Author Archives: Alan Conner

How to Form a Physician Corporation: A Step by Step Guide

As a physician, you have either just signed with a contract group, or you have decided to do some shifts as a Locum Tenens. There is a chance that your contract group will require you to be an employee, but that is not often the case. Now you need to form a corporation. We are often asked why. The simple answer is that it draws a clear line between you the individual and you the professional. Another response is that as a corporation, you are afforded additional tax benefits that are not available to you via Schedule “C”. Your SEP IRA contribution for one. As a physician, your options are limited to either a PC (Professional Corporation), PA (Professional Association) or PLLC (Professional Limited Liability Company). There are subtle differences in each type of entity, but there are some specifics that you will need to keep in mind. First and foremost, your state will most likely dictate what type of entity you can form, also, some states do not allow PLLC’s. Don’t just blindly form an entity without knowing the correct type of entity for you. Also, as a physician, forming a corporation will not insulate you from civil liability. For advice related to asset protection, call us. From this point forward, we will discuss the formation of a PC/PA.

The creation of your entity:

The formation process begins with a stop at the Secretary of State office, or the division of corporations. This is where you will find the forms for your specific state, along with the filing requirements and related fees. Filing requirements for professionals differ from state to state. For example, NY requires Physicians to verify their license status with the Education department before and after filing Articles of Incorporation. This is a two-step process, and involves paying two separate fees. Find out if your state has this requirement or a similar process before you file any documents. Some online Incorporation sites do not take this step. Not only will you not get your incorporation filed, you may not get your money back. Just as a precaution, before you fill out any documents, make sure there isn’t another physician in your state with your name. This can most often be avoided by using a middle initial or middle name, but you will want to be certain. Once you have confirmed this, reserve your own name. Send two copies of these documents to the state, and request a stamped copy be returned to you in a self-addressed stamped envelope.

Tax Status and Employer ID Number (EIN):

Once you have completed the Incorporation process, you will need to become legal in the eyes of the IRS. First, you will need to request a Tax ID# or Employer Identification Number. This is essentially the social security number for your business. This can be obtained online, or via fax. Simply fill out the form and submit. Now you need to address the tax status of your entity. All new corporations are seen as “C” corporations until you request to be taxed as an “S” or “Subchapter S” corporation. The difference is simple and straightforward. Do you wish to be taxed on your income twice, or only once? Most of our clients are “S” corporations. The “S” election form can be found on the IRS website, and must be filed with the IRS as soon as possible. You will receive a letter of acceptance once the IRS has approved your status. This must be completed prior to filing your first tax return. Our suggestion is to file this the same day you receive your EIN number. Send this certified mail to make sure you have proof.

Acting Like a Corporation:

Now that you are a corporation, you will have to begin acting like one. What this means is that when you do something business related, you will need to document it. First you will need to establish Bylaws. This will be the blueprint for the way you run your corporation. Sample Bylaws can usually be found on the website for the state where you incorporated. It will define what title you will have, how many times a year your board will meet, and any means to alter the nature of your entity. You will also need to have regular meetings of your Board of Directors, yes, even if you are the only one. When you hold these meetings, you will also need to keep details of what you decided to do. Whether that is opening a bank account, or entering into a contract for employment. In these minutes, you will also document how you will be compensated by your entity, and any employee benefits you will receive. You will now have to keep all of these in one place. That is why you have a Corporate Book. A corporate book can be purchased online from a variety of vendors. Within this book, you will keep the certified copy of your Articles of Incorporation, the acceptance letter of your Subchapter “S” filing, the notification letter for your EIN number, a copy of your bylaws, and each and every set of minutes from all of your Board meetings. This is the first thing that will be requested if your corporation is ever sued.

Reducing Your Taxes:

This is the primary reason you are putting yourself through this. The first reason is that as a Corporation, rather than a Sole Proprietor, you are able to make a SEP IRA contribution up to 25% of your salary versus only 20%. If you pay yourself enough to make the maximum contribution, that would be a salary of $212,000 in order to make a SEP contribution of $53,000. As a Sole Proprietor, you would only be able to contribute $42,400 at the same salary. Not contributing the additional $10,600 just cost you an additional $3,710 if you are in the 35% tax bracket. If your state has an income tax as well, you saved even more. Also, as a corporation, you can establish a Defined Benefit Plan for yourself. This can allow you to put away $100k or more annually, thus accelerating the tax savings.

Tax returns and Annual Reports:

This is where your corporation will save you money, and make all of this worth it. Your corporation will have to file a tax return each year (Form 1120S), and you will receive a form K-1, which is the shareholder profit and loss, (think of it as your 1099 as an owner of your entity.) Regardless of whether or not your state has an income tax, you will still need to file tax returns for your corporation. No taxes will be due, as those will be paid on your personal return, but pay special attention to whether or not your state levy’s a “filing fee”.

The state will also require an annual report from you, although some are every other year, but you pay twice as much. This is simply informing the state that you are still in business along with your current address.

Summary:

You can do this. Just like most things that look complicated, it is more about following the process step by step. There are no shortcuts. If you decide you need some assistance, or simply feel that you would rather work with someone who does this all the time, we would be honored to add you to our list of satisfied clients.

My Professional CFO, LLC, is a Business Management firm providing the highest level of service in three key areas of importance to Independent Contractor Physicians, Small Business Owners and Entrepreneurs. We specialize in Corporation filings and ongoing Compliance, Accounting and Payroll, and Investment Management. Our professionals will assist you in forming the appropriate type of company for your situation and work with you to make sure your company remains compliant. We provide ongoing Accounting and Payroll services to make certain all necessary tax forms and withholding payments are made in a timely manner, as well as the set up and management of your retirement accounts. We are not simply a document filing service; we are here to help you with the part of the business that you have to do, so you can focus on what you love to do. For more information visit our website www.myprofessionalcfo.com!

