Should I Start an LLC for My Car Repair Shop?

Starting a limited liability company (LLC) for your car repair 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 car repair shop, lawsuits can arise from things like an employee accidentally denting a customer’s car while attempting to repair it or installing a faulty or malfunctioning part into a customer’s vehicle.   

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

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

Do I Need an LLC for a Car Repair 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 Car Repair Shop

By starting an LLC for your car repair 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.

Car repair shops will benefit from liability protection because of the risk of product liability, property damage, workplace accidents, and financial data breaches. 

Example 1: A client brings in a car with complex electrical components. Your mechanic is not familiar with it but manages to repair it. A week after, the client sees another fault and claims your mechanic's incompetence caused the problem. If the customer sues your business, your personal assets are protected by limited liability. 

Example 2: Your mechanic is working underneath a car, and the jack fails, causing the car to fall on him. It causes him serious bodily harm. If your mechanic files a lawsuit, as the business owner, you will not be required to make compensation from your personal assets. The required compensation will be restricted to your business assets only.

Example 3: A client brings in a car for repairs. The condition of the affected part is dicey, and you’re unsure of its chances. You attempt to repair it, and it breaks down completely. The client claims you failed to inform him of the 50/50 chance and insists you replace the damaged part. If he sues, limited liability will protect your personal assets.

Example 4:  While moving a customer’s vehicle out of a service bay, one of your mechanics accidentally backs the vehicle into the service bay door. The customer asks you to cover the new 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 Car Repair 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 car repair 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

Car repair 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.

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 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

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, all businesses need insurance to protect their business assets from risks — even LLCs. This is because the limited liability offered by the LLC structure only protects the owners’ personal assets. Business insurance, on the other hand, will cover the business’s assets.

Common Situations Business Insurance May Cover for a Car Repair 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 Car Repair 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 that 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.

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

Which is better for my car repair 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.

What type of insurance does a car repair shop need?

At a minimum, you’ll need general liability insurance, commercial property insurance, and workers’ compensation insurance if it employs other mechanics.

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

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

To start, you will need a business license and Automotive Service Excellence (ASE) certifications. You'll also need to buy a $5,000 diagnostic machine, a $3,700 hydraulic lift, and other mechanic tool sets that can cost up to $15,000. Other requirements include business insurance which costs $4,000 yearly.

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

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

Some of the primary operating costs for a car repair shop are rent, payroll, and insurance.

Learn more about running a car repair shop.

How do car repair shops make money?

Car repair shops make money by charging hourly or flat rates for various car repairs.

Learn more about starting a car repair shop.

What is a car repair shop and is it profitable?

Car repair shops fix and maintain customers’ vehicles. Some shops focus on a particular make or vehicle style, while others may offer services to all brands and vehicle types.

A mechanic makes on average between $30,000 and $50,000, and owners of a car repair shop with a team of mechanics can make over $100,000. 

Learn more about starting a car repair shop.

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