When you buy a car through your Limited Liability Company (LLC), you're not just securing a means of transportation; you're making a strategic business move that can have multiple financial and legal benefits. An LLC combines the simplicity of a sole proprietorship with the liability protection typically associated with a corporation, and for most business owners, it's a great way to reduce personal liability and safeguard your privacy. The benefits also extend to tax deductions, but understanding how LLCs are taxed is crucial to maximizing them. Still, there are key factors to consider before buying a car under an LLC. And while the perks are attractive, a business car subscription could offer a more flexible alternative with unique advantages.
Advantages of buying a car under an LLC
Buying a car under an LLC offers several advantages. If you're considering this move, here's how it could help your business:
1. Liability protection
One of the main benefits of purchasing a car under an LLC is its liability protection. Owning the vehicle through an LLC helps separate your personal and business liability, which is important when an accident or legal issue involves the car. For example, if you run a delivery business and buy a van through your LLC, the company owns the vehicle, not you personally. So, if you or your employee gets into a serious accident and the other driver sues for damages, the lawsuit is filed against the LLC, not you personally. Similarly, only your business assets (van, bank account, etc.) are at risk, while your personal assets, including your home and personal accounts, are protected.
2. Privacy
Privacy is another advantage you'll enjoy after buying a vehicle under an LLC. Only the company's information is listed as the owner when you purchase and register a car under an LLC. Why? This is because the company owns the vehicle and not the individual (you). Therefore, all documents regarding the car, including the title, loan release, dealer warranty, and more, will have the LLC's information, providing anonymity for members of the LLC.
3. Tax deductions
Tax deductions and benefits are often the most significant financial advantages of buying a car under an LLC. When you purchase a vehicle for business purposes, the business can claim deductions for expenses related to the car, including fuel, maintenance, and insurance costs. Additionally, you can deduct the car's price, depreciation, and loan interest as business expenses. For more details on how deductions work for small companies, see our guide to small business tax deduction.
Downsides of buying a car through your LLC
While there are several benefits of buying a car under an LLC, there are also some downsides, and they are as follows:
1. Limited personal use
When you buy a car under an LLC, its primary use must be for business purposes so that it can benefit from liability protection and tax deductions. Using a company car for personal use may risk these benefits and incur additional taxes and penalties. As such, keeping detailed records regarding the car's use and ensuring that personal trips are minimized is essential.
2. Financing hurdles
Securing a loan as an individual is pretty straightforward, but as an LLC, it's not as simple. You will find it challenging to get a loan from most lenders as they view LLCs as a higher risk due to their limited credit history. To secure a loan, lenders may require personal guarantees from the LLC members, negating some of the liability protection the LLC structure provides.
3. Higher insurance premiums
Insuring a car under an LLC is more expensive than insuring it as an individual. This is because vehicles owned by LLCs are usually for business purposes, and typically, commercial vehicle insurance policies have higher premiums. Additionally, if more than one employee will be operating the car, the LLC may need extra coverage to safeguard against potential liability.
4. Additional financial and administrative strain
Setting up and running an LLC usually costs more and involves more steps than purchasing a car as an individual. You'll need to pay fees to register the LLC, pay annual fees to keep it active, and possibly hire a lawyer, accountant, and/or tax professional to help you follow all the rules and tax requirements.
While purchasing a car under an LLC has its perks, it comes with challenges that might make it less appealing. A business car subscription is a more flexible alternative, slashing administrative burden and streamlining the process. A business car subscription from SIXT+ provides a winning combination of operational flexibility, premium service, and financial efficiency, making it a great alternative to traditional leasing or vehicle ownership. Here are some of the benefits you'll enjoy with this service:
- Maximum flexibility: SIXT+ gives your business monthly access to vehicles without being locked into long-term contracts. Additionally, you can start, stop, or adjust your subscription based on your current needs, swap vehicles monthly, and pause your subscription for up to three months if needed.
- All-inclusive pricing: With SIXT+, one fixed monthly fee covers the typical costs of vehicle ownership, including maintenance, wear and tear, and general inspection, simplifying budgeting and making it easier to predict expenses.
