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.
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.
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.
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.
Here are some of the other most popular options you can consider for your agency.
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).
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.
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.
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.
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.
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.
This article reflects the features of Nectar as of the date of publication. Features are subject to change at any time. This article is meant for informational purposes only, it is not a guarantee that using Nectar will help you achieve specific business or financial results and is not intended to serve as the sole recommendation for any business financial decisions.