Corporate structure
Moderators: Josh, independent guy
Corporate structure
What corporate structure ( C corp., S corp., or LLC) would be the most efficient for the small (2 people) startup agency?
Nothing wrong with a partnership, either. Most small agency owners don't need to add the addditional bookwork needed to run a corporation.
Also, many companies will only give appointments to the experienced producer, not an agency that is a "start-up". Finally, if you also will be selling Securities the broker / dealer will only license an individual without lots of other hurdles being jumped!
Swymmer
Also, many companies will only give appointments to the experienced producer, not an agency that is a "start-up". Finally, if you also will be selling Securities the broker / dealer will only license an individual without lots of other hurdles being jumped!
Swymmer
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jctwindad
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I would not recommend a C Corp. This is where you get into the "double taxation" that you mention. The corporation must file a federal tax return each year, and pay tax on profits. Then, when profits are distributed to the owners, they pay personal income tax again. In addition, when selling the agency, you go through the same tax process again.
I like a Subchapter S Corporation, and it is perfect for small businesses. Any profits are passed straight to the owners at year end, on a Schedule K, and there is no federal tax return required from the corporation(although your state may still require a corporate return).
Should you initially form a C Corp and then later decide to change to an S Corp, you can, although you have to let 10 years pass before selling the agency, if you want the benefits of the S Corp taxation.
As one writer wrote "Why not a Partnership?", my answer is that a Partnership does not allow you to protect your personal assets from liability, as a corporation does. This is the primary reason that most people form a corporation. The paperwork involved, etc. with a small corporation are not very time consuming, and are well worth the protection provided from Liability.
Advice from both your Attorney and Accountant are suggested.
I like a Subchapter S Corporation, and it is perfect for small businesses. Any profits are passed straight to the owners at year end, on a Schedule K, and there is no federal tax return required from the corporation(although your state may still require a corporate return).
Should you initially form a C Corp and then later decide to change to an S Corp, you can, although you have to let 10 years pass before selling the agency, if you want the benefits of the S Corp taxation.
As one writer wrote "Why not a Partnership?", my answer is that a Partnership does not allow you to protect your personal assets from liability, as a corporation does. This is the primary reason that most people form a corporation. The paperwork involved, etc. with a small corporation are not very time consuming, and are well worth the protection provided from Liability.
Advice from both your Attorney and Accountant are suggested.
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Rob
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Actually I agree with jctwindad as an S corp does have some benefits. I was thinking that it wouldn't be possible with two unrelated individuals. I was a C when I was a 2 person corp, then I bought out the other person and switched to an S. The S lets you take dividends that aren't subject to social security tax as well I believe. Again, consulting a CPA would be good to get all the ins and outs of all options. I wouldn't do a partnership as it doesn't give the same protection as a corp.
Jctwindad, the only way a professional agent can protect personal assets from creditors is to have enough E & O coverage and don't do anything stupid that would be cause for denial of a claim. Anyone that thinks they can protect their own hind-end from an act of professional negligence on their part is dreaming.
It doesn't matter what type of business form you choose... if you screw up you'll be liable. And, for the non-professional exposures you can own a BOP, GL , Hired & Non-owned Auto, Etc...
My experience working with two-person agencies is a loose partnership that really is a cost-sharing and affilliation relationship. Then, the producers get paid exactly what they are worth and no one carries the other. Just my opinion.
Swymmer
It doesn't matter what type of business form you choose... if you screw up you'll be liable. And, for the non-professional exposures you can own a BOP, GL , Hired & Non-owned Auto, Etc...
My experience working with two-person agencies is a loose partnership that really is a cost-sharing and affilliation relationship. Then, the producers get paid exactly what they are worth and no one carries the other. Just my opinion.
Swymmer
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jctwindad
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Wlunday,
Sorry to disagree, but you are wrong. I own a 3 location, 27 employee agency. Prior to getting into the insurance business 30 years ago, I attended law school, before deciding that I preferred insurance. I am a CPCU, CIC, AAI, CLU. I tell you all of this to say that I didn't just fall of the apple cart. I've been around the block a few times, and know what I am talking about. I don't know where you get the idea that a corporation does not protect your personal assets. The way you word your reply, indicates that you strongly feel you are right. I suggest you discuss this with an attorney, as you are misinformed. However, I do not want to get into an online argument. Enough said.
