Should I Start an LLC for My Car Dealership?

Starting a limited liability company (LLC) for your car dealership can provide several benefits.

Most importantly, an LLC structure offers limited liability to its owners, which can protect their personal assets from lawsuits and creditors.

For a car dealership, lawsuits can arise from things like a customer getting injured while driving a car purchased from your dealership and claiming that it was a result of the car malfunctioning.

LLCs are also affordable, highly flexible (from a tax point-of-view), and can make your car dealership seem more credible.

Recommended: Use Northwest to form an LLC for $29 (plus state fees).

Do I Need an LLC for a Car Dealership?

LLCs are a simple and inexpensive way to protect your personal assets and save money on taxes.

You should form an LLC when there's any risk involved in your business and/or when your business could benefit from tax options and increased credibility.

LLC Benefits for a Car Dealership

By starting an LLC for your car dealership, you can:

Protect your savings, car, and house with limited liability protection
Have more tax benefits and options
Increase your business’s credibility

Limited Liability Protection

LLCs provide limited liability protection. This means your personal assets (e.g., car, house, bank account) are protected in the event your business is sued or if it defaults on a debt.

Car dealerships will benefit from liability protection because of risks like product liability, workplace accidents, property damage, and financial data breaches.

Example 1: You promise a customer of your car dealership LLC to deliver a certain model of car by a certain date. Unfortunately, logistics problems prevent you from meeting the deadline. The customer sues for breach of contract. If his action is successful, he can only be compensated from LLC assets. Your personal assets are safe.

Example 2: Cars are damaged en route to your dealership. The manufacturer claims the loss is yours because the title to the cars passed to your dealership when the carrier took possession. You disagree and refuse to pay; the cars were damaged before reaching your dealership. In the event of legal action, your personal assets would be protected. The LLC may be liable for payment, but you are not.

Example 3: A manufacturer of your best-selling model discontinues that line. You are forced to close your car dealership LLC. The LLC does not have enough assets to satisfy creditors’ claims. Creditors will be unable to go after your personal assets because as a member of the LLC, your liability is limited to your total investment in the LLC.

Example 4: A customer is walking across the lot and slips on some ice. He falls and breaks his arm. You are asked to cover his medical expenses.

An LLC will also protect your personal assets in the event of commercial bankruptcy or loan default.

To maintain your LLC's limited liability protection, you must maintain your LLC's corporate veil.

LLC Tax Benefits and Options for a Car Dealership

LLCs, by default, are taxed as a pass-through entity, just like a sole proprietorship or partnership. This means that the business's net income passes through to the owner's individual tax return.

The business’s net income is then subject to income taxes (based on the owner's tax bracket) and self-employment taxes.

Sole proprietorships and partnerships are taxed in a similar way to LLCs, but they do not offer limited liability protection or other tax options.

S Corp Option for LLCs

An S corporation (S corp) is an IRS tax status that an LLC can elect. S corp status allows business owners to be treated as employees of the business (for tax purposes).

S corp tax status can reduce self-employment taxes and will allow business owners to contribute pre-tax dollars to 401k or health insurance premiums.

The S corp status requires that the business pay the employee-owner(s) a reasonable salary for the work they perform.

In addition, the business might need to spend more on accounting, bookkeeping, and payroll services. To offset these costs, you'd need to be saving about $2,000 a year on taxes.

We estimate that if a car dealership owner can pay themselves a reasonable salary and at least $10,000 in distributions each year, they could benefit from S corp status.

You can start an S corp when you form your LLC. Our How to Start an S Corp guide will lead you through the process.

Credibility and Consumer Trust

Car dealerships rely on consumer trust. Credibility plays a key role in creating and maintaining any business.

Businesses gain consumer trust simply by forming an LLC.

A growing business can also benefit from the credibility of an LLC when applying for small business loans, grants, and credit.

Northwest will start an LLC for you for just $29 (plus state fees).

Get Started

How to Form an LLC

Forming an LLC is easy. There are two options for forming your LLC:

You can hire a trusted LLC formation service to set up your LLC for a small fee
Or, you can choose your state from the list below to start an LLC yourself

Select Your State

For most new business owners, the best state to form an LLC in is the state where you live and where you plan to conduct your business.

