Start an Agency
Going independent doesn’t mean doing it alone.
Steps to Independence
Starting and running an independent property/casualty insurance agency is not for everyone, but if you’ve gotten this far, here are nine general aspects you’ll want to consider.
Nearly every successful agency started with a clear vision and sound business plan. Besides knowing what you want and how you intend to accomplish it, a business plan is essential for solid company relationships especially for a new agency with no track record.
Introduction to Business Plan Basics
Most agency leaders are well aware of the value of a good business plan. Besides the importance of knowing what you want to accomplish with the agency and how to accomplish it, business plans are essential for attracting and maintaining relationships with most insurance companies. A business plan is especially important for a new agency that does not have a documented track record. Much has been written on the subject of business plans in agency trade literature and there is no shortage of planning guide references that can help you create a very detailed and elaborate business plan. However, the purpose of this article is to simplify the process and lay out the elements a business plan should address in a straightforward way. As you create your business plan, write it as if your were going to pitch it to investors. When you think about it, insurance carriers are investors in your agency.
The Four Elements Every Business Plan Should Address:
1. People Profile – At its core, the fundamental value of any agency resides in the capability of its people to execute its objectives. Therefore, your business plan should include information about the people who are responsible to execute it. At a minimum, include resumes on each of the key players that describe the professional and personal background relevant to the agency business as well as the knowledge, skills and abilities possessed by each. For start ups, a lack of a demonstrated track record may inhibit your ability to attract prospective employees, customers and carriers. To mitigate this uncertainty, include an explanation of who you know and how you may be known in the community and/or industry.
2. The Business Opportunity – Obviously, a key to agency success and of interest to all current and potential stakeholders is how the agency plans to acquire customers including with what products and services and with what advantages over competitors. This section should demonstrate that you know who your customer is, what your products and services are and how you will position your products and services to be selected over those of your competitors. While numbers have a place in this section, the emphasis should be on the elements of your particular model for success. However, carriers will be interested in growth projections and you will need a budget for sources and uses of funds necessary to execute your plan.
3. The Business Environment – Your business plan should demonstrate that you have a keen awareness of the external business environment in which you operate, that you understand its impact on your business prospects and how you will navigate and exploit it. The discussion should encompass regulation, the economy, labor supply, customer markets, suppliers, competitors and in what way the status of these factors are relevant to the operation of your agency.
4. The Risks – Many business plans, especially those that will be used outside the agency to attract other stakeholders, often make the mistake of painting only a rosy picture. However, risk is inevitable. The best business plan readily identifies and confronts the risks to be faced. Potential stakeholders, especially prospective carriers, will develop confidence in those agencies who pose them and provide strategies to resolve them.
Summary
The basic purpose of any business plan is to address the ingredients necessary for success: the people, the opportunities, the environment and the risks. Too often, business plans paint an overly optimistic outlook. Instead, your business plan should demonstrate that you have fully considered both the opportunities and risks. The agency business is dynamic and the business plan should be amended as needed to address the changing landscape. The following is an outline for a typical business plan.
Business Plan Format:
Executive Summary: One page overview the plan
Situational Analysis: Where we are now
- External in terms of:
- Environment (political regulatory, economic, social, technical, and other relevant areas)
- Prospects and Markets
- Labor
- Suppliers
- Competition
- Internal
- Clients
- Carriers
- Organization
- Problems and opportunities
Business Plan Goals: Where do we want to go?
- Competitive standing
- Financial results
- Market share
Strategies: How are we going to get there?
Positioning
- Target Segments
- Unique selling position or source of competitive advantage
- Usage incentives
Marketing Mix
- Product/service
- Distribution & delivery
- Price
- Marketing communication: advertising, personal selling, promotion, etc.
Contingency Strategies
Budget: How much is needed, where should we allocate it?
- Resources (money, people, time)
- Competencies
- Amount and allocation
Action Plan: What do we need to do?
- Detailed breakdown of activities required.
- Responsibility by name
- Activity schedule in milestone format
- Tangible and intangible results expected from each activity
Monitoring systems (Are we moving toward our destination?)
- Ongoing situational analysis
- Intermediate and final measures of performance
- Gaps between goals and performance triggering changes
The Small Business Administration at www.sba.gov has a business-plan outline plus a list of links for additional Web sites that provide information for starting your own business.
