Captive to Independent. Can I Create my Own Entity?

Discussion in 'General Insurance Agent Discussions' started by MisterBill, Aug 6, 2017.

  1. MisterBill
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    MisterBill Member

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    Thank you all for your advice. I greatly appreciate it. Those responses were exactly what I was hoping to receive. I truly love this business and I have no doubt that I will succeed in it. My background is sales in many capacities. However, I am one of the lucky ones that wants to go out every day to make a positive impact in people's lives. I've seen enough people come and go and a few that make it through. I have had a good start as a captive agent with a great company. It's time to take back half of my paycheck so I can do even more good in my community.
     
  2. FLM2
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    FLM2 Well-Known Member

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    Where did I ever say it was specific to a C Corp? In my case, though, the contribution limits are higher than $18K and, with a C Corp, I can contribute 25% of my wages (salary plus 401K contribution, not profits) on a completely tax free basis.

    Every situation is different and the OP needs to consult with experts on these matters.
     
  3. adjusterjack
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    adjusterjack Well-Known Member

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    I see you've received several responses since my comment so I'll touch on a few things that may not have been addressed.

    An LLC is a disregarded entity for income tax purposes so having one doesn't change your tax issues.

    A C-Corp is taxed separately as a corporation but you are also taxed on your income from the corporation either as a shareholder or employee. Seems to me that would only make your tax administration more complicated.

    Download the IRS Tax Guide for Small Businesses:

    https://www.irs.gov/pub/irs-pdf/p334.pdf

    You already have an actual business. You sell insurance. Your business write offs aren't any more or less legitimate whether you have an "entity" or not.

    It's basically a matter of segregating and keeping good records. Not rocket science.

    I had rentals for many years. Never had an "entity." Never had a tax problem. Had the proper liability insurance. Never lost any sleep over it.

    I was self employed as a private investigator for several years. Never had an "entity." Never had a tax problem. Had the proper liability insurance. Never lost any sleep over it.

    That's exactly the misconception I had in mind when I asked the question.

    The LLC form of business, like the corporation, protects the owners of the business from personal liability for the debts of the business. For example, if the LLC enters into a contract with a third party and breaches it, the LLC is liable for that, but the LLC members are not unless they personally guaranteed the contract, which is something that lenders and astute business people often insist upon. The LLC member is always responsible for his own debts and wrongs, including liability for the negligent acts he performs for the business (and for which the LLC might also be liable). There is also the possibility of “piercing the corporate veil” (google it) which is an even bigger risk for single member LLCs.

    The same goes for a corporation.

    As a licensed insurance agent you would be responsible for your own negligent acts (for which you buy adequate E and O liability insurance) and contracts with insurance companies would be with you personally as the licensed agent and not with your business entity. In those cases a business "entity" would likely be superfluous.

    I don't think there is any difference between being an insurance agent and being a real estate agent with regards to an "entity."

    Sure, there may someday be a need for an LLC or corporation if you end up having employees or lots of sub-agents or have to rent office space or if you are making hundreds of thousands of dollars a year and need the consumer perception of an "entity." Even then an LLC would be fine and a lot less costly to administer and insure.

    With regards to what you actually end up paying in taxes, well, I doubt that you'll find a significant enough difference with or without an "entity" as long as you are a "small business."

    That's not to be taken pejoratively. You can make a lot of money and still be a "small business."

    :yes:
     
  4. scagnt83
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    scagnt83 Well-Known Member

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    Your 401k Contribution Limit is higher because of your age. Unless you are talking about the Defined Contribution Limit, which is different than the 401k limit (but includes the 401k limit), and also has age based catch-up provisions.

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    The 25% contribution is technically called Profit Sharing Contributions.
    And S-Corps can contribute that exact same TAX-FREE 25% Profit Sharing.


    Which has been my point all along. You said:
    I was just pointing out that an S-Corp can do the exact same thing. So that reason should not be the OPs, or anyone else's, reason for choosing a C-Corp over an S-Corp.

    And they should be very aware of the double taxation trap that occurs with a C-Corp.
     
  5. VolAgent
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    VolAgent Well-Known Member

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    A few points that have been addressed, but put together for brevity.

