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The Right Business Entity for Insurance and Financial Teams

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The COVID-19 crisis has shown us that you can’t really account for what might happen in the future. This has put financial planning and insurance at the forefront of everyone’s mind, with CNBC reporting that many Americans are now racing to buy life insurance.

In the meantime, and partly in response to this increased demand, solo advisors are teaming up and teams are looking to formalize their relationships. While in doing so, they should always seek advice of their accountants and attorneys, but it might be helpful to talk generally about the entity options here. After all, the business entity you choose can end up defining other business decisions and affect taxation.

There are, generally, three business entities that financial or insurance teams can consider:

The Balance notes that partnerships require at least two owners, but that there can be as many more as you want. Partnerships operate similarly to sole proprietorships in that they are easy to set up, which might be a good way forward for advisors who want to get their business off the ground. That said, in a two-advisor partnership, both partners put their personal assets at risk. Furthermore, both partners are held equally liable, so even if just one partner has caused the liability, the other partner’s personal assets may also be accessible in a lawsuit that seeks sums not covered by E&O or other insurance. This lack of legal protection makes partnerships risky to sustain in the long run, which is why choosing to form a partnership has to be seriously thought through.

Limited liability companies (LLC)
LLCs require a few more steps when it comes to registration, but they grant you liability protection by holding your personal assets separate from that of the business. The LLC is a recognized legal entity in every state, and online services such as Zen Business allow you to form your own LLC if you are so inclined. Forming an LLC helps you market your team as a trusted organization. A flexible organizational structure also allows you and your partners to run your business as you see fit. However, maintaining an LLC will require you to appointed a registered agent in your state to receive your legal documents and you also have to set up separate bank accounts for your business.

You can either incorporate as an S corporation or a C corporation. As with an LLC, doing so grants insurance agencies and financial practices an air of legal legitimacy. According to this guide by the National Law Review, the biggest difference between the two is that C corporations are for businesses that want to fund their operations primarily through venture capital and stocks and S corporations can take advantage of “pass through” taxation that exempts them from entity-level tax that C corporations are required to pay. Regardless of the option you choose, corporations require even more steps to the registration process. You’ll need to write your corporate bylaws, hold a shareholder’s meeting, and follow your state’s annual requirements.

What happens if…

Perhaps the biggest issue that all of these business forms need to address comes in the “Buy Sell” agreement that goes along with them. What happens if a partner dies, is disabled, retires or otherwise leaves the team. Make sure these issues are addressed.

 Choosing the right business entity for your business is one of the most important decisions you’ll make and isn’t one that should be taken lightly. That’s why it’s important to involve accounting and legal professionals. 

Formalize your team and serve the growing need created by COVID-19. And always, keep REACHING


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