The Arizona Secretary of State at www.azsos.gov offers information on Business Start-Up with a list of helpful links; information on business registrations, notary services, public records, and chapter laws.
The Arizona Commerce Authority at www.azcommerce.com offers information on business structure, State incentives, programs and grants along with federal and state employer requirements.
The following section is a description of the various types of business entities available for a new agency. The determination of what entity you utilize in the formation of your new agency is one of the most important decisions you must make. The decision can have significant impact on ownership and taxation in future years.
This section was authored by S. David Childers of the law firm Kutak Rock LLP in Scottsdale, Arizona and one of the most respected insurance specialists in Arizona. S. David Childers is a former Director of Insurance for the Arizona Department of Insurance and handles a wide variety of legal matters relating to insurance and insurance agencies including corporate and regulatory representation, government relations and commercial litigation.
It is because of his extensive knowledge and experience that Kutak Rock LLP is recognized as one of the premier firms within the Arizona insurance community. The selection of the correct law firm for your new agency is also one of the most important decisions you must make in the formation of your agency.
You can contact Kutak Rock LLP at (480) 429-5000 or view their website for more information.
Choice of Entity Selection in Arizona
Issue – What are the advantages and disadvantages of selecting one entity form over another under Arizona law?
Discussion – Setting Up Your Insurance Agency in Arizona
I. Introduction
An insurance agent has many options when organizing an insurance agency business in Arizona. Possible business structures include: (i) sole proprietorship, (ii) general partnership, (iii) registered limited liability partnership, (iv) limited partnership, (v) limited liability company, (vi) regular “C” Corporation, and (vii) “S” Corporation. This article will briefly discuss the legal and practical aspects of each business structure and considerations that an insurance agent or agency owner should address when deciding which type of entity is best for its insurance agency.
II. Factors To Be Considered
When deciding which business structure would be best for an insurance agency, a prospective owner must consider two factors: (i) who will have liability for torts (i.e., professional negligence, deceptive trade practices, defamation, tortious interference with a contract, etc.) and contractual obligations of the business, and (ii) what are the income tax consequences of the entity selection.
Depending on the type of business entity chosen, an equity owner can be vicariously liable for the legal obligations of the business. However, not all possible business structures create an exposure to personal liability for the owner. This will be discussed in more detail below.
Regarding income taxes, different business structures create different tax results. Some entities may result in the taxation of the ultimate owner only, while other entities result in taxation at both the entity level and also with respect to distributions or dividends paid to the owners of the entity. This will also be discussed in more detail below.
Other factors, although less important, to consider when choosing a business structure are: (i) transferability of ownership interests, (ii) ease of management, (iii) formation costs, and (iv) limitations on the number and types of owners. As noted in Section IV below, the transfer of ownership within certain business structures may create additional tax consequences which should also be considered.
III. Liability
In order to best understand liability issues, certain legal principles need to be reviewed.
An owner of a business may be personally liable for debts and other liabilities of the business, depending upon the type of business structure chosen. A sole proprietorship essentially refers to a natural person (individual) doing business in his or her own name and in which there is only one owner. Therefore, the owner will be liable as a matter of law for all tort and contractual liabilities of the business. Any contracts entered into by the owner or by authorized employees of the business give rise to liabilities that can be satisfied, not only out of assets of the business, but also from the non-exempt assets of the owner of the business. The same is true with respect to tort liabilities (or statutory liabilities such as taxes) of the sole proprietorship.
Like sole proprietors, general partners are vicariously liable as a matter of law for the tort and contractual liabilities of their business. A general partnership, a default form of business organizations, is created when two or more people associate to carry on a business for profit as co-owners. Within the ordinary course of business, any contracts entered into and any torts committed by any of the partners or authorized employees give rise to creditor’s claims that may be satisfied, not only out of the property of the partnership, but also out of all of the non-exempt assets of each general partner. Like general partnerships, general partners of a limited liability partnership (“LLP”) or a limited partnership will be personally liable for the partnership’s contractual debts and tort liabilities.
