LLC for a Car Dealership

Do you need an LLC for car dealership businesses?

If you’re considering starting a car dealership, you might be wondering whether forming a limited liability company (LLC) is necessary or beneficial for your business. In this guide, we’ll explore the key factors to consider when deciding whether to establish an LLC for your car dealership.

Forming an LLC for your car dealership can offer several advantages that provide protection and structure to your business operations. One of the primary benefits of forming an LLC is the limited liability protection it provides. There are also tax benefits like pass-through taxation and the flexibility to choose the structure that most benefits your business. The structure also can enhance your professionalism and credibility with potential customers, lenders, and partners. 

Throughout this guide, we’ll provide you with step-by-step instructions and valuable insights on how to form an LLC for your car dealership. Whether you’re a seasoned car dealer looking to formalize your business or considering entering the industry for the first time, forming an LLC can be a crucial step toward building a successful and sustainable car dealership.

Why Starting an LLC for a Car Dealership is Important

Personal Asset Protection

The top reason to form an LLC for a car dealership is to gain access to the personal asset protection provided by this business structure. Whether you operate a small used-car lot with only a handful of vehicles or a large dealership with a broad selection of cars, you need the limited liability protection that an LLC can provide.

As an example, let’s say that you sell a customer a car with faulty parts. That customer drives off the lot, and the car breaks down in traffic and causes an accident. If you operate your dealership as a sole proprietorship or general partnership, your personal assets — like your house, car, or personal bank accounts — would be at risk if that customer decides to sue your business.

On the other hand, if you form an LLC for your car dealership and you operate and maintain that LLC in a compliant fashion, the scope of your customer’s lawsuit will usually be limited to your business assets. In other words, your personal assets will be protected by the business structure you’ve chosen.

Taxation

However, this is just one of the advantages of the LLC for a car dealer. Another important aspect is the tax benefits. The LLC actually provides its owners with a selection of options regarding how they want the business to be taxed, which could save you a considerable amount of money compared to simply operating as an informal business entity.

Sole Proprietorship/General Partnership

Your car dealership LLC can be taxed as a sole proprietorship (for single-member LLCs) or general partnership (for multi-member LLCs), which is the default option. With this tax structure, your dealership itself does not pay taxes, but rather the profits are passed through the business entity and your owners pay taxes on that money when they file their own personal taxes.

C Corporation

You can also choose for your dealership to be taxed as a C corporation (the default form of corporation), although this option isn’t very popular because it subjects your business to what’s known as double taxation — meaning that your profits are taxed first on the corporate level and again on the personal level when they’re distributed to your owners.

S Corporation

The other option is S corporation taxation. There are quite a few limitations to electing S corp taxation, but most car dealerships have no trouble meeting these requirements — your business cannot have more than 100 owners, they all must be either residents or citizens of the United States, and so on.

S corp taxation can help your car dealership save money by reducing your self-employment tax burden. Instead of paying self-employment taxes (a 15.3% tax that includes the employer and employee portions of Medicare and Social Security) on all of your business income, you can pay yourself and your co-owners a reasonable salary for your roles and only pay self-employment tax on that portion of your income, while you can reinvest the rest of it into your business without paying this tax.

Compared to operating a sole proprietorship or general partnership as a car dealer, the S corp taxation model could potentially save you quite a bit of cash that you can use to buy more cars and expand your operations, rather than writing a big check to Uncle Sam.

Enhanced Credibility and Name Uniqueness

Finally, an LLC structure can enhance the credibility of your car dealership business venture. Informal business entities don’t have exclusive assumed business names and typically operate under the personal name(s) of their owner(s). For instance, if your name is Johnny Smith and you operate a sole proprietorship as a car dealer, your company’s name is also “Johnny Smith,” which obviously isn’t a great name for a dealership.

In this scenario, you could register a DBA (doing business as) name to give your business the ability to operate under an assumed business name, but DBAs have no exclusivity regarding their naming rights in many states. This means that if another dealer wants to use your DBA name as their own, they’re not only allowed to do so, but they can actually register a formal business entity with that name, preventing you from continuing to use your own assumed name.

With an LLC, you not only have the rights to exclusive use of a business name, but you will also have either the phrase “limited liability company” or the letters “LLC” in that business name. This provides your business with a jolt of respectability because customers respect the professionalism displayed by an LLC. Also, they typically feel more comfortable writing checks to a business entity rather than to an individual.

What is an LLC?

LLCs are formal legal entities that are typically taxed similarly to sole proprietorships and general partnerships in that the owners include any company profits or losses into their personal returns — the LLC itself does not owe income taxes. An LLC may also elect to be taxed like a corporation, although this is not a very common option.

There are similarities to corporations, too, especially when it comes to financial responsibilities. In an LLC, the owners or members aren’t usually personally accountable for the financial status of the business. This means that if someone sues your LLC, your personal assets are not at risk in most cases. For more information see our LLC definition page.

