The landscape of the American business industry is always changing, especially with the introduction of share economy businesses like Uber and Airbnb. A decade has passed since peer-to-peer services took the nation (and the world) by storm. The idea of earning extra money for driving people around town or letting people stay in your spare room sounds great; however, most people may not realize the liability and tax consequences that come with a share economy business. Even if you are not a full-time rideshare driver or “innkeeper,” you may still consider the benefits and protection offered from self-incorporation.
What is a Share Economy Business?
The share economy business is also referred to as "peer economy" and is likely the oldest business form in America. Take away the corporation/storefront/middle man, and you have direct interaction between the property owner and the client. Uber and Airbnb are the more popular examples of the sharing economy business model. Other types of businesses include:
- Instacart: Shopping and delivering groceries
- Favor: Ordering items and delivery
- DogVacay: Dog boarding and walking in a real home
- Turo: Rent a car for hours/day
- TaskRabbit: Marketplace for hiring help
The idea of the marketplace has been revived, in a sense, through share economy businesses and has moved online. Why buy a car when you can rent one for a few hours or a few days? Are you too busy to do groceries? Why spend too much for kennels and hotels when you (and/or your pup) can stay in a comfortable home for much less? One of the primary hallmarks of most sharing economy businesses is renting/reusing/recycling versus buying.
Tax Consequences of Sharing Economy Businesses
If you are a rideshare driver or lodging provider (or a DogVacay sitter or RelayRides renter), you are responsible for paying taxes on your earnings. Generally, you are considered a freelancer and will fill out Form 1099-MISC or 1099-K with the parent company you work under. Even though you are filling out tax forms, it does not mean that the company is paying taxes — that part is up to you.
Independent contractors are expected to pay taxes on a quarterly basis:
- April 15
- June 15
- September 15
- January 15
You can choose to pay estimated taxes if you have a rough idea of how much you expect to make in the year. Otherwise, you need to keep track of your earnings and deduct your tax payments for each quarter.
If you are a renter, there are different sets of rules to determine your tax payments that depend on how often you rent rooms and whether the property in question is your full-time residence.
The bottom line is that you must give the government its cut, or you could incur fines and other penalties.
The Case for Self-Incorporation
Your rideshare job may be a side gig to you, but the potential liability you could incur is not part-time. Since most sharing economy businesses involve the use of personal property (vehicles, homes, etc.), asset and property protection should be a top priority.
The most popular business entity option for small businesses is the LLC — it is less complicated than a standard corporation (C corp) and provides more legal protection than a DBA/sole proprietorship. Forming an LLC protects you by providing a clear distinction between your business assets/property and your personal assets/property. If something happens where a customer attempts to sue you, he/she will actually sue the LLC, and your personal assets are mostly removed from litigation.
Forming an LLC is not as complicated or expensive as you might assume — Texas, for example, does not have a state income tax, and the franchise tax threshold is over $1 million, which means that your LLC will likely not be charged much tax other than the federal rate. Another LLC-friendly state is Florida, which does not have a state income tax or charge a corporate/franchise tax against LLCs.
Before you begin filing any paperwork, you should check out the requirements for forming an LLC in your state.
Paying Attention to the Fine Print
Forming an LLC for your sharing economy business can only protect you within the bounds of the law. Just as speeding makes you susceptible to being pulled over and levied with a traffic ticket, carelessness on your part lessens the protection that an LLC would provide.
If you are involved in an auto accident while transporting a customer and you are at fault for the incident (i.e., running a stop sign/traffic light), then your personal assets are vulnerable to a lawsuit from that customer. Also, if a guest is injured while staying in your Airbnb rental because of your negligence (not maintaining the property), then you personally can be held liable.
Additionally, you will be less protected by the laws governing LLCs if you are breaking the law in the course of doing business. For example, if you are transporting a rideshare customer while driving under the influence of alcohol or drugs, or if a crime is committed during the transaction, business liability laws can no longer protect you.
Finally, Be Protected While You Serve
Starting a sharing economy LLC does mean some extra paperwork and additional attention to compliance requirements from your state, but the benefits and protection that come from forming an LLC should outweigh the added work. The recently passed tax plan may give small business owners more breathing room with taxes and offers some benefits that can help grow your business.
Don’t wait for complications to happen, and don’t pay more than you have to. File an LLC today.
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