    1. Which tax entity to use is a question for a licensed professional in your state who knows your situation. Taxes vary from state to state and your income and expense situation may influence the decision as well.

    2. For liability, there is no avoiding personal liability. If you sign the app or your name goes on it, you are personally liable. There isn't an entity on the planet that will protect you. Even putting it in a trust is suspect as if you benefit from it, have discretion or control, a court may disregard the trust. I say may because you would have to get into the details of the situation. Make sure you have appropriate professional liability insurance.

    3. For non-personal liability, that is a different story. A limited liability entity can definitely protect your personal assets from the actions of others, such as employees. Also, if someone were to be hurt on a premise that is owned or controlled by the entity then there may be protection as well. Again, I say may because your level of control may play a role.

    4. As far as business expenses. Expenses are expenses, regardless of the entity. There are very few things that can be deducted by a C Corp that cannot by others. The key is proper record keeping. Also, if you do have a separate entity, it is also important to make sure and keep all accounts separate. Co-mingling of assets is an attorney's wet dream. There is no faster way to lose the limited liability protection than co-mingling of assets and accounts.

    It is my personal belief that most agents operating as a one man shop with no employees or assistant would be just fine as a sole-proprietor. There are exceptions, but I would say most would be just fine filing an individual return with a Schedule C. Any entity will add costs, in time, filing fees and potential tax exposures. That may not be enough to offset the advantages offered by the entity.
     
  6. FLM2
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    FLM2 Well-Known Member

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    Once again, my original post said that the 401K contribution was ONE of the considerations, not the ONLY one. I considered both the S Corp and LLC structure before settling on the C Corp, if 100 people did the same thing 30 might choose C Corp, 30 S Corp, 30 LLC and 10 Sole Proprietor or something else (or the ratios could be different).

    If you want to keep berating me on this be my guest, I have better things to do today. The OP can do whatever the f**k he wants, it's his choice, not mine or yours.
     
  7. walthamny
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    walthamny Well-Known Member

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    There are different opinions on this topic, CPA's are sometimes not the best on this type of advice. Here are some unique situations where I find LLC better than a S corp. In many states, you can't sell a S corp to a foreign citizen, no such restriction on LLC's. IRS section 754 allows LLC to adjust tax basis when one partner dies. No such luck with a S corp. Transfer of value exception is allowed for LLC's, not for S corporation. This could cause life insurance death benefits to be taxable. A rare event, but it is possible in theory. If your business goes south and you lend your S corporation money, it is very complicated. It is very easy with a LLC.

    Interesting point is that all big 4 CPA firms advise their clients to form C Corp over LLC in most cases, however, they are structured as LLP's themselves almost the same taxation as LLC), they have never chosen to be a C Corp.
     
  8. VolAgent
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    VolAgent Well-Known Member

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    If I had to wager, I would say it is tied to the old partnership idea. Once upon a time, accounts, investment banks and law firms were all partnerships. Making partner was a big deal. While I seem some PLLCs with senior people listed as shareholder, I don't think that holds quite the same prestige as partner.

    I could very well be wrong, but that is my opinion on why they choose LLP.
     
  9. MisterBill
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    MisterBill Member

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    Thank you all. This is some great information. There are so many valid points. What I like about differences of opinion is that in most cases they are All correct in one way or another.
     
  10. scagnt83
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    scagnt83 Well-Known Member

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    Im not berating you. Your original post implied that a Ccorp could do this and other entities cant. I simply pointed out that this is not the case.

    Take it personally if you want to. But that should not be ANY of the reasons for choosing a C-corp over an S-corp or LLC.

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    They can bill more hours because it takes more to set up and maintain! ;)

    I have a client that uses one of the big 4 and is an LLC. I have no idea what the original recommendation was though. Very interesting observation though.

    Ive found that most independent CPAs recommend LLC or SCorp to most small businesses.

    For a single owner, I personally am a big fan of having a LLC but filing taxes under the S-Corp election assuming it makes sense that year. Low admin, highly flexible, and you get all the tax benefits of having a SCorp.
     
    Last edited: Aug 7, 2017
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