Should I Start an LLC for My Car Rental Business?

Starting a limited liability company (LLC) for your car rental business 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 rental business, lawsuits can arise from things like a rented car malfunctioning and causing a traffic accident while a customer is driving it.

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

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

Do I Need an LLC for a Car Rental Business?

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 Rental Business

By starting an LLC for your car rental business, 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 rental businesses will benefit from liability protection because of the risk of product liability, property damage, personal injury, and financial data breaches.

Example 1: A customer gets into an accident with a vehicle from your car rental business and sues your business for giving them a faulty vehicle. Limited liability protection can protect your personal assets if the court finds your car business guilty of the charge.

Example 2: A disgruntled ex-employee of your car rental business sues your business for wrongful termination after losing their job. If the court deems your business guilty, limited liability protection can shield your personal assets from the fines incurred in the lawsuit.

Example 3: An employee makes a mistake in a customer’s order and gives them a different vehicle from the one they requested. The customer finds out later and sues your business for damages due to employee incompetence. Limited liability protection can limit the lawsuit damages to only your business assets.

Example 4: A customer sues your business after getting into an accident, claiming that their rental vehicle was not properly maintained.

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 Rental Business

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 rental business 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 rental businesses 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?

Yes, LLCs need insurance to ensure that the assets of the business are safe. Even though an LLC offers protection, this protection is limited to your personal assets.

Business insurance helps extend this protection to the assets of your car rental business. These assets include your vehicles, maintenance tools, and any other item your business owns.

Common Situations Business Insurance May Cover for a Car Rental Business

Example 1: While walking to their rented vehicle, one of your customers slips on ice in the parking lot. The incident causes several injuries, some of which require medical attention. General liability insurance would likely cover the cost of treatment for the injuries.

Example 2: When posting on social media, your company’s manager makes a comparison to another rental car company. The comparison is factually inaccurate and puts your competitors in a bad light. They file a libel lawsuit in response, which general liability insurance would cover.

Example 3: Your car rental company runs an ad in the local newspaper that includes rates you don’t actually offer. Customers file a class action false advertising lawsuit against your company, and the legal fees and settlement are expensive. General liability insurance would probably cover the lawsuit.

Other Types of Coverage Car Rental Businesses 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 rental companies should obtain:

Commercial Property Insurance

If your rental car company owns its office space and/or parking lot, those assets should be protected with commercial property insurance. This coverage insures buildings, other structures, and certain equipment (usually not including rental cars).

Commercial property insurance can be purchased through a business owner’s policy (BOP).

Commercial Auto Insurance

Commercial auto insurance is used to insure commercial vehicles, including rental cars. Your rental car company will need this coverage for every vehicle that it owns and rents.

Rental cars tend to have high values because they’re fairly new and have low mileage. Make sure the limits of your company’s rental car insurance equal or exceed the business fleet’s fair-market value.

Commercial auto insurance is frequently available through a package policy.

Workers’ Compensation Insurance

Most car rental companies need workers’ compensation insurance because they employ workers. Most states require businesses that have employees to carry workers’ compensation coverage for them. The coverage is a safeguard against injuries and illnesses related to activities at work.

Commercial Umbrella Insurance

If you’d like to protect your car rental company with more liability coverage, you may want commercial umbrella insurance. This insurance provides a secondary layer of liability protection, and limits can often be set in the millions of dollars.

Commercial umbrella insurance is often available through a BOP.

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 auto insurance, workers’ compensation insurance, and commercial property insurance.

Read our Car Rental Business Insurance article for more info.

Car rental businesses require sizeable capital as you would need to acquire vehicles, vehicle maintenance tools, a camera system, an office, and office equipment (computers, printers etc). You will also need to set aside capital for payment of incorporation fees, employee wages, marketing, and business insurance for your automobiles.

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

Some of the main operating costs for a car rental business are payroll, vehicle maintenance, purchasing new vehicles, and insurance.

Learn more about running a car rental business.

Car rental businesses make money by renting vehicles to customers.

Learn more about starting a car rental business.

Car rental businesses provide various vehicles to both individual and corporate customers. A successful car rental business could earn around $50,000 to $100,000 per location.

Learn more about starting a car rental business.