structure for a small-scale food truck business especially if you are just starting out with moderate start-up capital, but people prefer Limited Liability Companies.

As a matter of fact, if your intention is to grow the business and have an active presence all across the United States of America and other countries of the world, then choosing a general partnership is not an option for you. Limited Liability Company will be your best option.

A Limited Liability Company will protect you from personal liability. As a matter of fact, if anything goes wrong in the business, it is only the money you invested into the limited liability company (the food truck business) that will be at risk.

But this is not so for sole proprietorships and general partnerships. Limited liability companies (LLCs) are simpler and more flexible to operate and you don’t need a board of directors, shareholder meetings, and other managerial formalities.

When you closely study the different business entities, you will come to the conclusion that a limited liability company is most suitable. Interestingly, you have the option of starting the food truck business as a limited liability company and in the future, you can decide to convert the business to a ‘C’ corporation or an ‘S’ corporation. This is necessary if you have plans to take the business public by selling shares.

Upgrading to a ‘C’ corporation or ‘S’ corporation will give you the opportunity to grow your food truck business so as to compete with major players in the industry; you will be able to generate capital from venture capital firms, you will enjoy separate tax structure, you can easily transfer ownership of the company, and you will enjoy flexibility in ownership and in your management structures.

In Conclusion,

Even though a limited liability company is considered the best business entity for a food truck business as suggested in this article, it is important to note that the peculiarity of your business, your financial capacity, and business exposure should come to play before choosing the business structure to should settle for.