Other business entities, however, do not create vicarious liability exposures for its owners. In a limited liability company (“LLC”), a corporation which has not made an IRS S-election (“C-Corporation”), and a corporation which has made an IRS S-election (“S-Corporation”), the owners are not vicariously liable for the contractual or tort liabilities of the entity. In limited partnerships and LLPs, limited partners are generally shielded from personal liability for the debts and obligations of the partnership if the limited partners do not participate in the control of the partnership. A limited partner may, however, remain personally liable for the partnership’s debts if he permits his name to be used in the name of the partnership in certain circumstances. Moreover, an owner will always be liable for torts which the owner personally commits while acting on behalf of the entity in which he owns an interest. For instance, if the owner negligently collides with another vehicle while driving on company business, the injured person can recover against the negligent owner/driver. In addition, entities are, by law, responsible for negligent acts committed by the entity’s agents within the course of the entity’s business. Therefore, any valid claim may also be recoverable against the entity.
Owners may also contractually assume or guarantee a debt of the entity; frequently, creditors require them to do so. In that case, the creditor can assert any unpaid claims against the owner’s non-exempt personal assets as a result of the owner’s contract with the creditor. The owner may not defend such a claim by asserting that the entity is primarily liable.
In conclusion, the use of certain business forms, such as sole proprietorships and general partnerships, automatically result in vicarious personal liability of the owners of the business. Exposure to personal liability, except that resulting from the owner’s own torts and contracts, may, however, be avoided or restricted to limited partners by choosing another business form, such as a limited partnership, LLP, LLC, C-Corporation or S-Corporation.
IV. Taxation
The main issue to focus upon when considering income taxation of a business entity is the possibility of “double taxation” of the entity’s revenues. Double-taxation refers to the possibility that revenue earned by the business may be taxed at the entity level and taxed again at the individual level when paid to the business’s owner(s) in the form of distributions or dividends.
Sole proprietorships, general partnerships, LLPs, limited partnerships, LLCs, and S-Corporations are generally not subject to taxation at the entity level. These business entities, except for sole proprietorships, file an information tax return with the IRS, and all income is taxed at the individual level in proportion to each owner’s distribution or interest in the business. With respect to a sole proprietorship, the income of the business is simply reported as the income of the owner/sole proprietor.
A C-Corporation presents the risk of double taxation. However, if a C-Corporation does not pay dividends, it can avoid “double taxation.” If a corporation pays out all or most of its net income to its officers without such payments constituting “excessive compensation” under IRS rules, all or most of the income of the business can be returned to the owners in the form of salaries. In such a case, no dividends are paid, and no second tax is paid on the dividends. However, inactive shareholders cannot be paid substantial salaries, and dividends are the primary way to get income to these shareholders. Consequently, dividends may be double-taxed, first at the business level when received as income, and second, at the individual level when paid to shareholders.
The double-taxation issue also arises in connection with the sale of an insurance agency. Often, buyers of insurance agencies prefer to buy the assets of the insurance agency, rather than the ownership interests in the entity (e.g., shares of stock, partnership interests or membership interests in an LLC). There are two reasons why this is the case. First, in the case of an asset purchase, the buyer generally does not take the assets subject to any of the seller’s liabilities (known or unknown) unless the buyer contractually assumes the obligation to pay such liabilities. Second, the buyer can generally take depreciation and amortization deductions against future earnings for all or most of the purchase price of assets (but not the purchase price of ownership interests).
For all business structures other than a C-Corporation, the sale of the company’s assets is not a detriment to the sellers because there is no double taxation of the gain resulting from the sale of assets. However, for a C-Corporation, the gain from the sale proceeds of the assets will be taxed to the C-Corporation and any distributions in excess of cost of the stock will also be taxed to the shareholder. As a result, disposition of any agency organized as a C-Corporation will generally result either in a discounted sales price (if the stock is sold) or additional taxes (if assets are sold).
V. Choosing a Business Entity Structure
When making the choice of a business structure, one must consider the advantages that certain entities provide and whether those advantages sufficiently justify their use. Because sole proprietorships and general partnerships offer no liability protection, these forms should only be used when there is no concern for personal liability, due to an absence of risk or the existence of adequate insurance.
