Lesson 1: Should You Incorporate?
From time to time, I get questions from agents across the country about starting an agency. Most common question that I get is when and how to go about incorporating. If you’re asking yourself, do I need a corporation or to start an agency? Answer that depends on a few things. We all know that a corporation or agency license is unnecessary to conduct business in the insurance world. As a matter of fact, there are many more individual independent agents working in our industry than corporations with licensed agents.
Before we get into why incorporating an agency is a good business decision, I want to discuss a few scenarios when you may want to delay incorporating your agency.
The biggest obstacle to consider when deciding to incorporate comes down to a financial decision. There can be high economic costs in the process of incorporating your business. If your insurance business is more of a side hustle or a hobby, the cost of incorporating in the hoops that must be jumped through are probably not worth the gain that you’ll see from incorporating at that point. However, if your side hustle takes off significantly, it may be time to reassess.
If your business is struggling to an extent, the apps are just not coming in the way you’d like, and we’ve all been there at one time or another, starting and incorporating an agency in and of itself won’t change that. In this situation, I recommend reassessing your marketing strategy and right the ship. Before you go through the cost of incorporating speaking of costs, let’s discuss some of the costs associated with incorporating and starting an agency.
First, you’ll have the cost of creating your own incorporation with the resident state from the start. You also incur expenses in licensing your newly created corporation with your resident states department of insurance. Depending on the specific carrier. Also incur costs to appoint the new agency. One of the highest costs you can get stuck with is licensing your corporation in non-resident states. For newly formed corporations from start to finish to license in only a handful of non-resident states can be very expensive. Now that we’ve discussed when not to incorporate and the cost can be expensive, let’s talk a bit about when you should consider incorporating.
When you’ve grown your insurance book of business to exceed a hundred thousand a year in revenue. Proper tax planning can noticeably reduce your tax liability. Maybe things have gone well for you and you’ve amassed a larger book of business, and you now need to hire someone to help you manage your book.
Incorporation not only helps protect you from certain liabilities, but also for the actions of future employees. Maybe you’re looking for the next genuinely scalable opportunity. In the insurance world, you need extra capital to invest in the next steps of growing your business. Access to business capital is much harder to come by without incorporating the benefit of a different tax structure. Liability protection and access to capital are all great reasons to incorporate market recognition and credibility are the other advantages of incorporation in starting an actual agency. A well named agency will get much more online traffic than the principal of that same agency would get if they simply created a website named it after themselves and put it out into the market.
Before we move on to our next lesson about creating and incorporating your agency, it’s time to test your knowledge with a short quiz.