The trillion-dollar supply chain management is a prominent avenue of interest for Owner-operators / small carrier investors. Trucking tends to face recession more often – almost two times more than the regular economy – and stringent regulations challenge you to run a profitable business.
Nearly 90% of trucking companies are owned by small and family businesses, mostly Owner-operators, who don’t have enough resources to manage the operations with efficiency.
Nearly 70% of trucking companies fail during their first year, unable to find profitable loads, as well as with a failure to comply with tougher safety regulations and compliance. Several common problems are listed below:
- Pay is based on brokers’ discretion, no minimum standard.
- Rising fuel costs.
- Declining workforce and rising wages.
- Deteriorating equipment quality.
- Tightened safety regulations.
- Staggering insurance prices.
- Unpredictable weather and Health and Safety (COVID-19)
- Economic recession (Freight industry experienced twice as many recessions since 1972 as the overall economy)
Below are guidelines on how to operate a successful trucking company.
Business Plan
For small businesses, funding adequate capital is essential, at times this can be Owners’ experience, or capital contribution. Capital needs can be broken into Capital budgets and a working capital budget.
Capital budget means the funds needed to buy an existing business or Equipment (Trucks and Trailers). The capital budget can be debt leveraged and the borrower’s reputation is key as it will determine the interest rates.
Working capital budget is a stream of revenue and expense forecast, focused on daily needs such as Driver wages, fuel charges, insurance, repairs, maintenance, warranties, rent, utilities, and other general expenses. Trucking is seasonal and it is wise to plan ahead for cyclical seasons.
Form an Entity and obtain Tax ID
Being on the roads is risky; big trucks bring bigger risk, potentially results in millions of dollars spent in legal disputes. Forming a legal entity and having compliance in place protects you from personal liability. Operate the Company as a separate entity and do not commingle business funds with personal, run business like business.
Register company as a Corporation or limited liability Company and elect the below tax status by filing form 8832 or 2553.
C Corp: You are a shareholder in the Company, the company assumes all business risks, pays taxes on profits and declares dividends when adequate income is available for distribution. Electing to be a C Corp is a good strategy when you need to accumulate wealth under a legal entity.
S Corp: This is only a tax classification which the Internal Revenue Service (IRS) allows you to elect for tax treatment on certain eligible conditions. The Company passes Income to the shareholder who pays taxes on income.
Limited Liability Company: Another form of protecting liability, under the LLC, you can restrict your liability to the amount of Capital contribution to Partnership. For tax treatment, you need to elect it to be a Partnership, Corp or single member pass through entity.
Register Business with City Council, open Bank account
Register your business with Local authorities and obtain your D.B.A.
Buy or lease Truck and Trailer
The type of Cargo you haul is the key factor in deciding what equipment to buy. Most regular cargo types are Dry van, Reefer, Flatbed. The other trailer modes are flat bed, car hauler, Tank, Step Deck, Gooseneck, and heavy-duty trucks.
Choosing the right equipment is a major decision so do your research on freight rates and discuss with dispatchers before you finalize.
Once you choose equipment, decide do you want to buy New vs Used or Buy vs Leased based on capital availability.
Obtain Insurance
Obtaining insurance is a challenge for a start-up trucking Company. Unfortunately, this is a prerequisite and must be obtained before you can apply for the business permits (DOT, MC, IFTA and so on) for trucking Company. The insurance cost per truck could vary based on your experience, drivers experience, type of cargo, travel distance and so on. In certain States, the Workers Compensation and General Insurance is a prerequisite to obtain before the permits.
Insurance is usually offered for six months and may include an option to setup the payment monthly with a premium. Pay attention, be aware of the set procedures to be compliant with the policy terms.
Apply for US DOT
US DOT: All commercial vehicles which cross Interstate should display a US DOT number. This mandate requires even if you cross interstate borders one time. If you determine to apply for a US DOT, you need to file Form 150 with FMCSA (Federal Motor Carrier Safety Administration).
