Agency Corp Status C vs S ??

[TXPLAgent]

I have recently purchased a small PL agency and established a corporation ( 1 month ago) -- trying to determine if best to continue as a C or file for S status.

A few facts:

Gross revenue $145,000.00
My loan payments for the book is @$30,000.00 a year for about 5 years. ( no interest)
After a reasonable salary I plan to reinvest all profits for next 10-20 years for growth.
I have no plans of selling any time soon.

I would appreciate any experienced feedback.

[Insismypassion]

Not being an accountant myself, just a former agency owner, I can only offer an opinion.

Depends on what your goals are.

"C" Corps are taxed as a legal person, and then you are taxed. The advantage is the "C" Corp can put aside money for capital improvements and growth, just taxed at the corporate rate.

"S" Corps are not taxed as a person, all "profits" (including your salary) flow through to you and are taxed at your rate. You can still set the money aside, but it is taxed at your higher rate.

As I said, an accountant and tax attorney can give you clearer answers, but if you're wanting to set money aside to reinvest, I think "C" corp is better in the long run, especially if you are going to look for investors in the future.

[TXPLAgent]

Thank you Insismypassion . I see it the same way, however i am not an CPA and the one that I have consulted with doesnt seem to really understand insurance agencys. Thank you for your time.

[wlunday]

As an additional thought... what's wrong with staying as a sole-prop? 11 years ago I merged my life / health practice with a P/C shop, and have been reaping the depreciation of the book, etc... My CPA and several carrier reps skilled in agency perpetuation have all said it's easier to sell the assets of an agency (when I'm ready) if NOT incorporated.

I also paid for the P/C book over five years, and later learned I should have used a 15-year contract to take full advantage of the depreciation schedule. Oh, well, I'm done with payments and still using the depreciation! Good luck!

Swymmer

[Insurance101]

A sole prop has the personal liabilities that a corporation does not. In this business I have always been told it is advisable to be incorporated. Definitely spend the time and money to speak to a good accountant as you should get this right from the beginning. You dont want to have to change your legal status down the road. As for a C corp vs an S corp, I've been told that is adviseable to be an S Corp as an insurance agency. I as well am not an accountant and you really need to get proper advice. This is not necessarily the forum to use to base your answer on. Speak with a professional. We are insurance people, not accountants. However, I do know that if and when you ever do want to sell or merge your agency, you will have a much harder time as a C corp due to the tax structure. You wil be double taxed in the event of a sale of the agency.

Good Luck and make sure you get advice from an accountant.

[wlunday]

Insurance 101 needs to look a little deeper (perhaps 102?). As a sole-Prop most everything is easier... from bookkeeping to draws, etc... And, as any form of business you get a GL policy to cover business related exposures, a good personal liability umbrella to cover your butt at home, and a quality E&O plan for the professional exposure.

Incorporating your buuiness will not eliminate the professional exposure. Even in other types of business (industries) the personal acts of neglience by the business owner does not escape a lawsuit or judgement just from incorporating. If it did we wouldn't need E & O...

There may be some benefits to incorporating, but as a long-time agency owner I have not yet become convenced to make the change.

Let us know what you decide, and why. Thanks,

Swymmer

[Insurance101]

Wlunday needs to look a bit deeper himself (or herself). My reply to the post was merely stating what I have seen and above all to speak to a tax advisor. No need for you to make snide remarks. I just looked at a few pages from the 2006 "Best Practices Report". I have no idea what size agency anyone in this thread is, but according to the report, out of all the agencies surveyed that were in the revenue range of $2,500,000 - $5,000,000 here's how the numbers stack up:

S-Corp 41.9%
C-Corp 48.4%
Partnership 3.2%
LLC 6.5%
Sole Prop 0.0%

There is obviously many reasons for the reults above. I dont know what the results are for agency groups in lower or higher revenue ranges and they could be different. Unfortunately I dont have that information. I suspect it's not much different though.

One disadvantage to a Sole Prop I did not mention prior is taxes. As a sole prop you have to pay self employment taxes (roughly 15.3%) on your entire compensation net profit). As an S-Corp you have the ability to take a lesser salary and the balance as distribution which is not subject to self employment tax. Again, speak to your tax advisor.

Good Luck.

[wlunday]

Hey, 101... I was out of line with the remark. My apology.

I also believe that agencies with revenues in the 2 million range should have a more formal organization... However, the original post by TXPLAgent shows a small agency with only $145,000 of gross income. Probably a one-man shop at this point.

Swymmer

[meytai]

One is talking about protection and a defense against liability.. and another is talking about the ease of being a sole-prop.

[mhutch69]

From my experience, a corporation is rarely ever penetrated absent fraud. Not negligence, but fraud. That is from two attorneys I have used for 20+ years, both of which were prior Directors of Insurance. (not that that means much) But, both are good counsel.

I would incorporate as an "S" Corp. if you would like to pay lower taxes. You can pay a small salary and take profits as loans, management fees, or re-payment of loans.

I have not heard of many agencies of much size ever operating other than an LLC or Corp.

Just my two cents.

[Brock Andersen]

I recognize that this is an old thread, but in case anyone is still thinking about these issues, I am a partner in a CPA firm that works with gobs and gobs of businesses in the insurance business. It almost never makes sense to operate as a C corporation. The exception would be for a company preparing to go public.

For most agencies, an LLC taxed as an S corp is the best answer. It offers the best of all worlds--the LLC has minimal formalities and the S corp status is a great tax avoidance tool. As it has been noted, operating as a sole proprietor is the simplest, but probably the worst approach because sole proprietors pay higher taxes and have no liability protection.

Operating as an LLC taxed as an S corp does have some strict requirements that must be followed, so please don't do this without a professional. In this area of tax law, a good advisor will absolutely save you money.