Top Ten Things to Consider When Applying For Your Motor Carrier Authority
Applying for your Motor Carrier Authority and going into business for yourself are major steps in your life. Here is a list of what we feel are 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. If you need help with any of these things we can either do it for you or point you toward the right resources.
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. If you are reading this, chances are you are going about getting started the right way.
- a. 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 max 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. Often this is a new company’s only option. Since they are fully financed, to get started you are only required to give the first and last month’s payments up front. Since monthly payments tend to range between $2,000-$2,500, your first payment will be around $5,000.
- b. 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 pretty safely plan on paying between $1,500-$2,500 per year and you will usually have to pay the entire amount up front.
- c. 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.
2. How to structure your new business – Here are the three most common business structures. Your tax accountant or a lawyer can usually help you pick which is right for your situation:
- a. Limited Liability Company or LLC – 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.
- b. 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.
- c. Sole Proprietor – 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. Insurance – I have outlined the cost of insurance above, but 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. Pick The Best 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 and be paid for by your business before taxes are taken out of your income. Here are the most common tax structures; your accountant should be able to help you choose which will be best for your particular situation. Each has its own pros and cons.
- a. Disregarded entity – Most sole proprietors and single member LLC’s are taxed this way. It just means the business taxes will be part of your personal 1040 tax return reported on Schedule C.
- b. Partnership – By default, LLC’s with more than one member/owner are taxed as a partnership.
- c. 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.
- d. 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.
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5. Who is going to apply 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 out there who help new trucking companies apply for their motor carrier authority. The first type does nothing but get you your US 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
- a. Obtaining US DOT and MC Numbers $549.00
- b. Drug and Alcohol Regulations Compliance $159.00
- c. UCR $120.00
- d. Audit Assistance $199.00
- e. 2290 Form $550.00
- f. Business Organization $70.00-$1,000.00+ depending on your state and who files the paperwork.
7. New Entrant 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, which do not meet the minimum FMCSA safety requirements, can be fined, given a conditional rating, ordered to provide a Corrective Action Plan, and/or be placed out of service and ordered to cease operations.
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.
9. 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. Know your cost per mile – One of the biggest reasons I see 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. In the near future I will dedicate an entire post on tips for tracking your cost per mile.
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 short cuts may not seem like such 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 Unified Carrier Registration, or because you don’t have the proper permit for that state, you are mired in a messy New-Entrant Audit or any of a multitude of other reasons. Doing the proper research, or getting capable assistance, pay off in the long run by allowing you to operate efficiently and effectively, and best of all, helping you make a profit. Good luck in your new endeavor.