Don't Be Fooled By Entity Structures

Business of Insurance Podcast

SET UP YOUR BUSINESS PROPERLY

EP 65 - Today’s episode is one of several episodes about how to get started in business.

Some of you might be working for someone now and thinking about going off on your own and some of you might just be entering the industry and doing so as an independent. If you are in either of these two categories or if you are someone that works with agents that are working independently, this episode is for you.

I started in this industry on the property and casualty side and quickly moved into commercial insurance when I started. Working with my dad, his personal lines clients were all starting their own businesses and they came to him for advice. We basically learned as we went along what we needed to do to help them. Fast forward 30 plus years, I’ve had many years of educating business owners about getting started.

When I first started in sales, I got involved in teaching insurance to a local SCORE chapter. If you aren’t familiar with SCORE, it’s called Service Corp of Retired Executives. It’s a division of SBA, the small business administration which is a wealth of information for business owners, new and experienced. If you aren’t familiar with them, go to sba.gov to learn more.

In this particular SCORE chapter, they did a 3 hour program for new business owners. The first hour was on accounting with a local CPA, the second hour was was legal, taught by a business attorney and the third hour was insurance, taught by yours truly! The legal was mostly entity structures and contracts. Since I went last, I always heard the lawyer’s presentation which is how I learned so much!

Fast forward 20 years, I started volunteering with the Maryland Women’s Business Center and taught a class called The ABC’s of Starting a Business. This class was 4 hours and went over why businesses fail, entity structures and then the next steps to get started in business.

I taught this program for over 5 years. It was my ‘give back’ to the business community. I believe I educated over 500 new business owners in this program. The Women’s Business Center is also a division of SBA, like SCORE, so we have to work within their guidelines.

Today I’m sharing a segment of that class, on entity structures. I see so many agents asking about them in the different groups I’m in and I want to clarify things about these entity structures that is essential to understand, especially if you are thinking about going the DIY route. I don’t recommend DIYing this important segment of starting your business, but some people just want to save a few dollars and don’t care about the rest.

Before getting started, my advice to people is to always talk to both your CPA and your attorney.

• Why? - Your situation is different than mine as is your risk tolerance. I can’t tell you what is right for you because I don’t know your situation. So when you take advice from someone in a FB group or a stranger, you are creating potential problems for yourself!
• Your CPA can guide you better from a tax perspective. Understanding if it makes sense financially to set up one of these entities and getting guidance on how to do it properly from a tax perspective. Make sure your CPA has experience dealing with business owners as well. Some CPAs just do taxes or audits and aren’t up on all the issues relating to business owners.
• You attorney will guide you from a legal perspective. Understanding the risks involved and how to create the proper documents, how to sign your contracts, how to handle multi states. All of these are essential if you are going to be in business for yourself. Make sure your attorney is a business attorney, not a criminal, divorce or personal injury attorney. Just like with the CPA, you want an attorney that focuses on working with business owners because they are usually more on top of the current laws around business owners and doing things properly.

When I started in the business back in the 70’s we basically had 3 different entity structures to choose from. You were a sole proprietor, partnership or corporation. In the mid 80’s the LLC entity structure was beginning to emerge and it really began to pick up speed in the 90’s. Now an LLC common place. There are some variations of different entity structures like a PLLC or an L3C or a B corporation. So, knowing which entity structure is right for you depends. For today, I’m only going to focus on the sole proprietor, LLC and corporation.

Let’s start with sole proprietor - this is basically you the individual operating as a business owner. It’s your name trading as (T/A) or doing business as (DBA) your insurance agency. My first insurance agency was Debbie DeChambeau t/a The DLD Group. I was a sole proprietor when I set up my first agency in 1990.

Being a sole proprietor allows you to deduct your business expenses at tax time, but it does not provide any person legal protection. You’ll get some protection from your general liability or your professional liability policies, but if you lose your case, you could also lose your house and all of your assets, depending on the court ruling.

