Should I Create an LLC for My Insurance Agency?

Insurance is all about risk avoidance and risk management. Customers pay a premium to protect themselves from financial harm should they suffer physical damage to a home or car, for instance. Coverage also comes into play for liability — protection that extends to your client if they damage someone else's property or injure another party.

If you're getting ready to run your own insurance agency, you have risk-based decisions to make as a business owner, too. Some of those decisions might involve how much capital to invest in the new venture. And at least one of those choices will revolve around what type of business structure you should form.

You have a few options here if you're running as a sole owner. Some agents might choose a sole proprietorship that probably requires the least amount of administrative work. Other insurance representatives strongly consider limited liability companies (LLCs) that give some favorable tax treatment and peace of mind in case the unexpected happens. (And you know how "things" happen.)

But is the LLC option right for you? Let's take a look at it, along with some alternatives, so you can decide.

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What Is an LLC?

An LLC is a form of business ownership that any small business can pursue. Each state has different statutes surrounding LLCs, so it's prudent to check your state's regulations to see how they affect your strategy. The person or people who own an LLC are referred to as members, and you can have more than one member share in the ownership of an LLC. Ownership shares can even extend to corporations or other LLCs.

Tax treatment for the LLC depends on how you set up the company. But, how you file a tax return hinges on things like the number of members and whether you opt to be organized as a corporation. An LLC that has two members would be viewed by the IRS as a partnership unless the owners choose otherwise. A single owner of an LLC can use either an employer identification number or their Social Security number to file taxes on a personal return.

Before you choose to form an LLC or other business entity, it's highly advisable to seek the advice of an accountant and an attorney. It's also smart to weigh the advantages and disadvantages before selecting which type of business entity meets your needs.

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Pros and Cons of LLCs for Insurance Agencies

Just as you would with a prospective client, you'll want to ask yourself some questions regarding your individual circumstances before forming an LLC. If you have a partner in the agency, they will obviously need to take part in this fact-find as well. While these may seem like red-tape matters, it's important to find time to address your business formation long before you open your doors. You'll be managing many responsibilities, and solidifying some of these bureaucratic matters will help you redirect your attention to critical sales and marketing campaigns.

With that in mind, here are some pros and cons of LLCs.

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Pros

• Forming an LLC is fairly simple. If you're the sole member, you don't need to apply for an employer identification number (EIN) if you choose not to. You can use your own Social Security number to report taxes, apply for financing, etc.
• You may not need to file a separate business tax return. Your agency income and deductions flow through to your personal tax return. If you're not already familiar, Schedule C on IRS Form 1040 reports your revenue and expenditures. All you need to do is retain commission statements and receipts for business expenses.
• There are fewer headaches than some other options. Initial paperwork for setup and subsequent reporting requirements are less burdensome than that of subchapter S or C corporations. You won't need to issue corporate shares or spend a ton of time complying with state and federal reporting mandates.
• You can shelter personal assets from any liability the insurance business might encounter. From a legal perspective, you and the business are two completely separate entities. If you must dissolve the business due to circumstances beyond your control, any outstanding creditors cannot seek repayment from your personal savings or investments.

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Cons

• You may have to share ownership. If you have multiple members within the LLC, you will be ceding some control over how the insurance agency operates and brands itself. Partners might have a different vision for the business than you do. Sharing ownership under an LLC may be as big a decision as starting up the venture in the first place.
• You'll take home pay differently. You may be accustomed to receiving a paycheck and having all tax deductions preconfigured. If you own an LLC, you won't be able to take a salary in the traditional W-2 sense. You'll need to take a draw and report the income differently than you had if were paid a salary or wages.
• Unintentionally mixing personal with business transactions can happen pretty easily. Doing so can negate one of your biggest advantages as an LLC. This oversight can expose your personal assets to outstanding debts, lawsuits, liens, or any other negative actions against the business.
• You may deal with fees. Depending on the state where your agency is domiciled, there will likely be annual fees to pay to various government bodies. These costs may be comparatively higher than the charges levied against other types of business structures.

Just like the Ben Franklin close that you may use with prospects, you want to look at the pros and cons and figure out if the good points outnumber the bad points. Of course, you may place different weight on each pro or con as you see fit. If an LLC doesn't work for you, there are other options.

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Other Business Structures for Your Agency

Here are some of the other most popular options you can consider for your agency.

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S Corporations

Corporations can evolve to become extremely complex business organizations. It's why you see most multi-billion-dollar companies take shelter under a corporate umbrella. Under an LLC, you can opt for S Corporation status. This selection allows owners to take traditional salaries, enroll in company health benefits, and contribute pre-tax dollars to retirement plans such as a 401(k).

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Sole Proprietorship

Probably the most basic of all business setups, there's not a lot of distinction between you and the business. As the name suggests, only one member takes on 100% of the ownership structure. "Sole props" don't require you to file any formal paperwork but, unlike LLCs, personal holdings can be exposed to business creditors.

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Partnership

A partnership often consists of two or more partners in a limited partnership in which a general partner owns the business with other partners. The difference between a general partner and a limited partner is the general partner has unlimited liability with respect to business exposures, whereas limited partners are liable only to the degree of their share of ownership.

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Should You Create an LLC?

Whether you elect to form an LLC for your insurance agency is a matter of personal choice — and perhaps a decision geared toward the size of your operation. An LLC may be the best choice if you're taking over a large, existing book of business and employing a staff of producers and administrative personnel.

There's a simple logic behind this reasoning. More premium requires more personnel, which equates to more transactions. All this activity increases the risk of something going awry, and protecting your personal assets from any financial harm is best achieved through an LLC.

On the flip side, perhaps you're dipping your toes in the waters of agency ownership. It's strictly a side gig until revenues can support your lifestyle. Less activity might translate to less risk of financial harm from legal action, and you may see a sole proprietorship as the way to go. You just need to fully understand the exposures you have and find a way to mitigate them.

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How To Set Up Your LLC

Consulting with an attorney or legal service is the safest way to set up an LLC. For the small fee that you'll pay, it's worth the cost knowing that the operating agreement, business licenses, and filings have been managed properly. Each state has different rules around establishing this type of business entity. So, the party that helps you set up the LLC should have considerable knowledge about rules and regulations.

Start the process a few months before you open your doors. Getting an early jump on things will help ensure that you're ready to roll when the time comes to find prospects and sell policies.

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Now You Can Get Down to Business

Once you have the LLC up and running, you can focus on finding customers and building relationships. You'll need a way to connect with warm prospects, and Nectar can help by providing you with real-time leads who are ready and willing to buy. Contact Nectar today to learn more about how we can help you grow your business, whatever structure you choose.

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