September 13, 2013
Top 10 Things to Consider When Applying For Your Motor Carrier Authority
Applying for your motor carrier authority and starting your own business are big decisions to make. Here is a list of the ten most important things you need to consider as you begin your journey. The list does not include everything you need to think about or be prepared for, but it will get you off on the right foot.
1. Major Startup Expenses
The biggest hurdle to starting your own business is coming up with the money to get started. It takes a lot to get going, but don’t let that discourage you. The long-term benefit is worth it, as long as you do things right. Before starting your company, you can expect to pay for:
The Truck and Trailer
This will be by far your biggest expense. Most companies start out with used equipment. The easiest way for a new trucking company to get into a truck and trailer is usually through a lease-to-own option.
The bad thing about a lease-to-own option for a new company is that you are limited to how much they will lend you. The maximum most lenders tend to give is around $45,000 per piece of equipment. You can get a pretty decent trailer for less than that, but the tractor will be old with higher miles.
The good thing about this type of “loan” is you usually don’t have to come up with a huge down payment because they are 100% financed. Since they are fully financed, you are only required to give the first and last month’s payments up front. Monthly payments tend to range between $1,000-$2,500, so you can expect your first payment to be around $5,000.
However, you can also choose to purchase a used or new truck, which creates a higher expense, but that means the truck is yours and you don’t have to worry about bad contracts.
Vehicle Registration Fees
This depends a lot on the state you are based out of and the states you are going to run in, but you can plan on paying between $1,500-$2,500 per year upfront.
2. How to Structure Your New Business
Here are the three most common business structures. Which one is right for you depends on your business.
Limited Liability Company (LLC)
LLC is probably the most common business structure for new small businesses because it is the simplest to maintain and protects your personal assets under most circumstances. As an LLC, you are not personally held responsible for any debts or liabilities. If your business has financial troubles, your personal funds are not used to pay back the debt under an LLC.
Setting your business as a corporation also protects your personal assets under most circumstances. This option is usually the best if you plan on growing into a very large company.
A sole-proprietor is just you personally operating a business and is usually not a good option because your personal assets are at risk. In a lawsuit, you could potentially lose personal assets like your home or personal savings.
3. Trucking Insurance
Your insurance cost will range between $6,000 and $10,000 per year. To start the policy, you will usually need to make a down payment of between $1,500 and $2,500. You also need to keep in mind that most insurance carriers will not cover a new trucking business that has drivers with less than 2 years experience and companies that plan on having more than one truck in their first year.
4. Picking The Right Tax Structure
One of the big benefits of owning a business is the tax benefit. Many things you already use, like your cell phone, can become business expenses paid for by your business before taxes are taken out of your income. Here are the most common tax structures. Each has its own pros and cons.
- Disregarded entity. Most sole proprietors and single member LLCs are taxed this way. It just means the business taxes will be part of your personal 1040 tax return reported on Schedule C.
- Partnership. By default, LLC’s with more than one member/owner are taxed as a partnership.
- S-Corporation. Many small businesses, whether an LLC or Corporation, elect to be taxed as an S-Corporation because of its many benefits. The company itself does not pay any income tax. The tax liability flows through to the personal tax obligation of the owners. You have to formally request this tax structure through the IRS.
- C-Corporation. This is the default tax structure of a corporation. The company pays income tax on profits and then pays dividends to the owners, which can also be taxed.
5. Who Is Applying for Your Motor Carrier Authority
This doesn’t sound like an important step, but it probably is one of the most important. There are two types of companies who help new trucking companies apply for their motor carrier authority. The first type does nothing but get you your DOT and MC numbers and they are usually the cheapest.
The second type of company is more full-service. They will do everything the inexpensive guys do, and they will also help you through many of the other steps you must take before you are able to start hauling loads for hire. They charge a little more but are worth the price because they will save you lots of headaches in the future. This is one of those cases where you definitely get what you pay for.
6. Additional Startup Costs
Depending on your company, you may have to pay a number of other costs.
- USDOT Number and MC Number. Registering under the FMCSA to obtain your DOT and MC numbers costs $300. You can hire another company to help for a set extra cost, but it may be worth it to know that your paperwork will be done correctly.
- Drug and Alcohol Regulations Compliance. Whether you’re an owner operator or running your own fleet, you need to have a program in place for any necessary drug and alcohol testing.
- Unified Carrier Registration (UCR). The price varies depending on the number of trucks in your fleet
- Audit Assistance. New trucking companies are required to pass the new entrant safety audit. Some companies offer audit assistance packages starting around $99.
- 2290 Form. The tax form for the Heavy Highway Vehicle Use Tax (HVUT) is used to account for the wear and tear on roads caused by heavy vehicle use.
- Business Organization. The cost of this can vary anywhere between $70 and $1,000, depending on your state and who files the paperwork.
7. The New Entrant Safety Audit
The FMCSA, or one of their state partners, will audit every interstate trucking company within the first 18 months of operation. The New Entrant Safety Audit can be a breeze if a little prep work is done beforehand. It can also turn into a nightmare if you are not doing things properly. Companies that do not meet the minimum FMCSA safety requirements can be fined, given a conditional rating, or be ordered to provide a corrective action plan. Without a corrective action plan, your company could be placed out of service.
8. Additional Permits
If you are going to operate in New York, Kentucky or New Mexico, there are additional permits you are required to have. Make sure to do your research to find what is required in your state.
9. International Fuel Tax Agreement (IFTA)
You are going to have to start tracking the miles you travel and how much fuel you purchase in each state. Then, each quarter you have to report those miles to the state you are based in. It sounds complicated, but there are many ways to keep things simple, from using an electronic onboard recorder, to using trip envelopes.
10. Knowing Your Cost Per Mile
One of the biggest reasons new trucking companies fail is because they don’t understand how much it costs to operate per mile and then they take on loads that don’t pay enough to cover their operating costs. Figuring out how to calculate your cost per mile is crucial in maintaining proper cash flow and whether or not your loads are actually making a profit.
Starting a new business is definitely a situation where an ounce of prevention is worth a pound of cure. It is possible to take short cuts and get those wheels turning quickly. The shortcuts may seem like a good idea, until you are stopped at a port and not allowed to continue because you didn’t realize you have to pay the UCR, because you don’t have the proper permit for that state, or any other reason.
Want to Learn More
If you want to learn more about what it takes to start your own trucking company, download our free guide. If you’re ready to start your trucking company, leave all the paperwork to Motor Carrier HQ. We’ll work hard to make sure you have everything you need to keep your business on the road.