Freight Brokerage Business. The Staff of Entrepreneur Media, Inc.
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“I know that’s been done a lot of times. More and more, creative relationships are open for consideration.”
A sole proprietorship is owned by the proprietor, a partnership is owned by the partners, and a corporation is owned by the shareholders. Another business structure, the limited liability company (LLC), combines the tax advantages of a sole proprietorship with the liability protection of a corporation. The rules on LLCs vary by state; check with your state’s Department of Corporations for the latest requirements.
Sole proprietorships and partnerships can be operated however the owners choose. In a corporation, the shareholders typically elect directors who, in turn, elect officers who then employ other people to run and work in the company. But it’s entirely possible for a corporation to have only one shareholder and to essentially function as a sole proprietorship. In any case, how you plan to operate the company should not be a major factor in your choice of legal structures.
So what goes into choosing a legal structure? The first point, says Bernstein, is who is actually making the decision on the legal structure. If you’re starting the company by yourself, you don’t need to take anyone else’s preferences into consideration. “But if there are multiple people involved, you need to consider how you’re going to relate to each other in the business,” he says. “You also need to consider the issue of asset protection and limiting your liability in the event things don’t go well.”
Something else to think about is your target customers and what their perception will be of your structure. Bernstein says, “There is a tendency to believe that the legal form of a business has some relationship to the sophistication of the owners, with the sole proprietor as the least and the corporation as the most sophisticated.” Because your target market is going to be other businesses large enough to be shipping substantial amounts of cargo, it will probably enhance your image if you incorporate.
Your image notwithstanding, the biggest advantage of forming a corporation is in the area of asset protection, which, Bernstein says, is the process of making sure that the assets you don’t want to put into the business don’t stand liable for business debt. However, to take advantage of the protection a corporation offers, you must respect the corporation’s identity. That means maintaining the corporation as a separate entity; keeping your corporate and personal funds separate even if you are the sole shareholder; and following your state’s rules regarding holding annual meetings and other record-keeping requirements.
Davis incorporated based on the advice of both her accountant and attorney; the C corporation suited her operation best for both tax and liability purposes. Andrews is incorporated, but he personally owns 100 percent of the stock, so he can essentially function with the autonomy of a sole proprietor.
You don’t need an attorney to set up a corporation, LLC, or partnership, but consulting with an attorney and an accountant prior to setting up your business’ legal entity is a sound business practice. Bernstein says there are plenty of good do-it-yourself books and kits on the market, and most of the state agencies that oversee corporations have guidelines you can use. LegalZoom (www.legalzoom.com) is an example of a fee-based online service that walks you through the process of setting up a corporation without an attorney.
However, it’s always a good idea to have a lawyer at least look over your documents before you file them, just to make sure they are complete and will allow you to truly function as you want.
Finally, remember that your choice of legal structure is not an irrevocable decision, although if you’re going to make a switch, it’s easier to go from the simpler forms to the more sophisticated ones than vice versa. Bernstein says the typical pattern is to start as a sole proprietor and then move up to a corporation as the business grows. But if you need the asset protection of a corporation from the beginning, start out that way. Says Bernstein, “If you’re going to the trouble of starting a business, decide on a structure and put it all together; it’s worth the extra effort to make sure it’s really going to work.”
Because you never actually take possession of your customers’ goods, you don’t need to worry about insuring them. It is carriers’ responsibility to provide coverage for the value of the freight they are hauling. Generally, a certain amount of value (which may vary by carrier) is calculated into the basic freight rate, and if the actual value of the goods exceeds what the basic rate covers, the shipper can purchase additional protection from the trucking company.
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Sit down with your insurance agent every year and review your insurance needs, which are sure to change as your company grows. Also, insurance companies are always developing new products to meet the needs of the growing small-business market, and it’s possible one of these new policies will be more appropriate for you.
Even though you don’t need to worry about insuring freight, your company still has insurance issues to address. If you’re homebased, do not assume your homeowner’s or renter’s policy covers your business equipment; chances are, it doesn’t. If you’re located in a commercial facility, be prepared for your landlord to require proof of certain levels of liability insurance when you sign the lease. In either case, you need coverage for your equipment and supplies, and workers’ compensation if you have employees. You also need additional insurance coverage if you plan to have employees working from your home.
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When you purchase insurance on your equipment and fixtures, ask what documentation the insurance company requires before you have to file a claim. That way, you’ll be sure to maintain appropriate records, and the claims process will be easier.
Within your records, keep receipts for all computer equipment and related technology you purchase. Make sure you have, in writing, the computer’s system configuration and serial number, for example. This also applies to other equipment, like printers, fax machines, and office telephone systems.
A smart approach to insurance is to find an agent who works with other freight brokers and transportation companies. The agent should be willing to help you analyze your needs, evaluate what risks you’re willing to accept and what risks you need to insure against, and work with you to keep your insurance costs down.
Typically, homebased freight brokers want to make sure their equipment and supplies are covered against theft and damage by an act of God, such as fire or flood, and that they have some liability protection if someone (a customer, supplier, or employee) is injured on their property. In most cases, one of the insurance products designed for homebased businesses will provide sufficient coverage. Also, you will probably use your vehicle for business purposes, so make sure it is adequately covered.
If you opt for a commercial location, you’ll need to meet the landlord’s requirements for general liability coverage. You’ll also want to cover your supplies, equipment, and fixtures. Once your business is up and running, consider business interruption insurance to replace lost revenue and cover related costs if you are ever unable to operate due to covered circumstances.
You may also want to carry contingency cargo insurance. This is coverage that would take over on cargo if the carrier’s insurance did not fully cover the value of a load that was damaged or destroyed.
As a business owner, you may be the boss, but you can’t be expected to know everything. You will occasionally need to turn to professionals for information and