Should I Start an LLC for My Insurance Agency?

Starting a limited liability company (LLC) for your insurance agency can provide several benefits.

Most importantly, an LLC structure offers limited liability to its owners, which can protect their personal assets from lawsuits and creditors.

For an insurance agency, lawsuits can arise from things like policyholders claiming your agency withheld important information about the policy they purchased or that your agency made errors in the application of a policy.

LLCs are also affordable, highly flexible (from a tax point-of-view), and can make your insurance agency seem more credible.

Recommended: Use Northwest to form an LLC for $29 (plus state fees).

A person being guided through an insurance policy

Do I Need an LLC for an Insurance Agency?

LLCs are a simple and inexpensive way to protect your personal assets and save money on taxes.

You should start an LLC when there's any risk involved in your business and/or when your business could benefit from tax options and increased credibility.

LLC Benefits for an Insurance Agency

By starting an LLC for your insurance agency, you can:

Protect your savings, car, and house with limited liability protection
Have more tax benefits and options
Increase your business’s credibility

Limited Liability Protection

LLCs provide limited liability protection. This means your personal assets (e.g., car, house, bank account) are protected in the event your business is sued or if it defaults on a debt.

An insurance agency will benefit from liability protection because of the risk of negligence claims, libel, trademark infringement, and even workplace accidents.

Example 1: Your insurance agency gets sued by a software vendor who claims it is owed for building an app. You have offered to pay a reduced sum because of flaws in the software. Even if you are required to pay the full price, plus damages, you will not have to make payment from your personal assets, which are protected.

Example 2: You are unable to keep up with the payments on a loan you took out to extend your office, and the lender sues. Even if it wins the case, the lender will not be able to go after your personal assets, which are protected.

Example 3: You decide to cease operating your insurance agency to open a real estate brokerage. Regrettably, your business liabilities are more than your business assets. Despite this, unpaid creditors will be unable to take action against your personal assets if they are protected by the limited liability shield of an LLC.

Example 4: One of the agency’s agents misrepresents the coverage of a client’s policy prior to the client enrolling. Later, that client’s claim is denied following an accident, and they sue the agency, alleging that the agent said they would be covered in this type of accident.

An LLC will also protect your personal assets in the event of commercial bankruptcy or loan default.

To maintain your LLC's limited liability protection, you must maintain your LLC's corporate veil.

LLC Tax Benefits and Options for an Insurance Agency

LLCs, by default, are taxed as a pass-through entity, just like a sole proprietorship or partnership. This means that the business's net income passes through to the owner's individual tax return.

The business’s net income is then subject to income taxes (based on the owner's tax bracket) and self-employment taxes.

Sole proprietorships and partnerships are taxed in a similar way to LLCs, but they do not offer limited liability protection or other tax options.

S Corp Option for LLCs

An S corporation (S corp) is an IRS tax status that an LLC can elect. S corp status allows business owners to be treated as employees of the business (for tax purposes).

S corp tax status can reduce self-employment taxes and will allow business owners to contribute pre-tax dollars to 401k or health insurance premiums.

The S corp status requires that the business pay the employee-owner(s) a reasonable salary for the work they perform.

In addition, the business might need to spend more on accounting, bookkeeping, and payroll services. To offset these costs, you'd need to be saving about $2,000 a year on taxes.

We estimate that if an insurance agency owner can pay themselves a reasonable salary and at least $10,000 in distributions each year, they could benefit from S corp status.

You can start an S corp when you form your LLC. Our How to Start an S Corp guide will lead you through the process.

Credibility and Consumer Trust

Insurance agencies rely on consumer trust. Credibility plays a key role in creating and maintaining any business.

Businesses gain consumer trust simply by forming an LLC.

A growing business can also benefit from the credibility of an LLC when applying for small business loans, grants, and credit.

Northwest will start an LLC for you for just $29 (plus state fees).

Get Started

How to Form an LLC

Forming an LLC is easy. There are two options for forming your LLC:

You can hire a professional LLC formation service to set up your LLC for a small fee
Or, you can choose your state from the list below to start an LLC yourself

Select Your State

For most new business owners, the best state to form an LLC in is the state where you live and where you plan to conduct your business.

Do LLCs Need Insurance?