How to Start a Car Dealership LLC

The formation process for LLCs varies depending on which state you’re forming one in, but in general, the process has some universal steps that need to be taken no matter what state your business is located in. If you want a comprehensive overview of all the steps required to form an LLC, check out our complete LLC guide on the topic. The basic steps in the LLC formation process in any state are as follows:

1. Choose an LLC name

Coming up with the perfect name for your new LLC is an important step. You’ll need to choose a name that represents your company and describes what you do, and you’ll also have to make sure it isn’t already in use by checking your state’s business database.

2. Designate a registered agent

Your LLC’s registered agent (which can be an individual or a professional service) is responsible for receiving important document deliveries from the state — like service of process or annual report reminders — and forwarding them to you. The registered agent ensures that the state always has a reliable point of contact for your business. While you can serve as your own agent, we highly recommend using a registered agent service.

3. File your formation documents with the state

The form used to create an LLC is usually called the Articles of Organization, although the name can vary (some states call it the Certificate of Formation or something similar). When you file your business formation documents, you’ll need to provide the state with some basic information about your business and its owners. In exchange, the state will formally create your LLC. You can also use an LLC formation service to help with this process.

4. Acquire an EIN

The Employer Identification Number (EIN) is a federal tax ID number that essentially functions as a Social Security number for a business. The EIN allows your business to hire employees, pay taxes, apply for bank loans, and more. You can obtain an EIN from the Internal Revenue Service free of charge.

5. File a BOI Report

New in 2024, your car dealership LLC is required to file a beneficial ownership information report, or BOI report. You’ll file this report with the Financial Crimes Enforcement Network, providing vital information about your LLC’s “beneficial owners.” Beneficial owners are people who control the LLC or get significant economic benefit from it. It’s crucial to file this report by the deadline to maintain compliance; failing to file means you won’t be operating your dealership business legally and you could face hefty legal and civil penalties.

6. Create an LLC operating agreement

Most states don’t require operating agreements, but every LLC should have one regardless. This is an internal document that outlines several key operational aspects of your LLC like how profits are distributed, the responsibilities of each LLC owner, and how the IRS will view the LLC for tax purposes. The value of the operating agreement is how it can help prevent ownership disputes down the line by clearly explaining how the LLC will be run.

7. Create a financial infrastructure

You will need a business bank account for your LLC, and you’ll probably want a business credit card for work-related expenses, as well. It’s also a good idea to use accounting software like QuickBooks or even hire an accountant to handle your bookkeeping for you.

8. Handle taxes, licenses, and permits

Depending on your state, you may need a general business license to operate your LLC in compliance with state requirements. Each state has its own licensing requirements for car dealerships, so make sure to follow your state’s guidelines to the letter to operate a compliant business. Don’t forget to check with your state to see if there are franchise or privilege taxes assessed on LLCs, and also see if your municipal and/or county government entities have any further licensing requirements.

9. Understand maintenance requirements (annual reports, franchise taxes, etc.)

Again, these requirements can vary by state, but most states require some sort of regular report to ensure that your LLC’s info is up to date in the state’s business database. Some states require reports each year, while others only require them biennially or not at all. No matter what your state requires, you’ll need to stay on top of it to keep your LLC in good standing.

Additional Resources for Starting a Car Dealership

1. Dealer Marketing Magazine

As you might expect, Dealer Marketing Magazine has all kinds of information for car dealers, but the page we’d direct you to is their “Top 10 Online Resources for Dealers” post. On this page, you’ll find training and education tools, along with information on industry regulations, technology and software, blogs, forums, marketing research, and much more.

2. CBT Automotive Network

CBT Automotive Network claims to be a “highly targeted multimedia platform for retail automotive professionals,” and it offers an excellent collection of resources for car dealers. We especially like its “Just Starting Out” page, which includes five tools that new dealers can use to develop their businesses.

3. Higher Turnover

Do you need a high-performing website for your car dealership? You might want to get in touch with Higher Turnover, as this company specializes in providing websites for car dealerships. They claim that their websites can help you “sell more cars, save time, and save money in the process.” Sounds good to us!

4. National Independent Automobile Dealers Association (NIADA)

Don’t let the outdated interface of the NIADA’s website fool you — there’s still lots of great information to be found. They offer webinars, training programs, and legal information. Plus, for used car dealers, there are few resources as valuable as the NIADA’s official magazine, Used Car Dealer.

5. Edmunds Industry Center

Edmunds has plenty of resources for car buyers and sellers alike, and for the aspiring car dealership owner, we really appreciate their industry center. They provide tools for online car sales, and their downloadable dealer education resources file is packed with valuable info. Edmunds is one of the biggest names in car sales today, and there’s a good reason for that.