.avif)
Cowritten with Aaron Stocks, CEO of AgencyPoint.
Your entity type and tax election affect how you pay yourself, how much you owe in taxes, how you keep your books, and even how your agency looks when you compare it to others. It’s incredibly important to choose the entity type that matches your agency’s goals and sets you up for success.
This guide explains the three most common structures for independent insurance agencies: LLC, S-Corporation, and C-Corporation. You will learn how each one works, the strengths and weaknesses of each option, and when it makes sense to transition as your business grows. We also cover why comparing your numbers to those of another agency with a different structure can lead you to the wrong conclusions.
Understanding the Basics
There are two layers to every business structure:
- The legal entity you form with your state.
- The way the IRS taxes that entity.
Corporations and LLCs are legal entities, then S corporations and C corporations are tax classifications. Many companies misunderstand this distinction, which leads to confusion later when they try to compare themselves to others.
- An LLC can be taxed as a sole proprietorship, partnership, S corporation, or C corporation.
- A corporation will be taxed as a C corporation by default or can elect to be taxed as an S corporation.
Many small businesses decide to start out as an LLC because of the flexibility of how they can be taxed. With an LLC’s structure, you can start simple and adjust when the time is right.
LLC: The Most Flexible Starting Point
An LLC is a natural fit for many early-stage agencies. It offers liability protection with a lighter compliance load. Most young agencies need room to grow before taking on the administrative work that comes with more complex structures.
Strengths of an LLC
- Flexible in how it can be taxed
- Simple to manage in the beginning
- Easy to transition into S corporation taxation later
- Allows owners to focus on growth before adding payroll or corporate formalities
Weaknesses of an LLC
- Owners often pay more self-employment tax as profits grow
- Books and records can become messy if owners treat it too casually
- Partnership rules can become complicated when more than one owner is involved
When does an LLC fit best
- Early stage agencies
- Solo owners or small partnership groups
- Businesses still building toward consistent profit
- Agencies that want to delay payroll, corporate returns, and more formal systems
The LLC works well for this group because it protects the owner while giving the business time to mature. Once profits are steady, the owner can elect S corporation status and tighten the financial structure.
S Corporation: A Strong Option for Growing, Stable Agencies
The S corporation is not a legal entity. It is a tax election. Both LLCs and corporations can elect to be taxed this way once they qualify.
Under an S corporation election, the IRS expects owners who work in the business to take a reasonable W2 salary. Profit above that salary can be taken as distributions. This is the primary reason agency owners consider the S corporation path.
Strengths of an S Corporation
- Potential tax savings when profit is high enough
- Clear structure for how owners are paid
- Encourages disciplined bookkeeping and payroll systems
- Well suited for valuation work, lending, and acquisition activity
Weaknesses of an S Corporation
- Separate tax returns with higher preparation fees
- Must run payroll and document reasonable compensation
- Requires clean books, separation of funds, and corporate meeting minutes
- Difficult and sometimes costly to unwind if done incorrectly
Who the S Corporation fits best
- Agencies with consistent, predictable profit
- Owners who are active in the business
- Agencies ready to commit to structured financial systems
- Businesses approaching or above one hundred thousand dollars in annual net income
This structure works well for owners who are past the early volatility of startup life. It supports tax efficiency, financial clarity, and professional operations. Those qualities are helpful when an agency is preparing to grow, acquire, or transition ownership.
C Corporation: Less Common, Useful in Certain Situations
A C corporation is the default tax status for corporations. It is less common for small, closely held agencies today, but still appears in legacy agencies or those with specific planning needs.
Strengths of a C Corporation
- Access to certain benefit programs
- Ability to retain earnings within the entity
- Useful for more complex ownership or investment structures
Weaknesses of a C Corporation
- The corporation pays tax on its profit
- Owners may pay tax again when profits are distributed
- Converting from C corporation to S corporation requires technical analysis
- Often unnecessary for typical independent agencies
Who a C Corporation fits best
- Agencies with complex ownership or investors
- Businesses with specialized compensation or benefit strategies
- Older agencies that formed as C corporations and need a thoughtful transition plan
This structure works for specific strategic reasons, not general use. Most agencies do not need a C corporation unless there is a clear purpose for it.
When Owners Should Consider Changing Structures
Transitioning from an LLC to an S corporation is the most common move for independent agencies. The actual IRS form is simple, but the analysis behind the decision is where you want expert guidance.
Owners may consider a transition when:
- Net income is consistently above one hundred thousand dollars
- The agency is ready to run payroll for owners
- Clean books and formal records are already being maintained
- The owner wants the long term tax and valuation benefits of an S corporation
On the other hand, transitioning out of an S corporation is much harder. Taking assets out of an S corporation can be treated as a taxable sale. If the agency has been operating incorrectly, the IRS can even terminate the S election and classify it as a C corporation instead.
Agency owners should make S corporation decisions carefully, with guidance from both a CPA and an attorney who understand agency operations.
Why Comparing Entities Can Create Misleading Benchmarks
One of the biggest challenges AgencyFocus and AgencyPoint see in benchmarking work is owners comparing themselves to agencies with completely different structures.
This can distort the picture in several ways:
- Owners in S corporations may show lower payroll expense if they take part of their income as distributions instead of W2 wages
- Owners in LLCs may show higher net income because they do not run compensation through payroll
- C corporations may retain earnings in the business, which makes their income statement look different from an S corporation
Partnership structures may split profit in ways that do not match how roles and responsibilities are shared
When you compare EBITDA, profit margin, or producer compensation across agencies with different structures, the numbers can look higher or lower for reasons that have nothing to do with performance.
This is why AgencyFocus normalizes financials during valuations and benchmarking. Structure differences need to be adjusted so owners can compare apples to apples.
Understanding the structure behind another agency helps you avoid drawing the wrong conclusions. A weaker structure can make a strong agency look weak, and a strong structure can make a weak agency look strong.
Bringing It All Together
Most independent agencies follow a predictable path. They start as an LLC because it offers protection and simplicity. When profits rise and operations stabilize, many transition to S corporation taxation. A smaller group remains C corporations due to legacy reasons or specialized planning.
There is no perfect structure for every agency. The right choice depends on your profit level, long term plans, number of owners, and how willing you are to maintain the systems each structure requires.
The most important things for agency owners to understand are:
- Your structure impacts how you pay yourself, how much tax you owe, and how complex your operations become
- Transitions should be made intentionally, not reactively
- Benchmarking and valuations only work when structure differences are understood and adjusted
- The structure you choose today affects the value of your agency later
