Page 72 - The UnCaptive Agent

WHAT KIND OF AGENCY DO YOU WANT TO START? 45

burden you pay and consequently isn’t very popular for
smaller insurance agencies.
There are a couple of significant advantages to C
corporations. One of the challenges in any growing
business is the continual need to increase the amount
of working capital that the business has on hand as it
grows. A disadvantage of pass-through entities (like S
corporations, partnerships, and limited liability com-
panies) is that the owners pay taxes on the income the
business generates at personal income tax rates, which
are generally higher than business income tax rates.
This reduces the ability to save money in the business
and build working capital. The C corporation, on
the other hand, usually pays a lower tax rate, making
building working capital easier. Another advantage
of a C corporation is the ability to have a corporate
tax year that is different than the owner’s personal
tax year (which must, by law, be the calendar year).
Depending on the way in which cash flows work in
an agency, this different timing of when taxes are due
may create an advantage in the ability to shift taxes
from year to year. As agencies grow larger, they often
create a C corporation in addition to a pass-through
entity to take advantage of timing differences, as well
as to grow working capital easily.
In the early 1990s, a new form of organization was
created in the United States to combine the flexibility
of partnerships, the flow through tax advantages of a
Sub S corporation, and the limited liability of corpo-
rations generally. This entity type is called the Limited
Liability Company. I helped write the Limited Liability
Company Act as a member of the Oklahoma Legislature,
and my agency was the first agency formed as an LLC
in our state. I’m a big proponent of LLCs for insurance
agencies!