Sorry to disagree, but you are wrong. I own a 3 location, 27 employee agency. Prior to getting into the insurance business 30 years ago, I attended law school, before deciding that I preferred insurance. I am a CPCU, CIC, AAI, CLU. I tell you all of this to say that I didn't just fall of the apple cart. I've been around the block a few times, and know what I am talking about. I don't know where you get the idea that a corporation does not protect your personal assets. The way you word your reply, indicates that you strongly feel you are right. I suggest you discuss this with an attorney, as you are misinformed. However, I do not want to get into an online argument. Enough said.
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independent guy
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Hey, jctwindad... no arguements here! I agree with you... for a three location, 27 employee firm the corporate choice is correct!
The original post said... what is the best way for a start-up, two person agency to organize. In this situation I think incorporating would be the wrong way to go. There is no business history for the firm, many carriers are only going to give appointments to the individuals, not a start-up corporation, and you can not remove yourself from a personal liability if it is your personal negligence that caused the tort in the first place. For all the other legal issues there is coverage available from GL's and E&O as stated before.
As you'll recall, I also mentioned even operating as a "loose arrangement to share office and overhead expenses" so as each producer earns income they get to keep what they are worth. Nobody wants to be carrying the partner.
Incorporating is a good thing in many circumstances. The LLC also works well in small to medium sized agencies where specific "partners" bring a special talent to the firm. But, not for a start-up 2-man shop. Not yet. They don't need all the headaches. I'm looking at the whole picture, not just from the lawsuit protection angle.
I do continue to seek counsel from my attorney and CPA. My agency has one location, 5 employees and just under 4 mil of P/C premium and about $150K of Life / Health / DI / LTCI income each year. They still tell me that it's not yet time to incorporate!
Oh, and by the way, I also have earned my LUTCF, CLU and ChFC and teach this stuff regularly for NAIFA affilliates.
Swymmer
The original post said... what is the best way for a start-up, two person agency to organize. In this situation I think incorporating would be the wrong way to go. There is no business history for the firm, many carriers are only going to give appointments to the individuals, not a start-up corporation, and you can not remove yourself from a personal liability if it is your personal negligence that caused the tort in the first place. For all the other legal issues there is coverage available from GL's and E&O as stated before.
As you'll recall, I also mentioned even operating as a "loose arrangement to share office and overhead expenses" so as each producer earns income they get to keep what they are worth. Nobody wants to be carrying the partner.
Incorporating is a good thing in many circumstances. The LLC also works well in small to medium sized agencies where specific "partners" bring a special talent to the firm. But, not for a start-up 2-man shop. Not yet. They don't need all the headaches. I'm looking at the whole picture, not just from the lawsuit protection angle.
I do continue to seek counsel from my attorney and CPA. My agency has one location, 5 employees and just under 4 mil of P/C premium and about $150K of Life / Health / DI / LTCI income each year. They still tell me that it's not yet time to incorporate!
Oh, and by the way, I also have earned my LUTCF, CLU and ChFC and teach this stuff regularly for NAIFA affilliates.
Swymmer
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Rob
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I have to disagree, I think one is crazy to not incorporate. If a suit develops, as I understand it, it would be against the entity and if done correctly is really difficult to "pierce the corporate veil". I sleep better knowing my personal assets are separated from the business assets. You can still structure the corporation where the officers are compensated based on their production or efforts. I'm not seeing the logic behind the notion of "no need to incorporate". This is my opinion.
LLC, Corp, or Partnership?
wlundway, your situation is crazy? Your accountant told you NOT to incorporate yet? What did your attorney say?
I have three locations, two states, 15 employees, two corporations, 30 years of insurance experience as a retail agent, general agent and Company President AND $2 million E & O coverage and I never feel adequately protected from vicious attorneys trying to get my hard earned assets from me.
E & O works but upon reaching the policy limits with both the loss and defense costs, if they are not separate, the attorney now will take your agency, your home and your other personal assets totally unrelated to the lawsuit.
Without a corporation or LLC, you are crazy to expose hard earned assets to any potential claim. I write a fair amount of Professional Liability for insurance agents in several states including CA. and I would never recommend relying upon the E & O coverage ONLY. All insurance Companies LOOK for exclusions within their policies to avoid paying claims.
