Should I Start an LLC for My Custom Car Shop?

Starting a limited liability company (LLC) for your custom car shop 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 custom car shop, lawsuits can arise from things like an employee incorrectly installing something on a customer’s vehicle or a customer being unsatisfied with your changes and demanding a refund.

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

Recommended: Use Northwest to form an LLC for $29 (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 1: You finish customizing a client's car and drive it to him. On your way, you had an accident, and the car got scratched. The client is unhappy and decides to sue. If he does, only your business will be liable for damages and not your personal assets.

Example 2: An organization hires you to customize its fleet of cars. After the work, they notice a misspelling in their slogan throughout the fleet and complain that the error interferes with the message's meaning. If they decide to sue, your LLC will protect you from the lawsuit, leaving only your business assets liable.

Example 3: A fire accident mistakenly occurs at your custom car shop. Before you get help, some cars are already affected, and the car owners are angry and sues for it. In this case, your LLC will ensure your assets are safe from the lawsuit, and only your business may be held responsible for any compensation.

Example 4: 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 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 LLCs need insurance. An LLC’s protection covers only the business owner's assets, so you should protect the business by purchasing insurance. Custom car shops need insurance to shield them from business risks such as damages to customers' vehicles, etc.

Common Situations Business Insurance May Cover for a Custom Car Shop

Example 1: As you finish restoring a custom car and lower it down from the hydraulic lift, you realize it wasn’t secured properly and end up smashing the back end. General liability insurance will likely cover any damage to the vehicle and necessary repairs for your lift as well.

Example 2: A customer comes into the service bay to check on the status of their vehicle restoration. As they tour the shop, they trip over a cord and break their wrist. With general liability insurance, you can rest easy knowing that the damages associated with a lawsuit will likely be covered by your policy.

Example 3: As you move a fully restored custom car from the service bay out into the parking lot for pick-up, you accidentally smash into a side door. General liability insurance will likely cover the damages to the vehicle and the door as well.

Other Types of Coverage Custom Car Shops 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 custom car shops should obtain:

Workers’ Compensation Insurance

Most businesses are required to carry workers’ compensation coverage by state law. If one of your employees becomes injured on the job, this type of insurance policy will help to pay for their medical expenses and lost wages.

Commercial Property Insurance

If you own the building your custom car shop operates out of, you should invest in commercial property insurance to protect the building and any business-related items stored inside. This coverage can help to cover the cost of damages after a fire, inclement weather, theft, and vandalism.

Garage Keeper’s Liability Insurance

If you keep custom cars on your lot for an extended period of time, they are at risk of being stolen or vandalized by burglars. This specialized insurance coverage is designed to help cover the cost of repairs or the replacement of stolen vehicles.

Commercial Auto Insurance

Your personal auto insurance will not protect business vehicles. If you are involved in an accident or cause damage to another person’s property while operating a work vehicle, commercial auto insurance works to cover associated damages.

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 and commercial property insurance.

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

Starting a custom car shop will require you to rent a space which could cost over $1,500 per month, depending on the location. It also requires that you purchase tools such as air compressors and HVLP guns. You will also need to buy insurance, which costs $4,000 annually.

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

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

Learn more about running a custom car shop.

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.

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.