Very often, businesses owners increase their success, profitability and asset protection by starting or acquiring a second business that serves their primary business. 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.
Consider a successful business owner that chooses to stop leasing a facility in favor of purchasing a facility inside a new company owned by the business owner. In this situation, the business owner can now earn a profit on two companies and can depreciate the real estate asset in the second business to reduce taxable income as well. Or, consider a manufacturer that purchases or starts a business in its supply chain. This manufacturer is now able to earn profits on both businesses and gain better control of risk…specifically, the risk of a key supplier folding or choosing to sell to a competitor.
For many profitable businesses, there is a simple, well proven path to form a second, profitable business. That path is to start its own insurance company, specifically an 831 (b) captive insurance company.
What Is A Captive Insurance Company?
A captive is a unique insurance company. It includes its own corporation, insurance license, reserves, policies, policyholders, and claims. It is a sophisticated way to self-insure and is generally formed to insure the risks of its owners and related or affiliated third parties.
How Are Two Companies Really Better Than One?
First, the parent company is now able to insure risks that were previously uninsured.
Second, the overall (or aggregate) profit / wealth of one or more companies with a captive insurance company is usually higher than the overall (or aggregate) profit / wealth of one or more companies without a captive insurance company. This occurs for two primary reasons. First, the parent company takes an expense as it pays its insurance premium to its captive. This lowers the parent companies taxable income. And, the captive does not pay taxes on the premium it collects (up to $1.2 million annually). Second, the captive is able to earn a return on its reserve pool (or assets). And, the captives asset pool has been amassed with pre-tax dollars, enabling asset growth on a larger starting base.
How Does a Captive Insurance Company Increase Total Wealth?
A captive provides many benefits to its parent company or business owner including risk mitigation, asset protection, security from creditors and increased profits. A captive primarily insures its parent company or related companies. Hence, the parent company is able to purchase insurance from its captive. In the early years of owning a captive, a business can insure risks that third party insurers will not insure or risks where the cost to insure with a third party is prohibitive.
Some examples include (but are not limited to):
- Loss of a key account
- Loss of key personnel
- Loss of a license or certification
- Loss of a sales or distribution territory
- Loss of dealership rights
These are risks that many businesses regularly face and informally self-insure. Which means that if an event occurs, the business “bites the bullet,” often taking a loss, laying off workers and possibly facing partial or total closure. With an 831 (b) captive in place, businesses can formally insure risks not normally insured by third party insurers. And, importantly, claims paid by the captive are paid from pre-tax dollars and are not recaptured as income by the operating company. So the captive effectively acts as a legal tax shelter for the premiums received from its insured.
Premiums are paid from the parent company to the captive with pre-tax dollars, and accumulate tax-free as reserves of the captive (up to $1.2 million annually). Captive reserves can be translated into virtually any other type of asset (some domiciles have restrictions). Hence premiums paid to the captive are in effect a “transfer of wealth” and are protected from the parent company’s creditors and lawsuits. For this reason (tax savings and reserve accumulation), a captive insurance company is quite often a successful and profitable “second business.”
The Window For Profitable Businesses To Start Another Successful Business (By Forming A Captive) and Pay Premiums In 2012 Is Rapidly Closing
It takes 60 to 90 days to form a captive insurance company. Call us to discuss whether or not a captive insurance company or additional captive insurance company is the right move for your business portfolio.
Phone – 865- 386-4920
E-Mail – Tom@CICServicesLLC.com
Web – www.CICServicesLLC.com