Cell captive companies have experienced remarkable growth in recent years. Within the realm of cell structures, one can explore a plethora of options, ranging from series cells and protected cells to incorporated cells and various other fascinating forms of cell captives.
Cell Captive: Understanding the Concept
Cell captives manifest in diverse variations but fundamentally entail collaboration among a collective of interconnected or unrelated individuals to jointly partake in the expenses and advantages associated with possessing captive insurance companies. They essentially encompass the acquisition of an individualized segregated portion, referred to as a “cell,” within an established captive insurance company. These entities are frequently presented as an exceedingly economical means for small or mid-market enterprises to derive benefits from captive ownership. Cell captives are interconnected with a central “core,” serving as the gravitational center where the sharing of functions and services takes place. For instance, in certain arrangements, the core procures an insurance license, enabling all affiliated cells to operate under a single license.
Instead of opting for a cell captive arrangement, another choice is to establish an independent captive, which operates under the sole authority of the interested business owner. This type of captive is commonly referred to as a “pure” captive.
Cell Captive: Key Advantages
Cell captive insurance companies offer two main advantages: 1) a moderate reduction in both setup and operational expenses and 2) decreased initial capitalization demands.
It is important to consider that both advantages should be thoroughly evaluated considering the trade-offs associated with cell captive arrangements. Additionally, the second benefit, which pertains to lower capitalization, can have both positive and negative implications, especially during an IRS audit.
Cell arrangements bear a resemblance to condominium associations. Your ‘cell’ is legally and contractually interconnected with other cells, similar to how condo units are connected to neighboring units. In most cases, you have limited control over the selection of your fellow cellmates, and there is a possibility that some of them may engage in risky behavior unbeknownst to you.
- Audit consolidation: In this scenario, if one owner or business associated with a cell captive undergoes an audit, it can result in audits being triggered for all cells and related businesses.
- Contagion of defense costs: When multiple cells are audited, the attorneys and CPAs representing those cells need to invest significant time and effort in coordinating their defense strategies.
- Failure of firewalls: This situation arises when the legal barriers separating cell captives falter, either due to oversight or court interpretation. As a result, the liabilities of one or more cells can overflow and become the responsibilities of other cells. The legal effectiveness of cell-captive structures remains relatively untested in court.
The Core Control
Like how condo associations have ultimate power over their unit owners, cell structures’ cores possess the same level of authority. Condo associations can raise fees and impose assessments on unit owners, while core entities can access funds within individual cells. Cells are not only linked to the core, but they are also indebted to it and can be financially obligated if the core demands it. This is why cell captives can file a consolidated tax return.
Cell captives and condos both have their merits. In cases where all cells in a structure insure a single or related insured, the benefits outweigh the trade-offs. They also provide a viable solution for small businesses unable to afford their own standalone captive, similar to condos for homeowners on a budget.
However, we believe that businesses capable of having their own captive should opt for that choice rather than a cell structure. It is crucial to thoroughly assess the trade-offs before solely focusing on the cost-saving advantages of a cell arrangement.