Should I Start an LLC for My Custom Car Shop?

Most custom car shops will benefit from starting a limited liability company (LLC).

By starting an LLC for your custom car shop, you can protect your personal assets and increase your tax options and credibility.

Our Should I Start an LLC for My Custom Car Shop guide will explain the benefits of an LLC and teach you how to form an LLC.

Recommended: Use Northwest to form an LLC for $39 (plus state fees).


Do I Need an LLC for a Custom Car Shop?

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 Custom Car Shop

By starting an LLC for your custom car shop, 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.

Custom car shops will benefit from liability protection because vehicle service shops face risks associated with working with expensive vehicles and with clients visiting the shop. 

Example: As you begin lowering a car from a lift, you realize it wasn’t secured properly. The car sustains multiple damages, and the customer sues you for the repair costs.

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 Custom Car Shop

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 custom car shop 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

Custom car shops 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 loansgrants, and credit.

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Northwest will start an LLC for you for just $39 (plus state fees).

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What Is an LLC?

An LLC is a US business structure that combines the limited liability protection of a corporation with the simplicity and pass-through taxation of a sole proprietorship.

Limited Liability protects a business owner’s personal assets (e.g., car, house, and savings) in the event that a business is sued or defaults on a debt.

The main LLC cost is the state filing fee, which ranges between $40 and $500, depending on your state.

There are two options for forming an LLC for your custom car shop:

How to Form an LLC

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

  • You can hire a professional 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

Step 1: 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.

Step 2: Name Your LLC

When you file your LLC's formation documents, you'll need to give your custom car shop a unique name. 

Need help naming your business? Use our free Business Name Generator and our How to Name a Business guide to get started.

Once you find a business name, check if your name is available as a web domain with GoDaddy.

Find a Domain Now

Once you've secured your domain name, take the next steps. Learn how to create a website and then create a logo using our free logo maker.

Step 3: Choose an LLC Registered Agent

Your LLC registered agent will accept legal documents and tax notices on your LLC's behalf. You will list your registered agent when you file your LLC's Articles of Organization.

Hiring a registered agent service offers a number of benefits, including privacy and peace of mind.

Many of these Best LLC Services offer a free year of registered agent service when you hire them to form an LLC.

Step 4: File Your LLC's Articles of Organization

The Articles of Organization, also known as a Certificate of Formation or a Certificate of Organization in some states, is the document you will file to officially register your LLC with the state.

Step 5: Create an LLC Operating Agreement

An LLC operating agreement is a legal document that outlines the ownership and member duties of your LLC.

Our operating agreement tool is a free resource for every small business.

Step 6: Get an EIN

An Employer Identification Number (EIN) is a number that is used by the US Internal Revenue Service (IRS) to identify and tax businesses. It is essentially a Social Security number for a business.

EINs are free when you apply directly with the IRS. Visit our What Is an EIN guide for instructions for getting your free EIN.

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Need Help Starting Your LLC?

Check out our Best LLC Services review.

Should I Start an LLC FAQ

Which is better for my custom car shop — an LLC or sole proprietorship?

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.

How much does an LLC cost for a custom car shop?

The cost of an LLC depends on which state you form your LLC in. The primary cost of forming an LLC for your custom car shop is the state filing fee. This fee ranges from $40 to $500 depending on your state.

You can read more details in our How Much Does It Cost to Start an LLC guide.

How is an LLC taxed?

LLC taxation depends on if you operate a single-member or multi-member LLC as well as your LLC tax classification. 

Read our LLC Tax Guide for more information.

How do I pay myself from my custom car shop LLC?

How LLC owners pay themselves depends on how the LLC is taxed, the number of members, and any agreements regarding profit sharing and sweat equity.

Visit our How Do I Pay Myself From My LLC to learn more.

What is limited liability protection?

Limited liability protection is one of the benefits of an LLC. It means that the owner’s personal assets are protected if the company is sued or goes into debt.

Visit our corporate veil guide to learn more about maintaining your LLC's limited liability protection.

Is an LLC good for a custom car shop?

Yes. An LLC will give you personal liability protection against potential business risks as well as give your custom car shop more tax options and credibility. It is relatively inexpensive and simple to form and maintain an LLC.

Learn more about custom car shop LLC benefits.

When would I start a corporation vs. LLC for my custom car shop?

Corporations are complex to manage and they are subject to double taxation. For this reason, most small businesses won’t benefit from starting a corporation

When you know your custom car shop will need to rely on outside investors, then a corporation might be the right choice.

Learn more in our LLC vs. Corporation guide.

What is a corporate veil?

The corporate veil describes the limited liability protection (sometimes referred to as personal asset protection) provided by corporations and LLCs. If the corporate veil isn’t properly maintained, the corporation or LLC might lose its limited liability protection.

What are the benefits of starting an LLC for my custom car shop?

Some advantages of an LLC include personal asset protection, reduced paperwork when compared to corporations, tax flexibility, and increased credibility with customers and creditors.

Is a single-member LLC the same as a sole proprietorship?

No. A single-member LLC is a type of limited liability company, which is different from a sole proprietorship. Unlike sole proprietorships, a single-member LLC is formed by filing organization documents with your state government office.

Single-member LLCs are legal business structures that offer liability protection, branding, credibility, and privacy that a sole proprietorship doesn’t.

Do I need to open a business bank account for my LLC?

Using a dedicated business banking account for your custom car shop is essential for personal asset protection.

When you mix your personal and business accounts, your personal assets (e.g., your home, car, and other valuables) are at risk in the event your LLC is sued. In business law, this is referred to as piercing your corporate veil.

Can I transfer my custom car shop's DBA name to my LLC?

The rules regarding DBAs can vary from state to state. Read our How to File a DBA guide for more information.

What type of insurance does a custom car shop need?

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

Read our Business Insurance for Custom Car Shops article for more info.

What are the costs to start and maintain a custom car shop?

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

What are the ongoing expenses of running a custom car shop?

After initial overhead, some of the ongoing expenses include insurance, rent, and labor costs.

Learn more about running a custom car shop.

How do custom car shops make money?

This ultimately depends on what customers are coming to your shop for. Shop owners might find that they make money from a variety of services and charge varying respective rates.

Learn more about starting a custom car shop.

What is a custom car shop and is it profitable?

As the name suggests, a custom car shop customizes and fabricates vehicles for clients. Custom car shop owners typically profit anywhere from $50,000 to $100,000 in a year. 

Learn more about starting a custom car shop.

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