If liability protection is not an issue, a single business owner may choose to form the insurance agency as a sole proprietorship. The form is simple and inexpensive; in Arizona, no filings with the Secretary of State are required, except registration of a trade name (if utilized). Regarding taxation, the sole proprietorship requires no additional paperwork (income is reported on the owner’s individual tax return), and there is no risk of “double taxation” of income. However, there are other alternatives for a single business owner. A single business owner may create a single member LLC. A single member LLC is disregarded for federal tax purposes (no separate federal tax return is required for the LLC), and the LLC insulates the owner from vicarious contract or tort liability.
If more than one natural person owns the business and has no concern about liability, a general partnership may be the best choice of entity. It also does not present any risk of double taxation. Income of a partnership is not taxed at the partnership level but is allocated to be taxed to the partners in proportion to their partnership interests. Any taxes due are paid by the partners.
If there is concern about liability, one entity to consider is a Limited Liability Partnership (“LLP”). LLPs provide protection from vicarious liability of limited partners, but not general partners, for torts committed by other partners or other representatives of the LLP. However, general partners, a partner who is directly involved in tortious conduct, or a partner who supervised the tortious person, may, depending upon the circumstance, be found to be liable. Unless they have contractually agreed to assume this liability, limited partners of an LLP are not liable for the debts of the LLP. Regarding federal taxation, the tax scheme is exactly the same as that of a general partnership. There is no risk of double taxation because income is allocated to the partners and not taxed at the LLP level. A Statement of Qualification, a $10 fee plus $3 per page, and an annual filing with the Secretary of State are required.
If an LLP is determined to be unsuitable, a C-Corporation, S-Corporation or LLC are other options. All three forms provide protection from vicarious liability to their owners. The tax implications, however, vary. A C-Corporation will be taxed at the entity level, and any dividends will be taxable to the shareholders. A C-Corporation should only be used if the owners are not concerned about double taxation, including taxation on gains resulting from the sale of the assets of the corporation. The acceptance of a C-Corporation as a financing vehicle may outweigh the double-taxation issues. Also, the owners may be sufficiently involved in the business to justify salaries being paid to such persons (which are not so great as to be “excess compensation”) in order to reduce net income of the corporation to a relatively small amount.
If a C-Corporation is determined to be undesirable, the choice lies between an S-Corporation and an LLC. Of those two, an LLC is probably preferable. While both avoid double taxation, there are no restrictions on the number or types of owners of an LLC. Also, there are fewer administrative requirements for an LLC; the LLC is formed upon filing of its Articles of Organization and payment of a $50 filing fee and publishing its Articles of Organization in a newspaper of general circulation in three consecutive publications. By contrast,S-Corporations cannot have certain types of shareholders (e.g., generally corporations and other entities are prohibited), can only have one class of stock, and cannot have more than 75 shareholders.
VI. Conclusion
When deciding which business form should be used to create an insurance agency, one must consider the particular circumstances and concerns of the owner(s). The best choice will depend on an assessment of those factors and how the different elements of a particular business form would help mitigate the owners’ issues and concerns.
KUTAK ROCK LLP – S. David Childers
A number of minimum prerequisites must be met prior to acquiring a license including qualifying exams, meeting legal requirements and structuring the business among others.
Agent and Agency licensing information can be obtained from the Arizona Department of Insurance and Financial Institutions’ Insurance Licensing Webpage.
The Arizona Department of Insurance and Financial Institutions maintains a database of companies licensed to do business in Arizona. For additional information on any company with which you plan to do business, the Arizona Department of Insurance will provide you with general company information, contact information, types of insurance the company writes, company history, financial information and complaint ratio that you can obtain through their Annual Report.
You can also find an independent agent that will allow you to place business through your agency and share commission.
IIABAZ Members may access the IIABA How to Start An Agency Resource Page and the recorded training programs the Right Start Training Series, which provides startup agencies and new agency owners with essential tools to help them grow their agencies and gain appointments with leading carriers.
Deciding the product lines you want to handle will depend in part on your expertise, company appointment, and the marketplace.
A broad range of products and services are available to meet just about any prospective agent’s expertise and appetite from general personal and commercial lines to far more exotic lines of insurance. Selection here will depend also on your company appointment(s) and a host of other factors.
View several insurance products that are available to IIABAZ Members.
