Yes. An insurance agency can be an LLC in the United States; however, note that this will depend on the state, the stipulated regulations, and the restrictions in place.
In the United States, each state restricts the types of businesses that can form an LLC, and a good number of them restrict banks and insurance companies from registering LLCs.
An LLC is a form of business ownership that a good number of small businesses prefer in the United States. Each state features vastly different statutes when it comes to structuring your business as an LLC.
As such, it’s important to go through your state’s regulations to understand how they impact your strategy. The individual or individuals 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.
Pros and Cons of LLCs for Insurance Agencies
Before you settle for any business structure, it is necessary you ask yourself some questions regarding your individual circumstances. If you have a partner in the agency, they need to be included in this fact-find as well.
While these might seem quite daunting, it’s essential to address your business formation long before you open your doors. Nevertheless, below are the pros and cons of forming your insurance agency as an LLC.
- Forming an LLC is fairly simple. It is quite easy to form an LLC in the United States. If you’re the only member, then you won’t have to bother with applying for an employer identification number (EIN) if you choose not to. You can instead utilize your own Social Security number to report taxes, apply for financing, etc.
- You may not need to file a separate business tax return. In the United States, note that your agency income and deductions flow through to your personal tax return.
If you are not so conversant with the process, Schedule C on IRS Form 1040 reports your revenue and expenditures. You will only need to retain commission statements and receipts for business expenses.
- There are fewer headaches than some other options. Keep in mind that forming this structure is less tiring than that of subchapter S or C corporations.
You don’t have any need to issue corporate shares or spend a ton of time staying in line with state and federal reporting mandates.
- You can safeguard personal assets from any liability the insurance business might encounter. Another benefit of this structure is that you and the business are two completely separate entities.
If you have any need to dissolve the business for just about any reason, any outstanding creditors won’t go after your personal savings or investments.
- You may have to share ownership. For those with multiple members within the LLC, it means they have to give up certain control over their business.
Partners could indeed have a varying view of things or possess a different vision for the business. Sharing ownership under an LLC will need to be considered extensively same as starting up the venture in the first place.
- Your pay will be different. You may be used to getting a paycheck and having all tax deductions preconfigured. However, with an LLC, you won’t be able to take a salary in the traditional W-2 sense. It is expected that you draw and report the income differently than if you were paid a salary or wages.
- Merging personal with business transactions can happen quite easily. This tends to happen and can indeed invalidate one of the most notable pros of an LLC.
This mistake can leave your personal assets prone to outstanding debts, lawsuits, liens, or any other negative actions against the business.
- You may deal with fees. Although this will most often depend on the state where your agency is domiciled, there will most definitely be annual fees to pay to various government bodies.
These costs could indeed be higher especially when compared to the charges levied against other types of business structures.
Best Business Structure for an Insurance Agency
The best business structure for an insurance agency will depend on your personal situation as well as your vision for the business.
Nevertheless, an LLC is a viable option you will want to consider especially since it comes with numerous benefits. Forming an LLC for your insurance agency is a matter of personal choice — and maybe a decision geared toward the size of your operation.
An LLC might prove to be the ideal choice if you’re taking over a massive business and hiring a staff of producers and administrative personnel.
You have to understand that more premium requires more personnel, and this translates to more transactions. Note that all this activity heightens the risk of something going sideways, and shielding your personal assets from any financial harm is attained via an LLC.
However, if you are only trying to test the waters or maybe starting an Insurance agency as a side gig until revenues can support your lifestyle, then you will want to note that less activity might entail less risk of financial harm from legal action, and you may see a sole proprietorship as the way to go.
When looking to start your own insurance agency, note that you have risk-based decisions to make as a business owner, too. A good number of those decisions will involve how much capital to put into the new venture.
You will also find that some others revolve around what type of business structure you should form. Just as it was noted above, there are numerous options for you especially if you’re running as a sole owner.
A good number of agents will want to go with a sole proprietorship and it is known to require the least amount of administrative work.
Other insurance representatives might genuinely prefer limited liability companies (LLCs) especially since they offer some favorable tax treatment and peace of mind in case the unexpected happens.