To Incorporate or Not? That is the question.
Deciding whether or not to incorporate your insurance agency can feel like uncharted waters. Do I have options? Is this right for me? How do I incorporate my business? By providing answers to these questions, we want to help you navigate these waters in order to make the right decision for your business.
Incorporation Options:
When deciding to corporate your agency, there are several options you can take:
Sole Proprietorship:
As a sole proprietor, you are personally responsible for your company’s assets and liabilities. This includes all financial debt your business might acquire. Meaning in case of a lawsuit, your business assets along with personal assets could be used as compensation. While this is one downside to a sole proprietorship, there are several advantages to having complete control over your business. Other advantages to having a sole proprietorship include:
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- Owner is entitled to all profits
- Business is inexpensive to establish
- Business does not have to file separate taxes
Partnership:
In a partnership agreement, the company’s debts, revenue, operations, and labor are divided among you and your partner(s). Since partners include their share of the partnership’s income or loss on personal tax returns, the company doesn’t pay a separate income tax. Ultimately, having a partnership doesn’t increase tax savings for your business.
Limited Liability Company (LLC):
Establishing your company as an LLC will provide more liability protection in comparison to sole proprietorship or partnership, but had drawbacks in terms of taxes. As an LLC, you must pay self-employment taxes and pay taxes on profits at the individual level. Before establishing an LLC, it is important to know that some states won’t allow the use of the word “insurance” in an LLC name.
Corporations:
There are two types of corporations: S or C corporations. The main difference between these two types is how the company is taxed.
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- C Corporations: The company pays a corporate tax and files separate returns. Individual shareholders also pay taxes on profits taken as distributions.
- S Corporations: Company profits are given directly to shareholders, therefore separate company tax returns are not required. While you will pay individual taxes required for all shareholders, such as salaries, any profit beyond that can be reported as distributions resulting in lower tax rates.
In both forms of corporations, shareholders are not individually liable for the debts or actions of the company.
Before making this decision, it is important to consider the personal goals you have for your business. We suggest talking to a tax attorney or CPA to help you navigate specific state regulations in order to determine which structure best fits your business goals.
If you want to learn more, InternetCE is here to help with all your North Carolina insurance continuing education needs. Check out this article on Establishing Your Agency on Social Media or our courses on Running an Ethical Insurance Agency and Employee Benefits!
