Just starting out … what’s your business structure?

December 11, 2023

When starting an insurance agency, one of the first key decisions is choosing a business structure that aligns with your goals. This critical choice impacts liability protection, startup costs, administrative duties, taxes, raising capital, and planning for the future.

With options like sole proprietorship, partnership, corporation, and limited liability company, it can be overwhelming to pick the best fit. By weighing factors like liability coverage and flexibility for growth, you can select an ideal structure for your agency’s needs.

In this guide, we’ll analyze the pros and cons of each business structure for insurance agencies. Let’s explore the key considerations to make an informed decision.

Weigh liability protection

A major differentiator is the liability protection provided. Sole proprietorships offer unlimited personal liability for debts and legal issues. All your assets are at risk.

Partnerships split liability among owners, but general partners still have high exposure. Limited partners’ liability is capped at their investment amount.

For the greatest coverage, corporations and LLCs are preferable. With these structures, only business assets are vulnerable to claims or debts. Personal assets remain protected. In particular, LLCs provide liability advantages when set up properly with a registered agent.

Analyze startup costs

Startup costs also vary based on structure. Sole proprietorships have the lowest initial costs since no formal creation is required. Just start conducting business and get necessary licenses.

Partnerships have moderately low costs—like filing a partnership agreement. Limited partnerships require more formal filings.

Corporations have the highest startup costs, including incorporating, drafting bylaws, issuing stock, and legal/filing fees. Expect to pay more than $500 to incorporate.

LLC costs fall in the middle, typically $100-$800—depending on the state. Filings are required but fees are lower than incorporating.

Ongoing administrative requirements

Maintenance requirements differ as well. Sole proprietorships have minimal paperwork and formal processes. Just file a DBA and renew licenses.

Partnerships track contributions, allocate income/expenses, and maintain the partnership agreement. Annual tax returns must be filed.

Corporations have the most rigorous requirements: holding shareholder/director meetings, issuing stock certificates, filing reports, and complying with regulations.

For LLCs, duties vary by state but fall between sole proprietorships and corporations. Understand your state’s specific administrative rules.

Tax implications

Taxes also impact the bottom line. Sole proprietorships and partnerships pass through income/losses to owners’ personal returns. This avoids double taxation but may increase self-employment taxes.

With corporations, income is taxed first at the corporate level and again as personal income for shareholders. This double taxation means higher overall rates but more flexibility.

LLCs provide pass-through taxation but can elect corporate taxation if desired.

Raise capital

Access to funding is another differentiator. Sole proprietorships only can raise funds from owner contributions or business loans/credit.

Partners can inject startup capital and take on new partners over time. Limited partnerships facilitate adding passive investors.

Corporations can sell stock shares in exchange for equity investments, making it easier to raise large amounts from investors.

LLCs don’t issue stock but they can use membership units for investors to purchase equity. This allows flexibility in structuring ownership.

Plan for the future

As your agency evolves, business needs change. Sole proprietorships offer minimal flexibility before needing restructuring.

Partnerships can add partners over time but require agreement amendments. Corporations issue new shares/stock classes smoothly as financing needs change.

LLCs allow starting as a sole proprietorship, then transitioning to a partnership or corporate model over time. Unitized ownership also provides more wiggle room than rigid partnership percentages.

Prioritize flexibility to adapt without legal and administrative hassles.

Pick the right structure

Analyzing structures upfront is an investment for insurance agencies. Weighing factors like liability, costs, taxes, and flexibility ensures you pick the best fit aligned with your entire business. Meet with advisers to determine the ideal path for your agency’s unique needs, brand and vision.

Additional resources

PIA is committed to assisting association members with their business-building needs. If you are a member of PIA Northeast, you can access the PIA Steps to Success tool kit, which can help you can obtain information on specific business considerations for agency owners.

Rob Lora

Rob Lora is a business professional with extensive experience in workforce solutions and a keen eye for market trends and industry dynamics.

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