The ATV rental business has been having a noticeable spike in popularity over the recent years. Arkansas is one of the states where the demand for motorized vehicles and guided tours has been especially high thanks to its incredible landscapes and friendly climate.
If you’re looking to cash in on the outdoor activity craze in The Natural State and start an ATV rental service, you have an important decision to make and choose the ideal business structure. Small companies typically have 4 options to select from:
- Sole proprietorship;
- Partnership;
- Limited liability company (LLC);
- Corporation.
Today, we are going to talk about limited liability companies and find out if they offer enough benefits to make your rental service flourish.
What is an LLC?
An LLC is a love child of a sole proprietorship and a corporation, combining the taxation model of the former with the limited liability of the latter. LLC’s easy setup, versatility, and asset protection have made it the go-to legal entity for small businesses all over the US.
Benefits of an LLC
Starting a limited liability company comes with multiple benefits:
- Personal asset protection;
- Simple formation process;
- Clear taxation model;
- Legit business name.
Personal Asset Protection
Asset protection is the reason people choose limited liability structures over a sole proprietorship. Let’s agree, no one wants to lose their property, for example, a family car, if some angry customer files a lawsuit against your business. And believe us, running an ATV rental service puts you at constant risk of getting sued. People are going to crash and damage your vehicles all the time and then try to get away with it, but thanks to limited liability, you can sleep well at night knowing that your personal assets can’t be taken from you in court.
Simple Formation Process
Starting an LLC in Arkansas is very easy and cheap to set up. . All it takes is filling out the Articles of Organization form at the official website of the Arkansas Secretary of State and paying a fixed fee ($45). Or you can hire a professional business formation company and it will do everything for you. Some of the best-known LLC services are:
- ZenBusiness;
- Northwest Registered Agent;
- LegalZoom;
- Rocket Lawyer;
- Harbor Compliance;
- IncFile.
Not only these companies are going to handle all the paperwork required for the registration procedure but they also provide valuable business assistance and legal help to get your LLC going and prosper for years to come.
Clear Taxation Model
As we’ve discussed earlier, LLC owners are able to receive full income from their business operations and then split the taxes accordingly. The process is simple and it typically leads to lower payments compared to corporations.
Legit Business Name
Unlike sole proprietorships that require obtaining a trading pseudonym (DBA), LLCs can operate under the same name they were registered by. This relieves you from more unnecessary paperwork and also earns your business a few extra points in the customers’ eyes in the form of the LLC tag after the company’s name.
How is an LLC taxed?
Limited liability companies enjoy pass-through taxation, similar to sole proprietorships and partnerships. For business owners, this means they can get all the income and pay taxes individually, thus avoiding the so-called “double taxation”.
There’s also an option to upgrade a limited liability company to an S corporation (at least in the eyes of the Internal Revenue Service) and get taxed as such. Doing so can save you some money in certain situations, but generally, this move is not recommended for small businesses such as ATV rental services due to high maintenance costs.
Disadvantages of an LLC
However, the LLC structure is not without its shortcomings. Here are some of them:
- Annual maintenance;
- Limited management turnaround;
- Lack of investment opportunities.
Annual Maintenance
All LLCs in Arkansas are required to submit a franchise tax report at the end of each year. This includes paying a $150 fee which is not a lot, but you should take this into account when planning the budget.
Limited Management Turnaround
An LLC can be managed by a single person as well as multiple owners, but passing the torch from one member to another proves to be a bit difficult since there is no actual stock to be shared. We recommend specifying all the details in the LLC operating agreement to avoid problems in the future.
Lack of Investment Opportunities
Continuing on the topic of stock, LLCs don’t have “shares” that you can buy and trade, so naturally, such a business structure cannot attract investors from the outside. So, if you have potential sponsors in mind that you are planning to add to the ownership, you should choose one of the corporation types instead.
Which is better for my Arkansas ATV rental company — an LLC or sole proprietorship?
Any rental business implies a high risk of damage for both the customers and the equipment which may potentially result in a lawsuit against the owner. Yes, a sole proprietorship can cover the losses with a well-structured insurance plan, but most people would be afraid to put their own belongings on the line. For this reason alone, we recommend going with a limited liability company structure.
However, thanks to its incredibly cheap setup and management, a sole proprietorship is a good way to test the waters and get the feel of a small rental business (up to 5 vehicles, for example). If you like what you see, you can always upgrade to an LLC later and expand your lineup.
Do I need to open a business bank account for my LLC?
A business bank account is the only way to separate your personal belongings from the company’s assets. This account will be used for receiving rental fees from the customers and paying salaries to your employees (and yourself too).
Opening a bank account in Arkansas is relatively easy and can be done for $100 or even for free.
Conclusion
An LLC is the perfect legal entity for an ATV rental business in Arkansas. It takes little time and cost to start and maintain; the taxation is straightforward; and your personal property is going to be protected from any potential lawsuits.