A Financial Strategy Worth Ripping Off
Why Fortune 1,000 CFOs Own Captive Insurance Companies and Why Small and Mid-Size Businesses Should Too
Many mid-market CFOs and small business owners alike yearn for the day when their company can
Captivating Thinking
The Proven Approach To Start A Successful Second Business
One approach for a business owner to increase profit and further protect the business is the buy-up or stand-up all of the vertical businesses that support the core business. Think of starting or acquiring additional businesses as an approach to build and protect a wealth engine. This is often described as vertical integration, and it is often effective because a supplier or service provider is already making a profit serving the parent company.
For example, consider a successful business owner
The Cure For Insurance Hater’s Syndrome
We do most of our work with small and mid-market companies all across the U.S. No matter where I go, it is not uncommon to meet business owners and CFOs with a stage three case of Insurance Haters Syndrome or I H S (not to be confused with I B S, although the conditions
Congress Passed 831(b) Because of an Economy Wide Insurance Crisis
Even when we don’t see eye-to-eye, we still like to give credit when credit is due. For example, we often find ourselves in disagreement with the Internal Revenue Service (IRS), but we did give them credit for Acknowledging 831(b) Captive Insurance Companies ARE A LEGITIMATE TAX STRUCTURE (CLICK HERE).
In the same way, we have had some differences in opinion with Hale Stewart, Tax Attorney and Financial Advisor in Houston, Texas. However, this week we are tipping our hat to Mr. Stewart for his excellent article titled: “Congress Passed 831(b) Because of an Economy Wide Insurance Crisis.”
In his article, Hale points out that:
By the mid-1980s, U.S. business faced an insurance crisis caused by the following events: a Tsunami of litigation stoked by changes in tort law, aggressive plaintiff’s bars, more liberal insurance policy interpretations that broadened coverage beyond that contemplated by actuaries and, finally, larger jury awards, especially for punitive damages. The problem was so pervasive that Time Magazine placed the crisis on a 1986 cover.
Importantly, he concludes his article by saying:
Just remember: Congress passed 831(b) to solve an economy–wide problem. While this obviously benefited farm mutuals, it also benefited a large swath of American business.
We find ourselves in agreement. Congress also recognized that small and mid-market businesses have very fragile business models, at least compared to their Fortune 1000 brethren. The former often have concentrated revenue streams, are geographically concentrated, and can’t simply issue more stock/bonds to get them through challenging times when something goes wrong. This is one reason why, according to Small Business Administration statistics cited on Ready.gov, 40% of small and mid-market businesses never reopen their doors after a natural or human-caused disaster. This fragility takes a costly toll on the economy, and 831(b) is one way to help make small businesses more robust. By forming an 831(b) captive, a small business (or its owners, at least) can (all else being equal) have both more insurance AND more after-tax liquidity, both of which are key to survivability. 831(b) served (and continues to serve) very important public policy objectives besides just throwing a bone to farm mutuals.
To read Hale Stewart’s entire article, CLICK HERE.