In the late 1980's E & O was unaffordable for the small agent. I had 14 locations in 5 states. I separately incorporated each one using the same DBA for a name and went without E & O as it cost in excess of $20,000 per year per location at that time.
If some punk atty. got me, he would get two desks and a copier as the book of business would migrate down to my other office rapidly. I had one experience in CA. being named on a claim and the company went BK, I was pursued for 3 years for $600,000 due to proper denial of a claim and the day before trial, the Kuwaiti citizen and his fine atty. settled for $500.00.
Corporations and LLC's protect all personal assets with the exception of fraud being committed by the owner. In that case, the E & O carrier probably has an exclusion for you.
Your accountant has you missing out on numerous other financial benefits of a corporation or LLC. I would suggest firing both your accountant and attorney. I am surprised you have any personal assets at this point.
Just my two cents.
Hutch
I have three locations, two states, 15 employees, two corporations, 30 years of insurance experience as a retail agent, general agent and Company President AND $2 million E & O coverage and I never feel adequately protected from vicious attorneys trying to get my hard earned assets from me.
E & O works but upon reaching the policy limits with both the loss and defense costs, if they are not separate, the attorney now will take your agency, your home and your other personal assets totally unrelated to the lawsuit.
Without a corporation or LLC, you are crazy to expose hard earned assets to any potential claim. I write a fair amount of Professional Liability for insurance agents in several states including CA. and I would never recommend relying upon the E & O coverage ONLY. All insurance Companies LOOK for exclusions within their policies to avoid paying claims.
In the late 1980's E & O was unaffordable for the small agent. I had 14 locations in 5 states. I separately incorporated each one using the same DBA for a name and went without E & O as it cost in excess of $20,000 per year per location at that time.
If some punk atty. got me, he would get two desks and a copier as the book of business would migrate down to my other office rapidly. I had one experience in CA. being named on a claim and the company went BK, I was pursued for 3 years for $600,000 due to proper denial of a claim and the day before trial, the Kuwaiti citizen and his fine atty. settled for $500.00.
Corporations and LLC's protect all personal assets with the exception of fraud being committed by the owner. In that case, the E & O carrier probably has an exclusion for you.
Your accountant has you missing out on numerous other financial benefits of a corporation or LLC. I would suggest firing both your accountant and attorney. I am surprised you have any personal assets at this point.
Just my two cents.
Hutch
Where did you guys get your rose colored glasses?
There is not a decent attorney in the country that wouldn't name the agent, as an individual, as well as the business enity (corporation or whatever) plus the carier involved in a suit that included some sort of negligence on the part of that agent. The only way your personal assets are to be protected is with adaquate liability insurance... both GL and E&O. Sleep well... dream on!
If you doubt me... ask YOUR attorney if he would consider naming an agent as a individual, in addition to the corporation the agent owns in a lawsuit based on the actions of that agent.
Finally, the question, as I understand it, goes well beyond the legal protections. You're focusing on only one (minor?) part of the whole equation. 'Nuf said...
Swymmer
There is not a decent attorney in the country that wouldn't name the agent, as an individual, as well as the business enity (corporation or whatever) plus the carier involved in a suit that included some sort of negligence on the part of that agent. The only way your personal assets are to be protected is with adaquate liability insurance... both GL and E&O. Sleep well... dream on!
If you doubt me... ask YOUR attorney if he would consider naming an agent as a individual, in addition to the corporation the agent owns in a lawsuit based on the actions of that agent.
Finally, the question, as I understand it, goes well beyond the legal protections. You're focusing on only one (minor?) part of the whole equation. 'Nuf said...
Swymmer
Corporate Structure
Wlunday,
even if the opposing counsel names the agent as an individual, the corporation can not be pierced without proving fraud on the part of the agent. Then the agent can be sued individually.
If you have been in litigation, you would understand. If your attorney thinks otherwise, you need a new one.
Hutch
even if the opposing counsel names the agent as an individual, the corporation can not be pierced without proving fraud on the part of the agent. Then the agent can be sued individually.
If you have been in litigation, you would understand. If your attorney thinks otherwise, you need a new one.
Hutch