What Is the Best Legal Structure for an Insurance Agency?

By Team INEX |

Launching a business involves a great deal of decision-making, and insurance agencies are no different. One of the most critical is settling on the right business structure for the company. Should the company be a partnership, a sole proprietorship, a corporation, or an LLC?

At INEX, we often help clients through this process, as each option entails numerous financial, legal, operational, and administrative implications, encompassing taxes, liability, management organization, and other factors. What’s more, business structure rules and regulations vary from one state to another.

Given the complexities of structuring an insurance agency for optimal agency perpetuation and tax structure efficiencies, this blog post aims to cover some of the most important factors to consider when choosing an agency’s entity type. With our strategic guidance, business owners can be equipped with the information they need to speak with financial advisors, attorneys, accountants, and other professionals about which legal structure would best suit their unique needs and goals.

Legal Structure Factors to Consider

The two most important factors to consider when deciding on a legal structure for an insurance agency are liability issues and tax issues.

Liability Issues for Insurance Brokers

Insurance brokers face specific liability risks that could jeopardize their financial stability and reputation. Some of the common liability risks include the following.

Placement Risk

Brokers have the duty to place clients with suitable insurance carriers. Failure to do so can result in the broker being held liable for any gaps in coverage or financial losses that the client incurs.

Advisory Risk

Brokers offer advice on the types of coverage a client should consider. Incorrect or inadequate advice can lead to legal action if clients suffer losses they believed would be covered based on the broker’s recommendations. Additionally, the use of ambiguous or misleading wording in marketing materials or on websites can create the impression that clients are fully protected from all risks. Since no such guarantee can be made, this can expose brokers to legal action from clients who feel misled.

Cybersecurity Risk

Brokers handle sensitive client data, making them targets for cyberattacks. A data breach can result in legal actions, regulatory fines, and reputational damage.

Personal Assets

For brokers who operate without a legal separation from their business, such as sole proprietors or partners, personal assets could be at risk in the event of business debts or legal actions. A well-considered legal structure can offer some protection against the financial and legal consequences of these liability risks.

Tax issues

Business structures also dictate how the entity and its owners will be taxed. Here’s a brief summary of how the IRS treats different entity types:

  • Sole proprietorships and partnerships as well as limited liability companies (LLCs) are considered to be the same legal and tax-paying entities as the person or people that own them. Any business not registered as a formal business entity with the state is taken to be a sole proprietorship or partnership. As such, all business profits and losses will be made through the owner’s personal tax returns and are subject to self-employment taxes.
  • Limited liability companies also have the flexibility to file taxes as a C Corp or S Corp, which changes how taxes are filed and how much taxes are to be paid.
  • With limited liability partnerships (LLPs), business profits and losses are distributed among company partners according to their respective ownership share or as established in their operating agreement. Each partner reports their portion of earnings on their individual tax returns.
  • Professional corporations, or C corps, are legal entities separate from their owners. Owners are considered employees, receive a W-2, and pay taxes on their salaries. The company itself pays a corporate income tax and its owners also pay personal income tax on any dividends that receive.

With the above factors in mind, a sole proprietorship or partnership is not an ideal business structure for an insurance agency. For the best liability protection from the business’s debts and legal risks, the LLC and C Corp make the most sense.

Pros and Cons of a Corporation for an Insurance Agency


If an insurance agency chooses to structure itself as a corporation, it can enjoy tax breaks, a corporate veil (safety from personal liability), a flat tax rate (21% for tax years beginning after 2017), and the ability to bring on investors. With this option, owners have the highest level of protection from personal liability and can raise capital by selling stock.


With corporations, however, the cost of formation is higher than with other structures and there is a need for more intense record-keeping and reporting. In fact, this is the structure with the most paperwork and compliance requirements.

For example, it’s necessary to have a board of directors and hold at least one meeting a year between the owners and this board, complete with meeting minutes. There’s also the double taxation of profits, in which income is taxed at both the corporate and personal levels, which turns many entrepreneurs off this structure.

Pros and Cons of an LLC for an Insurance Agency


Limited liability companies offer some protection from personal liability, flexible management, and increased tax options when compared to a corporation. In the majority of cases, when an LLC faces a lawsuit or even bankruptcy, its owner’s personal assets aren’t at risk. Personal income isn’t subject to corporate taxes, but LLC owners are considered self-employed and must therefore pay self-employment taxes.


An LLC offers its owners limited choices for raising capital, fewer liability protections than a corporation, and the possibility of higher self-employment taxes. Because the IRS requires that business profits and losses are processed via the owner’s personal tax returns, all of the business’s taxable income comes under self-employment taxes whether the business owner personally uses the money or leaves it in the business.

Best Legal Structure for an Insurance Agency

Insurance agencies have a lot to consider when deciding on a legal structure, but liability protection and tax implications should be at the top of their list. Navigating liability when starting a business is confusing enough, but it can become even trickier when the business grows. There are financial, employee-related, and even corporate liabilities that insurance agencies should consider. Also, business structure rules and filing requirements vary by state, so it’s crucial to check the statutes in your home state.

Both corporations and LLCs are unique in nature, and each comes with its own set of pros and cons. Business owners have to consider what’s best for them both in the present and the future when it comes to growth and investment.

Again, C corps and LLCs may elect to be taxed as an S corp, which retains the corporation’s liability protections but may save the owners on taxes due.

Get the Expert Guidance Needed to Choose a Legal Structure

While both the C corporation and LLC legal structures are viable options for insurance agencies, each agency has specific needs, goals, motivations, and considerations. With all the options available, it makes sense to invest in working with insurance agency consultants such as INEX with a proven track record of success and experience.

About INEX

Founded in 2000, INEX Capital & Growth Advisors is a multi-disciplinary firm providing management consulting to the owners of insurance agencies throughout the United States. Our senior principals have participated in more than 500 perpetuation, merger, or acquisition transactions over the past two decades.

We are thought leaders and agency experts in several initiatives — from providing agency succession plans to valuation services to assisting with strategic planning and mergers and acquisitions, financial structure optimization, revenue maximization, and others to help agency owners seize opportunities that will bring current and future rewards. We also provide support in areas such as staff development and operational improvements.

The consulting arm of our company works with the management of insurance agencies and provides expert witness services and insurance coverage analysis in various insurance litigation cases.

To learn more, call us at 603-665-6000 or visit our website.