As an independent agent, you are running your own business. Because of this, you should give some thought to the type of business structure you want to use. An LLC provides many benefits and is worth considering.
Business Structure Options
There are several business structures to choose from, including:
- Sole Proprietorship: This is the simplest type of business structure – and you might have one without even realizing it! According the U.S. Small Business Administration (SBA), your business will be considered a sole proprietorship if you engage in business activities but don’t register as any other type of business. In a sole proprietorship, there is no separation between you, your liabilities, your personal assets and your business, your commercial liabilities, and your commercial assets. This makes the paperwork simple, but it can also expose you to liabilities and put your personal assets – like your house, your savings and your car – at risk.
- Limited Liability Company (LLC): This is a common business structure that provides some liability protection. When you use this structure, there is a separation between your personal assets and your business. This means your personal assets should be protected if you’re ever sued in the course of running your business.
- Corporation: This is a more advanced structure. According to the SBA, corporations are considered to be legal entities that are separate from the owners. Corporations enjoy strong liability protections, but they also have significant tax and record-keeping obligations.
The Advantages of Forming an LLC
Each type of business structure comes with its advantages and disadvantages, and the structure that fits one company might not be well suited to another.
For independent insurance agents, LLCs are an attractive choice for these reasons:
- LLCs provide liability protection. Insurance agents can be hit with lawsuits over various mistakes or omissions. Errors and omissions insurance provides important protection. Forming an LLC can provide another layer of protection.
- You can write off business expenses. If you’re not deducting business expenses, you might be paying a lot more in taxes than you have to. Common business expenses include transportation costs, office supplies, and commercial insurance. See the IRS page on deducting business expenses for more information.
- You can create a business name. You may want to do business under your legal name. However, if you decide to use a different business name, you will need to register it. One way to do this is by forming an LLC. The name of your LLC should include the phrase “LLC” or something similar to indicate its status.
- Your LLC status can make you seem more trustworthy. When you form an LLC, it shows others that you’re operating an official business, and this can make you seem more trustworthy to some. Whether you’re trying to make a good impression with a prospect or secure a business loan, that can be useful.
How to Create an LLC
To register your business as an LLC, you will need to contact the state agency in charge of business licensing. In Arizona, see the Arizona Corporation Commission’s page on Ten Steps to Starting a Business in Arizona for more details.