All businesses need insurance to protect their business assets — even LLCs. This is because the limited liability protection from an LLC protects your personal assets, not your business assets.

Insurance agencies need liability insurance themselves because they face the risk of lawsuits in tort from clients for poor advice. Liability insurance also covers damage to property and equipment, as well as personal injury.

Common Situations Business Insurance May Cover for a Insurance Agency

Example 1: During an insurance review meeting in your office, a client’s child climbs up to a shelf, pulls it and its contents down on top of him, and sustains injuries that require minor surgery. Your client sues your business for damages. General liability insurance would cover the child’s medical expenses, your legal fees, and any court-awarded damages.

Example 2: While conducting a home visit for a homeowners insurance policy, an employee accidentally lets the homeowner’s dog outside where a car hits him. Because the accident results in emergency veterinary bills for the homeowner and damage to the other party’s vehicle, they both sue you for damages. General liability insurance would pay for your legal defense and any required settlement.

Example 3: When your designer uses a copyrighted photo in flyers for your new marketing campaign, the photo’s owner sues you both in a copyright infringement lawsuit. General liability insurance would cover your legal fees and any court-awarded damages.

Other Types of Coverage Insurance Agencies Need

While general liability is the most important type of insurance to have, there are several other forms of coverage you should be aware of. Below are some other types of insurance all insurance agencies should obtain.

Commercial Auto Insurance

Since you will be driving your business vehicle on public roadways, you are mandated by the state to carry a commercial auto policy. Auto insurance protects not only your vehicle but any liability you may have in an accident. Your personal car insurance will not cover you if you are driving the business vehicle, even if you are off duty.

Commercial Property Insurance

If you own your location instead of renting, you need commercial property insurance to protect the building. If your business is based out of your home, your homeowners' insurance will not cover the home when it is being used for commercial purposes. Property insurance also covers items owned by your business.

Insurance agencies invest heavily in the equipment that is used to complete their work. Be sure that you have enough coverage to replace all of your equipment in the case of a loss. This coverage is generally offered in a Business Owner Policy (BOP).

In addition to the policies outlined above, there are a few other types of coverage your insurance agency may require depending on certain aspects of your operations. Some of these might not apply to you, so be sure to ask your agent which policies are right for your business.

Workers' Compensation Insurance

If your insurance agency has any employees (full-time or part-time), you are legally required to carry workers’ compensation insurance. This type of coverage will help compensate your employees in the case that they get injured on the job.

Read more about workers’ compensation insurance.

Business Interruption Insurance

In the event of a fire, flood, or other catastrophes, there is a good chance your business operations will be halted for some time. Business interruption coverage is designed to help you recoup a portion of the revenue your business would lose due to the inability to operate.

This type of insurance is typically included in a business owner’s policy.

Commercial Umbrella Insurance

Umbrella coverage allows you to extend above and beyond the standard limits of your other business insurance policies. If you are faced with a large lawsuit or other claim situation, there’s a possibility that the coverage limits of your standard policies will be insufficient. In this case, your umbrella policy will allow you to surpass these limits.

Should I Start an LLC FAQ

Choosing the right business structure depends on your business’s unique circumstances and needs. However, unless your business is very low risk (like a hobby), an LLC is likely the better option.

Visit our LLC vs. Sole Proprietorship guide to learn more.

At a minimum, you’ll need general liability insurance, professional liability insurance, and commercial property insurance.

Read our Business Insurance article for more info.

Startup costs for an independent agency will include the purchase of insurance management software with a price tag of $5,000 to $20,000. Monthly costs will be commissions, office rental, website maintenance, and commercial insurance.

Visit our How to Start an Insurance Agency guide to learn more about the costs of starting and maintaining this business.

Standard office expenses such as rent and utilities, payroll, and licensing fees constitute the bulk of ongoing expenses.

Learn more about running an insurance agency.

An insurance agent earns a commission for each policy that is written.

Learn more about starting an insurance agency.

An insurance agency helps match people with policies that best suit their needs. Once a sale is made, an insurance agency meets with clients to make sure the policies they bought remain a good fit. Insurance agents also help facilitate claims.

An insurance agency’s profits depend on how it is set up and what kind of policies it deals with.

Learn more about starting an insurance agency.