Should I Start an LLC for My Junkyard Business?

Starting a limited liability company (LLC) for your junkyard 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 junkyard business, lawsuits can arise from things like personal injury claims (e.g., customers entering your junkyard and accidentally cutting themselves on sharp pieces of rusted metal).

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

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

Do I Need an LLC for a Junkyard?

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

You should start 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 Junkyard

By starting an LLC for your junkyard, 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.

Junkyards will benefit from liability protection because of the risk of being sued for personal injuries that occur on the property as well as other general business risks.

Example 1: After a group of teenage children climb over your junkyard’s fence and start playing around, one of them cuts his arm on a rusty piece of metal, which leads to a serious infection. When the child’s parents decide to sue your LLC for medical damages, your personal assets will remain 100% protected regardless of whether your business is found to be liable in court.

Example 2: You decide to acquire a large business loan in order to start a second junkyard business. During the loan’s application, you make sure that you don’t personally guarantee it. Consequently, the lending party will be unable to sue you personally in order to recoup their investment if your LLC is unable to pay them back in the future.

Example 3: After two of your employees get in a heated argument, you decide to fire both of them. Since the argument was initiated by one party, you end up facing a wrongful termination claim. As a result of your junkyard business’s LLC classification, you will not need to compensate the claimant personally regardless of how the claim progresses in court.

Example 4: While looking for a particular part, a customer cuts his arm on a protruding engine part, requiring a trip to the hospital. He asks that you cover the resulting 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 Junkyard

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 junkyard 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

Junkyards 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 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?

All businesses need insurance to protect their business assets — even LLCs. This is because the limited liability protection from an LLC protects your personal assets, not your business assets.

If you want to protect your business’s assets as well (e.g., purchased land, etc.), you will need to purchase the required business insurance coverage.

Common Situations Business Insurance May Cover for a Junkyard Business

Example 1: While looking for a particular car part, a customer cuts his arm on a protruding engine part, requiring a trip to the hospital and potential surgery. Your general liability policy should cover his medical bills.

Example 2: Your marketing campaign includes a billboard and a new slogan. Another local business names you in a lawsuit and claims they have lost business because your slogan closely resembles theirs. General liability insurance should cover the cost of legal representation and damages, should they win the court case.

Example 3: You are hoping to expand the business by purchasing the land next door. As part of the loan agreement, the bank is requiring evidence of liability insurance. General liability insurance should fulfill that obligation.

Example 4: A thief jumps the fence around your property and your guard dog bites him. The thief is suing your business for his medical bills and pain and suffering. General liability insurance should cover the medical bills and potential damages awarded by the court.

Other Types of Coverage Junkyard 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 junkyards should obtain:

Commercial Property Insurance

Junkyards need a sizable amount of property to operate. Commercial property insurance will cover your business's real estate and property for perils like fire and weather.

This policy is generally included as part of a business owner’s policy (BOP). You can tailor this policy to your specific business insurance needs, whether you are a renter or building owner.

Workers’ Compensation Insurance

The state requires business owners to carry workers’ compensation insurance on all employees. If an employee injures themselves or falls ill doing work-related activities, the policy would cover their medical bills and a percentage of wages lost while out of work. It also protects the employer against lawsuits, offering legal representation if an employee sues.

Home-Based Business Insurance

Many junkyard owners live on the property they run their business out of. Since homeowners insurance does not include business property and losses, it is important to purchase the proper coverage. Check with a homeowner’s insurance company to see if an extension of coverage for an additional premium is available. If not, you can purchase home-based business insurance as part of a business owners policy (BOP).

Commercial Umbrella Liability Insurance

Being a junkyard owner exposes you to a number of liability risks out of your control. While a general liability policy will protect you when a liability claim arises, fees associated with a lawsuit can add up. If you exhaust your underlying general liability limits, a commercial umbrella insurance policy would take over. This policy helps with paying additional legal fees and court-awarded 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 Junkyard Business Insurance article for more info.

Your largest cost when starting a junkyard will be the land, unless you already own several acres of it. You will also need to invest in:

Security
Building fencing and facilities
Purchasing equipment

Your largest ongoing cost will be centered around your salvaging process, which involves purchasing a product, the materials used to process it, and paying for the necessary labor.

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

Most ongoing expenses stem from the salvaging process, including purchasing products and materials to process them and paying for processing labor. Other costs include insurance, marketing expenses, and typical administrative expenses.

Learn more about running a junkyard.

Junkyard businesses purchase usable parts, salvage or process them, and resell them at a profit.

Learn more about starting a junkyard.

A junkyard business, also called a salvage business, specializes in collecting and repurposing items that people do not want such as discarded appliances, vehicles, and furniture.

They can also serve as either a short-term collection and storage facility for vehicles on their way to another destination.

A junkyard business’s profits depend on the types of goods and services it offers.

Learn more about starting a junkyard.