- Big “I” Professional Liability
- Big “I” Markets
- Big “I” Flood Program
- Big “I” Retirement Services
- Non-Insurance Products and Services
- Flood Travelers
- Mexico Tourist Auto
- Personal Umbrella RLI,
- Personal Lines Connection: Eagle Agency
Eagle Agency is a general agency created exclusively for IIABA members. It gives Big “I” member agencies easy access to top-rated carriers for personal lines with low volume commitments and no fees. After achieving a pre-determined level of written premium with Eagle Agency, if the book of business is profitable, Eagle agents will have the opportunity to receive direct contracts with the partner carriers. Eagle Agency offers competitive commissions on new and renewal business. Gross commissions vary, depending on the line of coverage and the state. Eagle agents retain ownership of all the business placed through the Eagle Agency. This (ownership) will allow you to build an agency book of business and equity in your business.
More than a policy – this is a program involving insurance as well as support for loss control. IIABAZ offers professional liability coverage through it’s E&O Department designed by insurance agents for insurance agents through Westport, the nation’s largest and most reliable provider of insurance products for agents, also with Fireman’s Fund the second largest market for insurance agent E&O along with other markets that we shop for you.
Click here for more information, application for E&O, and rick management resources.
Technical policy and coverage resources are available with the Virtual University (VU).
If you would like to take a tour of the VU, Click Here
The Virtual University entails…
- Research Library – For those who seek a smarter way to research, the VU provides access to hundreds of insurance, business and technology articles written by volunteer faculty and other contributors. Technical insurance articles often include links to full sample ISO forms. You’ll also find white papers and articles on many issues affecting today’s insurance marketplace.
- Expert Services – Sometimes you need answers to questions that can’t be found in the research library. To help with these “just in time” issues, we have assembled a faculty of leading experts from around the country. Big “I” Members can submit questions to our “Ask an Expert” service and a response is usually sent within 3-5 business days, but often sooner.
- Online Courses – The VU offers a wide variety of online classes to enhance and expand insurance technical and business skills. When taking an online class through the VU, you can be confident you or your staff is learning the highest quality education available online. You do NOT have to be a member or subscriber to take an online course since a separate fee is charged.
- Free Newsletter – You can become one of the 25,000+ subscribers to our award-winning bi-weekly email newsletter, The VUpoint. You do NOT have to be a member or subscriber to receive the newsletter, however the newsletters and web links are archived in member/subscription area after two weeks.
- MORE – Members and subscribers have access to the most comprehensive informational hyperlinks page in the industry, the results of our periodic surveys and polls, and even our campus radio station, WIIA!
OTHER RESOURCES:
ACORD forms and instruction guide. Join their Agents’ Room and you can get it all electronically, including access to their customer service staff which can answer questions about the applications.
Insurance Services Office (ISO) where you can obtain the Commercial Lines Manual and sample forms. When ordering the manual, be sure to ask for the Arizona state exception pages. These resources are available electronically, or you can order a hard copy.
Another good reference for coverage and loss exposure information is the FC&S Online and Legal a popular countrywide subscription service.
Agency success is dependent on the expertise of your staff and its ability to address customer needs. This expertise is largely the result of proper training requiring both time and money. And while there is a long learning curve in the property/casualty business, you should be able locate a quick-start program from among numerous training resources including those offered by IIABAZ. Learn more by clicking on Education in the main menu bar above.
Whether you are hiring service staff or sales people (producers) you will need a training plan. IIABAZ’s educational programs provides help in structuring a training program.
Once an employee has a solid foundation in coverage basics, he is prepared to learn the application of these coverages to customer needs and the options that exist for tailoring coverage to those needs. The IIABAZ curriculum leading to the CISR and CIC designations in personal lines, commercial lines, or life and health is among the most comprehensive training available in Arizona.
IIABAZ offers a broad array of services, products and support important for new agencies. Membership is open to agencies that meet the following criteria:
- Holds an Arizona general property and casualty insurance license
- Are actively engaged in business for one or more property or casualty insurance companies
- Operate on a commission basis and as an independent contractor
- Have, by contract with insurance companies, ownership of agency accounts and policy expirations (book of business)
- Subscribe to IIABAZ’s articles of incorporation and bylaws
- Transact business in accordance with the principles of the American Agency System and as defined in the IIABAZ Bylaws
Discover the wide-ranging host of products, services, and business and technical support offered by IIABAZ.
For more information call Member Services at 1-800-627-3356, or click on JOIN above.