Using an LLC

[Allen Trent]

Why did you think you needed an LLC? I know "To protect my assets."

Sorry, you have been misinformed. As an agent an LLC won't protect you. You'll always be liable for your own professional negligence (Errors and Omissions) and you'll likely have to personally guarantee any contract you sign.

I suggest you buy your E & O insurance before you sell even one policy.

Isn’t the larger risk an employee being injured or causing injury. IE: staff driving car to make bank deposits, staff to go inspect properties, producers being added & using their vehicles. Those activities wouldn’t likely reach the assets of the owner personally if the business was an LLC or S Corp

 

[scagnt83]

Completely agree. Only caveat is I dont think the IRS will find the $30k to be a reasonable salary for an insurance agent. Maybe they will, but not sure 30% salary & 70% dividend, etc would make it through an audit. The bad thing is the IRS doesnt have any charts on what is reasonable

The IRS actually does give guidance in this area. There are now numerous court cases that have given a general structure on how the IRS determines "reasonable salary". This article will give you a very in-depth overview of it all: S Corporation Shareholder Compensation: How Much Is Enough?

Essentially, they compare the business revenue to other firms with similar size/revenue and what they pay their Corporate Officers. They also take into account experience, business structure, etc.

That article covers court cases where the IRS went step by step through the process of determining reasonable salary, and the court agreed. Setting a pretty firm precedent if you really need to do a hard calculation/comparison.

Also, most CPAs agree that the 70/30 rule is safe to stick to if in doubt, or if under the comparables of other firms. The thinking behind that is the old economic theory that most economic output consists of 70% labor and 30% is return of capital. While this ratio does not hold true for all business models, and shouldnt necessarily serve as a cap for S-Corp profits, it is a model the IRS is not going to question should you be audited. Essentially its the baseline you should start with, anything above that should be backed by justification of some sort.

Like in my area, the average income for an experienced insurance agent is $50k - $75k. Someone with my experience certainly would not go and work for someone else for any less than that range... so why would I work for myself for any less than that?? So it would be very hard for me to justify a salary smaller than $50k... unless $50k was more than 70% of revenue.

But you are correct that there are no firm numbers or ratios the IRS sets. And like most things tax related, you will get away with whatever you choose until you get audited.

 

[marindependent]

There are lots of reasons to incorporate and its true that some of the reasons are not valuable when you are a professional such as an insurance agent. If you are making real money, I would not let this deter you.

However as your agency grows and hires people and advertises, etc there are numerous exposures that incoporation may be able to assist you with. [But you have got to follow the advice of your attorney.]

In regards to getting appointed and paid in your agency name you will need to check with your state regulator. Some states [such as California] have exceptionally complex rules about getting names approved. Whatever the process is in your home state - follow that process until completion.

In addition is can also be a good idea to get the agency incorporated name added to your E&O and GL policy.

Lastly creating an LLC or S Corp, etc will require a lot more effort and timeon the owner's part than being a sole prop.

Best of Luck,

 

[scagnt83]

I once had an agent tell me he pays most of his commissions into an LLC he set up. The LLC is registered as an agency in his home state, but not appointed with any carriers. The payments are classified as a "consulting fee" or "marketing expenses".

He claims this adds an extra layer of protection to the situation as an agent. Im not sure how really... I guess he is the only client for the LLC... so no danger of it being sued by a client??

Seems like a lot of potential issues if he was ever audited by the IRS or the DOI. He works multiple states too, so it allows him (his words/thinking) to avoid getting the agency licensed in each state.

It was an interesting conversation, he was a tax consultant in a previous career. Not a CPA, just a normal accountant. But it seems like it could have a lot of potential issues on the insurance side of things.

 

[marindependent]

He claims this adds an extra layer of protection to the situation as an agent

For taxes from the IRS, or Legal Liablity from the DOI and such?

 

[The Benefit Coach]

Electing for S-Corp taxation will save you thousands of dollars a year in taxes, assuming you’re profitable. I don’t know why people scoff at this. If you made $100k, paid yourself 30% as salary, and took the 70k as a payroll tax exempt distribution, you would save $10,710 for the year in taxes.

Anyone who thinks that isn’t worth the hassle can feel free to wire me that amount right now to prove their point.

I've been using this whenever I could since the early 90's. If you really want to turbocharge this strategy, divert your tax savings into your retirement account. It being a corporation you open up SEP and SIMPLE IRA's, or maybe even a solo 401(k).

 

[scagnt83]

For taxes from the IRS, or Legal Liablity from the DOI and such?

Legal liability from clients is what he claimed.

It seems it was more a way to get around E&O, appointments, & agency licensing. But I guess it would add an extra layer of protection if the LLC retains any assets.

I dont see how you could pay out all of your income and the IRS not red flag it somehow and at least ask "why?'... and nobody wants any questions from the IRS imo... lol. Maybe you could get away with it if you retained 20% of revenue as a Sole Proprietor and payed the rest to the LLC.

 

[Allen Trent]

Legal liability from clients is what he claimed.

It seems it was more a way to get around E&O, appointments, & agency licensing. But I guess it would add an extra layer of protection if the LLC retains any assets.

I dont see how you could pay out all of your income and the IRS not red flag it somehow and at least ask "why?'... and nobody wants any questions from the IRS imo... lol. Maybe you could get away with it if you retained 20% of revenue as a Sole Proprietor and payed the rest to the LLC.

The other risk is commingling the funds & expenses of both entities. Have seen some property owners & farm owners that have a handful of separate entities to own various properties, equipment or run the business. But in court, the entities sometimes get collapsed because they were sharing checking accounts or sharing equipment informally or sharing labor. Basically, the businesses were operating as 1, but looking at not being subject to litigation across the entities.

 

[ARHfinacial]

Another question related to establishing LLC's. For those that primarily sell virtually or over the phone across state lines and have an LLC established, have you gone ahead and filed for a Certificate of Authority to do business in each state (which adds considerable cost)?

I have not contacted my attorney yet to research this and whether telesales, virtual sales over Zoom, etc. are an exemption to intrastate business statutes. I believe for most states the common understanding is they are exempt if that is the ONLY business you do within the state and do not maintain a physical office or hire W2 employees within the state.

I am new to the industry but very familiar with LLCs (single member sole prop, S-corp election and partnership tax election) as I am also in the real estate investment industry and use LLCs exclusively to hold title, have legal recourse within a given state and execute non-recourse loan docs.

(new member, new poster)

 

[marindependent]

have you gone ahead and filed for a Certificate of Authority to do business in each state (which adds considerable cost)?

Yep. Personally I would worry first about your home state and then methodically move through the states that you use most.