- Minimal administrative burden: Management is streamlined through a centralized business portal and the SIXT app, where you can oversee contracts, monitor mileage, manage invoices, and make bookings.
- International solutions: For global companies, SIXT+ Unlimited offers a flat-rate service that lets you access a vehicle in up to 10 countries under one contract and includes VIP benefits like airport lounge access and fast-track pick-up.
- Access to a broad fleet: A SIXT business car subscription gives you access to a broad fleet of vehicles not older than three months, with the vehicles available within days of booking. Whether you need a compact car for city escapades or a luxury SUV for executive travel, our vast fleet makes it easy to match your needs to a vehicle.
Key considerations before buying a car under an LLC
1. Tax perks come with a lot of paperwork
Buying a car under an LLC offers the advantage of tax benefits and deductions, but navigating the process to enjoy these perks can be more complex than expected. The biggest hurdle? Paperwork. The IRS will require proof that you use the vehicle for business purposes. This will include detailed mileage logs and relevant bills and receipts to justify any business expenses you wish to deduct.
2. Your LLC may be required to pay property taxes
Depending on which state your LLC is registered in, you may be required to pay annual property tax for vehicles, with the rate determined by your vehicle's current value. If your business is registered in certain states, you will be taxed on business inventory, which includes assets like a company car.
3. You could pay more in the long run
When you factor in all the costs of buying a car under an LLC, you may realize you're paying more in the long run. First, business auto loans come with higher interest rates than personal loans. On top of that, commercial vehicle insurance usually has higher premiums, as these policies carry greater liability coverage than personal ones.
How to buy a car under an LLC
Buying a car under an LLC offers several advantages, including tax deductions, privacy, and liability protection. However, following the required steps for a seamless process and maintaining compliance with legal and tax requirements is essential. These are the steps involved in buying a car under an LLC.
Before buying a business vehicle, you must set up a separate business account for making all LLC-related payments. To set up an account, the bank will require you to provide a business license, Articles of Organization, Articles of Incorporation, Employer Identification Number (EIN) from the IRS, and a valid ID.
After setting up the business bank account, the next step is to shop around for the best rates for a loan from banks, dealerships, and credit unions. If it's a new business, some lenders may require you to provide your personal credit history before a loan is approved.
After purchasing the car, the next step is registering it at your local DMV. The vehicle will be registered under your LLC's name, not yours. The titling and registration process and fees may vary depending on your state, type of vehicle, its weight, and its intended use.
The last step involves getting commercial vehicle insurance for your company car. This is a requirement regardless of where your business is located. Contact an insurance company that meets your needs and purchase a policy under your LLC's name.
Is owning a car under an LLC a good fit for your business?
Buying a car under an LLC is a smart business move. However, the choice depends on your specific business needs, vehicle use, and the company's financial health. Before making the leap, there's a lot to consider, and key among them is whether the tax benefits and liability protection outweigh the added costs and administrative responsibilities.
The decision to buy a business car isn't universal, and what works for another company may not work for you. That's why it is always essential to consult with legal and financial professionals so that you can make the best decision for your business.
Still, don't overlook the alternatives. Flexible solutions like business car subscriptions from SIXT can provide easy access to new vehicles with minimal commitment, transparent costs, and none of the long-term financial burden or administrative hassle.
FAQs: Buying a car under LLC
Yes, you can use your personal vehicle for your LLC. However, it's essential to keep meticulous records to differentiate between personal and business use. The IRS allows deductions only for the portion of vehicle expenses attributed to business use. Additionally, your vehicle must be used predominantly for business purposes (more than 50%) to qualify for deductions.
Yes, LLC-owned vehicles require commercial auto insurance because they're used for business purposes. Personal policies usually don't cover business use. Commercial auto insurance protects against liability, accidents, and damages, especially when multiple employees drive the vehicle, as business-owned cars carry more risk than personal ones.
Yes, your LLC can deduct the cost of the car and claim depreciation, provided the vehicle is used for business purposes. This includes expenses like fuel, insurance, maintenance, and loan interest. You can use deductions such as Section 179, bonus depreciation, or standard depreciation. To qualify, maintain accurate records of business use, mileage, and receipts. Consult a tax professional to maximize your benefits.
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