Advice on Lowering Business Insurance Costs
1. Tax and Legal Considerations
a. Substance Over Form Doctrine
- The IRS and other regulatory bodies look at the substance of transactions over their form. If the primary purpose of creating the LLC is to artificially reduce taxable income or insurance costs without legitimate business purposes, it could be challenged.
b. Arm’s Length Transactions
- If the management company pays the S-Corp or vice versa, these transactions must be conducted at fair market value. Pricing manipulation to shift revenue or reduce taxable income could be flagged as tax avoidance.
c. Separate Entities Requirement
- The LLC must operate as a truly separate entity with its own bank account, bookkeeping, contracts, and operations. If it’s merely a shell to funnel money, it would not withstand scrutiny.
2. Insurance Implications
- Many insurance companies calculate premiums based on your S-Corp’s gross revenue, among other factors. Splitting revenue into a separate LLC could lower reported revenue for your S-Corp, potentially reducing premiums.
- However, if the insurer discovers this arrangement and deems it an attempt to circumvent accurate reporting, it could lead to penalties, cancellation of the policy, or refusal to pay claims.
3. Practical Business Risks
a. Increased Complexity
- Managing two entities will require separate tax filings, bookkeeping, and compliance efforts, which can increase administrative burdens and costs.
b. Contractor and Customer Perception
- Your customers might be confused or concerned if they’re required to pay a separate entity. It could raise questions about why the arrangement exists.
4. Legitimate Uses for an LLC
If you want to go forward with this structure, here’s how to give it a stronger business purpose:
a. Genuine Material Management
- Set up the LLC as a procurement and logistics company that negotiates bulk discounts, manages inventory, or provides other tangible services.
- This gives the LLC a legitimate reason for existing beyond tax or insurance benefits.
b. Proper Contracts and Operations
- Draft contracts between your LLC, S-Corp, and customers outlining responsibilities, pricing, and terms.
- Ensure all transactions are documented, and funds are transferred appropriately.
c. Consult Professionals
- Work with a CPA and business attorney to ensure the setup complies with tax and legal requirements.
5. Alternative Ways to Lower Insurance Costs
- Explore other classifications or policies for your business with your insurer.
- Review your gross revenue calculation with an insurance broker to see if certain exclusions (e.g., material costs) can apply.
- Negotiate a policy that better reflects the nature of your work and minimizes premiums.