The Different Business Structures for Your New Insurance Agency

August 22, 2017 Becky Schroeder

hand grabbing keys

 

When starting a new independent insurance agency, one of the things you need to consider is how you’re going to structure the business.

The business structure you choose affects several things. This includes your operations, how you pay taxes and your liability as an owner.

As part of our continuing series for starting a new independent insurance agency, let’s take a look at the different forms of business. You’ll need to decide how you’re going to structure your agency for your business plan.

The most common structures are sole proprietorship, partnership and corporation. There are tax and legal implications for each type.

Note: This is an overview. I recommend talking with your lawyer or accountant about the different types. They can help you determine which structure will be best for you.

 

Sole Proprietorship

If a single person owns and operates a business and hasn’t registered it as any other business entity, it is a sole proprietorship.

Sole proprietorships are easy to set up and run. The business is part of the individual; it is not a separate entity. That means all the profits go to the owner. But, it also means taking all the losses. You report any business profits and losses on your personal tax return.

Not having a separate business entity also has an impact on the business’s legal situation. Any lawsuits against your business can affect you and your family personally.

Creditors can go after your personal assets if the business cannot pay them. And, you might find it hard to find investors or partners to join in your business goals without the ability to sell stock in your agency. Plus, banks can be hesitant to lend to sole proprietors.

If you choose sole proprietorship, I would suggest you set a higher limit on your E&O and general liability policies.

 

Partnership

A partnership has two or more owners who share the benefits and risks of the business. It may include general partners who are all involved in the daily operations and share in the liability for business debts and actions.

Or, it may include limited partners who are only investors and aren’t involved in the daily operations. Limited partners also don’t share in the liability.

The specific types of partnerships (general, limited and limited liability) you can form will depend on your state.

 

General Partnership

In a general partnership, all partners are involved in the daily operations. They also have personal responsibility for the business’s debts and liabilities. If someone sues the business or one partner, all partners are held liable.

 

Limited Partnership

A limited partnership has both limited partners and general partners. A limited partner is not involved in the daily operations of the business. They also have limited liability. Most often limited partners are investors.

 

Limited Liability Partnership

A limited liability partnership (LLP) mixes characteristics of partnerships and corporations. An LLP is similar to a limited partnership but gives all partners limited liability. Partners are not personally liable for the errors, negligence or liabilities of the other partners or employees.

In an LLP, each partner has the same responsibilities for managing the business and being involved in the daily operations.

 

Corporation

A corporation, sometimes called a C corp, is an individual entity separate from the owners. It can make a profit, pay taxes, and be held liable as its own entity.

Creating a corporation is more complicated as you have to register with your state. (Check with your state’s office of the Secretary of State for more information on this process.)

A corporation’s owners have shares of stock in the company. This is an advantage for corporations as they can raise capital via the sale of shares.

Owners also have greater protection from personal liability. The tax situation for corporations is a little more complex. Corporations have to pay corporate income tax on their profits. In addition, the shareholders (owners) pay personal income tax on their compensation and dividends.


S Corporation    

The S corporation, or S corp, is a hybrid structure. For legal and liability purposes, it’s a corporation. For tax purposes it’s a partnership. This means the owners have limited liability because the company is a separate entity. But, the owners receive the profits and pay taxes on those profits in the same way as a partnership.

To create an S corporation, you first register the corporation with your state. Then, you must file for an S corporation election with the IRS as only certain types of corporations are eligible for this status.

S corps avoid the double taxation on profits that a C corp can have.

 

Limited Liability Company

A limited liability company (LLC) is another hybrid of the corporation and partnership structures. Like a corporation, it protects the owners from personal liability in most cases.

Like a partnership, the owners’ pays taxes on the company’s profits as this money is part of their income. Some states may have a franchise tax on LLCs. Check with your accountant if you’re not sure about your state.

It is easier to set up an LLC than a corporation as there are no by-laws or corporate charter required.

 

Comparison Chart

Here’s a handy chart that sums up the differences among the different business types.

 

Business Structure

Ownership Liability Taxes

Sole proprietorship

One owner

Unlimited personal liability

Personal tax only

Partnership

Two or more

Unlimited personal liability (except for limited partners)

Self-employment tax (except for limited partners)

Personal tax

Corporation

One or more

Not personally liable

Corporate tax

S corporation

One or more (but no more than 100), all U.S. citizens

Not personally liable

Personal tax

Limited liability company

One or more

Not personally liable

Self-employment tax

Personal or corporate tax

 

Don’t Forget

Talk to your lawyer or accountant about the business structure that’s best for you. While it may be possible to change after you’ve been operating for a few years, it’s complicated and costly. Your lawyer or accountant can help you understand the benefits and limitations of each type.

 

Got a question about starting an agency you’d like us to answer in a future post? Leave it in the comments below.

About the Author

Becky Schroeder

As senior vice president of sales and marketing, Becky Schroeder oversees ITC’s sales and marketing departments. Her specialties include creating and documenting processes; establishing metrics for managing those processes; developing content strategy and generating leads; and driving the overall company sales and marketing strategy. Becky was named an Elite Woman in Insurance by Insurance Business America in 2016. She has a master’s degree in integrated marketing communication from Emerson College in Boston and a bachelor’s degree in journalism from Texas A&M University. Becky is a big Texas A&M football fan and enjoys cooking, reading and spending time with her husband and their three daughters.

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