Create Your Entity
You’ve got your name.
Now, it’s time to create your business entity.
There are a few options to choose from when filing your insurance agency.
Each has a different kind of business structure, with different levels of liability protection and tax advantages.
You can choose to establish your business as a sole proprietorship, a partnership, a limited-liability company, or a corporation.
Let’s unpack these choices a bit more.
A sole proprietorship is when you are solely responsible for your company’s assets and liabilities.
You do not have to file separate taxes with this structure, and it’s inexpensive to form.
In a partnership, you and a partner share the company’s debts, revenue, operations, and labor.
The company itself doesn’t pay separate income tax, because each partner includes their share of the income or loss on their personal tax returns.
That said, there are no tax savings in a partnership.
For a corporation, you’ll have either a C-corp or S-corp setup.
You’re not individually liable for the debts or actions of the company. But they do differ in how they’re taxed.
In a C-corp structure, your company will pay corporate income tax on any income. Shareholders are paid dividends from the income amount after taxes.
Then, shareholders pay personal income taxes on dividends. This is what is called double-taxation.
In an S-corp structure, company tax returns are not necessary.
You’ll pay individual taxes on the reasonable compensation for your business, like salary, that is required for all shareholders.
Any profit beyond that can be reported as distributions, which have a lower tax rate.
A limited liability company, LLC for short, is a hybrid entity that combines the characteristics of a corporation with those of a partnership or sole proprietorship.
It’s also the most common filing among our agency partners here at Ritter Insurance Marketing.
Limited liability means that owners are not personally liable for company debts, but taxes on individual profits must be paid as well as self-employment taxes.
It’s also worth noting here, some states don’t allow you to use the word “insurance” in your LLC name, so be sure to verify with your state and all states you plan on doing business in whether your business name falls within their guidance and regulations.
We recommend connecting with a tax or legal representative to review your specific business needs for selecting the type of business that’s right for you.
Once you’ve determined the type of business you’re creating, you’ll need to file it with your resident state.
State filing fees can be approximately $100 for the initial and renewal cost.
After your resident state approves and issues your new entity name and tax ID number, the next step is licensing the business.
It’s a process similar to the way you registered for your producer’s license.
And just like that process, we recommend using the National Insurance Provider Registry, NIPR for short.
They are the licensing and compliance resource for insurance professionals.
NIPR’s website links to state requirements for obtaining resident and non-resident licenses for your newly created business.
With a name and all the technical details taken care of, you’re ready to launch your business to the next level.
In our next lesson, we talk about how to get there.