Operating Authority (MC)
A company needs to obtain multiple operating authorities to support its planned business operations when hauling freight for payments (‘for hire’). Operating authority is often identified as an “MC,” “FF,” or “MX” number, depending on the type of authority that is granted. Operating Authority dictates the type of operation a company may run and the cargo it may carry. It also dictates the level of insurance/financial responsibilities a company must maintain based on the type of cargo it hauls.
| Kind of Equipment/Carriage | Commodity Transported | Minimum |
|---|---|---|
| For-hire (interstate or foreign commerce; GVWR of 10,001 or more pounds). | Property (nonhazardous) | $750,000 |
| For-hire and private (interstate or foreign commerce of any quantity, or intrastate commerce in bulk only; GVWR of 10,001 or more pounds). | Listed items of Oil, Hazardous waste, materials, and substances. | $1,000,000 |
| For-hire and private (interstate, foreign, or intrastate; GVWR of 10,001 or more pounds). | Hazardous substances, as defined in 49 CFR 171.8 | $5,000,000 |
Operating authority focuses on monitoring Motor Carrier Safety, new entrants’ safety, and perform safety audits covering the following aspects:
- Driver qualification and fitness
- Driver duty status, and hiring practices
- Vehicle maintenance
- Vehicle requirements
- Accident register
- Inspection, maintenance, and repairs
- Controlled substance, Alcohol and Drug test
- Hazardous material
- Safety management system
- Inspections and safety compliance
While US DOT number will be assigned automatically, an Operating Authority usually takes 20 to 25 days, unless they are subject to further review by the agency. New entrants are usually audited for safety within the first 18 months.
Appoint Registered Agent
The trucks pass through various States, violations could happen in any State; every State expects to have a place of business in each State to serve the notices of non-compliance. This is challenging for Truckers to open an office in every State they pass-through. To alleviate this limitation, you have can file BOC-3 with as low as $50 per annum, appointing agents who act on your behalf.
Only a process agent, on behalf of the applicant (carrier), can file Form BOC-3 (Designation of Process Agents) with the FMCSA. It must include all States for which agency designations are required. One copy must be retained by the carrier or broker at its principal place of business. This is a prerequisite to activate the MC and must be on file.
International registration Plates (IRP) – Apportioned plates
When you cross the home State where you have registered, you need to register in either all the States where you travel to or obtain temporary road permits for your trucks weighing more than 26000 pounds.
To make this process simpler, the US (48 States), the District of Columbia, and 10 Canadian Providences (AB, BC, MD, NB, NL, NS, ON, PE, QC, SK) agreed to participate in this IRP program as members.
MY, NM, OR, and the NY States are not participating in IRP, and you need to obtain State-specific permits.
IRP manages the collection and distribution of registration fees between member jurisdictions. Distribution is based on a fair share based on fleet operated in each jurisdiction.
International Fuel Tax Agreement (IFTA) registration
If you are operating as an Interstate carrier, you are subject to IFTA reporting requirements. IFTA was created to streamline the collection and distribution of fuel charges between US, and Canada.
Current non participating members:
- Alaska, Hawaii, and District of Columbia.
- Canada: Northwest Territories, Nunavut, and Yukon Territory
- Mexico: All states, and Federal District
Motor fuel use taxes that are imposed by each jurisdiction on the consumption of motor fuel in qualified motor vehicles are subject to IFTA taxes. The Company must maintain operational control and records for those vehicles in home jurisdiction. Document vehicle distance by jurisdiction, provided the required supporting data are maintained for audit purposes. Once you are licensed under the IFTA Program, you must file your quarterly returns.
Electronic Logging Device (ELD) Compliance
Fatigue could lead to fatalities on the roads. The ELD is mandated to address the risk of fatigue and improve the information flow between drivers, trucking companies and safety authorities. ELDs replace handwritten paper logs, ensure that drivers take the breaks they need. ELD improves the accuracy of the trip data and aids in IFTA reporting.
The ELD rule applies to inter-state carriers including buses that travel to Canada and Mexico unless exempted.
Unified Carrier Registration (UCR)
The UCR Program requires individuals and companies that operate commercial motor vehicles in interstate or international commerce to register their business with a participating state and pay an annual fee based on the size of their fleet. This includes ALL carriers – private, exempt, or for hire. The fleet size is determined using the DOT number and the number of trucks associated with it. This is an annual registration that expires on December 31 and is due in November of every year.
Heavy Vehicle Use Tax
All commercial vehicles weighing 55,000 pounds or more are subject to the federal Heavy Vehicle Use Tax (HVUT). The HVUT is a tax that is paid by motor carriers directly to the Internal Revenue Service. Those subject to the HVUT must provide proof of filing to the DMV at the time of vehicle registration by submitting an IRS stamped copy of a 2290 Form (Heavy Vehicle Tax Return).