You’ll want to check with your state, but most states require you to complete a form with the state that you have created your business and you’ll want to get a tax ID number in the name of that business. Once you’ve done those two, then you go to the bank and open a business account and have all of your business income deposited into that account. You can have it deposited into your personal bank account, but that means you are mixing funds which can become an accounting problem, so it’s best to keep them separate and pay yourself when you need to. Again, your accountant can guide you through this better but these are the basics.

If you decide to create a corporation, also known as the letters INC, then you are basically setting up a separate entity. I like to think of it as another person, and that’s the business. When set up and managed correctly, a corporation protects the personal assets of the stockholders, president, VP, etc, which is usually you, the business owner.

When setting up a corporation, you create articles of incorporation, establish bylaws, appoint directors, have a shareholders agreement. These documents must be set up according to the laws of your state and include the right information about your business.

When it comes to taxes, the corporation files it’s own taxes then the stockholders use that information on their individual taxes. This has long been a complaint of corporations, having to do the business return, then do the individual return. It’s where the term, ‘double taxation’ is often used.

You might have heard the term, don’t pierce the corporate veil. This is a test if there is a lawsuit that would protect the stockholders and officers personally. It’s essential that everything is done correctly for that protection to prevail. If you are in the commercial / business side of insurance industry, this is something you probably know well., Those of you in other areas of insurance, might have heard this in passing but never really understood it. If you are going ot be in business this is the one of the most important pieces you should understand

By everything I’m referring to contracts, agreements, processes, etc. This is where your attorney can fill you in better, but bottom line, if you are going through the expense of setting up a corporation then it’s important to do everything correctly.

Before I talk about a limited liability company, let’s hear from our sponsor:

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Now, let’s talk about LLC’s

An LLC is a limited liability company. Many people want to call it a corporation, but technically, it isn’t. As I mentioned earlier, there were very few LLC’s prior to the mid 80’s. When they were first created, many businesses were hesitant to set them up because the corporate veil hadn’t been tested. Business owners were concerned if an LLC would really protect them like a corporation. In the 90’s more and more states allowed them and now they are fairly common place.

An LLC designed to provide the legal protections like a corporation but the tax structure is different with an LLC, it’s similar to a sole proprietor. An LLC can elect to be taxed as a sole proprietor, partnership, S corporation or C corporation. This is one of the reasons a lot of companies are attracted to the LLC. It’s also why it is essential to talk to your CPA about this. Some people think an S Corporation is an entity structure….it’s a type of tax filing!

An LLC should have an operating agreement which states how the business is conducted and how management and ownership is structured. Not all states allow single member LLC’s so it’s important to understand the rules in your state and the states that you operate in. It’s also important to understand how to run and manage your LLC, not just from an accounting perspective but from a legal perspective. If you aren’t looking to protect your personal assets, then consider being an LLC. This is a good reason to work with a business attorney and not DIY it!

Understanding that most people set up an LLC or Corporation to protect their assets is one thing, but why go through the work of setting up the business if you don’t do it properly. Basically, you’ll have wasted a lot of time and money.

So do it properly and protect yourself the right way. Work with an attorney and and accountant and understand your obligations and responsibilities with the entity structure you select.

A lot of people starting out just set themselves up as a sole proprietorship. It’s less expensive. It’s when the business owner has assets to protect, having the proper entity structure is essential and managing that entity is imperative.

I want to reiterate that I am not an attorney or an accountant. This information is intended to give you an overview of your options. To learn more, go to sba.gov for the best information, then seek out a business attorney and CPA for local guidance.

It’s your business. Run it like a business, not a hobby. Do it right!

Until next time, keep creating opportunities. ….and support our sponsor!

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ABOUT THE HOST

This episode of the Business of Insurance podcast is produced and hosted by Debbie DeChambeau, CIC, AAI, CPIA - an entrepreneur, business advisor, insurance professional and content creator. Her goal is to inspire you to think differently and explore ideas that disrupt the status quo.

Debbie has an extensive business and marketing background with a focus of helping insurance professionals be more successful.

She is the co-author of Renewable Referrals and produces two other podcasts, Divorce Exposed and Seniors We Love.

Connect with Debbie on LinkedIn, Twitter or Instagram.