Do LLCs Need Insurance?

All businesses need insurance because of the many risks they face. Most obviously, car dealerships face the risk of property damage to their stock of cars or their premises. Additionally, there is the risk of personal injury to customers and workers and so general liability insurance is a necessity.

LLCs protect personal assets. Business insurance protects business assets.

Common Situations Business Insurance May Cover for a Car Dealership

Example 1: A customer is walking across the lot and does not see an obstacle. He falls and breaks his arm. Your general liability insurance policy will pay for the medical treatment for his injuries so your company does not have to.

Example 2: An employee is moving a car from one area of the lot to another when he accidentally hits a customer who is car shopping. Although the speed of the vehicle was not high, it still causes the customer significant injuries both from the impact of the car and the impact of the ground. The customer files a lawsuit against your business. Your general liability insurance policy will cover the fees associated with the lawsuit, including a settlement if the case is settled out of court.

Example 3: The new advertising campaign you paid for goes after the competition pretty fiercely, which causes your competitor to sue your business for libel. The general liability insurance policy you carry will pay for your legal costs whether you win or lose the case. It will also pay for a settlement if you settle the case outside of court.

Other Types of Coverage Car Dealerships Need

While general liability is the most important type of insurance to have, there are several other forms of coverage you should be aware of. Below are some other types of insurance all car dealerships should obtain.

Commercial Property Insurance

The value of your commercial property is substantial. If an unexpected disaster occurs, such as a major storm or fire, and that disaster destroys some or all of your automobiles, it may be enough to put you out of business. As the owner of a car dealership, you should carry commercial property insurance with limits high enough to account for the high value of your inventory.

Workers’ Compensation Insurance

Carrying workers’ comp insurance is an important part of being an employer, and most states legally require it. Not only does carrying this insurance keep you in legal compliance, but it also ensures that your employees can get the medical care they need for any job-related injuries. Your workers’ comp policy will cover both medical care and lost wages if employees are unable to work due to their injuries.

In addition to the policies outlined above, there are a few other types of coverage your car dealership may require depending on certain aspects of your operations. Some of these might not apply to you, so be sure to ask your agent which policies are right for your business.

Commercial Umbrella Insurance

Commercial umbrella insurance sits on top of a general liability insurance policy, picking up where the limits of the general liability policy left off. In a situation where your general liability policy limits are exceeded, such as if you lose a major lawsuit, you can depend on the umbrella policy to take over and pay the damages until the limits of the umbrella policy are reached.

Business Interruption Insurance

If a major event causes your business to shut down for a period of time—like after a tornado or other major disaster—then business interruption insurance would help to cover your business expenses and potential lost income during the downtime.

Should I Start an LLC FAQ

Choosing the right business structure depends on your business’s unique circumstances and needs. However, unless your business is very low risk (like a hobby), an LLC is likely the better option.

Visit our LLC vs. Sole Proprietorship guide to learn more.

At a minimum, you’ll need general liability insurance, commercial property insurance, workers’ compensation insurance, and commercial auto insurance.

Read our Business Insurance for Car Dealerships article for more info.

The major costs to start a car dealership includes expenditure for premises, a surety bond, and inventory, although manufacturers tend to offer inventory financing. Starting costs may run from $100,000 upward. Recurring costs will include salaries, utilities, marketing expenses, and commercial insurance.

Visit our How to Start a Car Dealership guide to learn more about the costs of starting and maintaining this business.

Typical operating costs for a car dealership include bonds, insurance, and payroll.

Learn more about running a car dealership.

Car dealerships make money by buying cars wholesale and then selling them for a markup. Some car dealerships boost profits by specializing in certain areas.

Learn more about starting a car dealership.

When starting a car dealership, you will need to decide if you want to focus more on new cars or on used cars. Both types of businesses present great opportunities for significant profit.

Cars are the most popular mode of transportation in the US, and there is always a large supply of potential customers. However, it is important to be aware of the significant startup costs and regulations for car dealerships.

Learn more about starting a car dealership.