Email us with any questions, or Call us at: 1 (800) 517-0CFO           1 (800) 517-0236

What type of Businesses Benefit from a Captive Insurance Company (“CIC”)?

What type of businesses could benefit from a captive insurance company (“CIC”)?

  • Businesses that are overpaying for third party insurance or with significant uninsured or underinsured risks

ExamplesContractors, developers, medical groups, family owned businesses, physicians, entertainers, professional athletes, high tech firms, professional service firms, real estate management companies, etc.  Upon reflection, almost every business has significant uninsured or underinsured risks.

  • Businesses with sufficient revenue and profits to afford the premium
    • – Over $1,000,000 in gross revenue.
    • – Over $200,000 in “excess” after-tax profits (i.e., money that doesn’t need to be directly reinvested into the business or paid out as compensation).

Tax savings versus informal self-insurance arrangements

Assuming that your captive insurance company (“CIC”) is a proper, licensed insurance company that writes appropriate, relevant insurance policies in exchange for independently-priced or market comparable premiums, then premiums paid to your CIC should be deductible to your business just as if they were paid to a third party insurer.   For instance, if you paid $1 million in premiums to your CIC this year for valid insurance, the resulting deduction would save you or your business $400,000 in taxes if you’re in a forty percent combined federal and state tax bracket.

In addition captive insurance companies receiving less than $1.2 million per year in premium income, can elect to have their underwriting profits taxed in a zero percent bracket under Code Section 831(b). For example a CIC which takes in premiums of less than $1.2 million per year with its premium income exceeding claims paid, may have those profits taxed in a zero percent bracket.  Assuming $1 million of CIC premiums and a forty percent tax bracket that represents $400,000/year of potential tax savings by formally self-insuring risks through a captive versus not insuring these risks at all as most businesses do.

Why do captives enjoy such a low tax bracket on underwriting profits?  Some hypothesize that Congress may have decided that third-party insurance arrangements should not be favored by the tax code over formal self-insurance arrangement like CICs.  Also, it seems that Congress may have intended to incentivize small businesses to begin setting aside reserves to insure risks they have failed to cover via third parties due to cost, lack of available coverages for certain risks, or other considerations.  Section 831(b) incentivizes small businesses to responsibly reserve for these risks through captive insurance arrangements.

Despite the obvious and frequently-noted tax advantages of a CIC, no business transaction should ever be completed simply or even primarily to achieve tax savings.  In some cases the IRS has authority to deny deductions that result from primarily tax-motivated transactions.   Thus, the decision to implement a CIC should be based upon the business owner’s careful considerations of the risks facing his/her business and the various means of mitigating them, and his/her decision-making process should be documented.  Unfortunately, it’s the rare business indeed that doesn’t have considerable exposure to innumerable uninsured risks, potentially bankrupting the business if left unaddressed, and which self-insuring via a captive can mitigate.  Your captive attorney and his or her insurance manager can assist you in recognizing and developing a plan to protect against such risks.

Why form a Captive Insurance Company (CIC)?

  • Reduce Insurance Costs: Conventional third party insurance policies insure a bundle of risks that may not be particularly relevant to you.  A standard package may include both relevant and comparatively irrelevant risks, and yet you pay for both.  In other words, you may be paying for coverage that you don’t need while “going naked” on coverage that you do.  Third party insurance premiums also include markups for things like marketing expenses and large underwriting departments, which may not benefit you at all.  These additional costs are reduced or eliminated with captive insurance.
  • Protect Your Business From Risk: The attorneys and insurance managers who assist you in forming your CIC are experts at identifying relevant but often over-looked risks.  Because CICs offer the ability to obtain tailor made insurance, your business should be better prepared to survive the unexpected
  • Improve Cash Flow: The potential savings realized by obtaining cheaper and more relevant types of insurance, combined with the tax savings that CIC’s provide, may result in significant improvements in your business’s after-tax cash flow.  There is also a decided advantage in being able to time the premium payments to the company’s natural cycle of cash flow.
  • Create Profit Center: Studies show that businesses which own a captive better manage their risk than 3rd party insurance companies, allowing CIC’s to have a much lower loss ratio. Captives are often therefore highly profitable. These profits can be invested in ways that which generate valuable investment income.  The result is often a new profit center for your business enterprises.
  • Increase Asset Protection: Properly formed and maintained, the profits of a captive are very well insulated from the creditors of both the business and the business owners.
  • Estate Planning: If your captive is owned by your children or a trust for the benefit of your children, then premiums paid to the captive each year are effectively removed from your taxable estate without gift taxes.

My Professional CFO, LLC, is a Business Management firm providing the highest level of service in three key areas of importance to Independent Contractor Physicians, Attorneys and Information Technology Professionals. We specialize in Corporation and LLC filings and ongoing Compliance, Accounting and Payroll, and Investment Management. Our professionals will assist you in forming the appropriate type of company for your situation and work with you to make sure your company remains compliant. We provide ongoing Accounting and Payroll services to make certain all bills are paid and necessary tax forms and withholding payments are made in a timely manner, as well as the set up and management of your retirement accounts. We are not simply a document filing service, we are here to help you with the part of the business that you have to do, so you can focus on what you love to do. For more information visit our website www.myprofessionalcfo.com Alan Conner, MBA – President of My Professional CFO, LLC has nearly 2 decades of experience working with professionals and small business during both the start-up and ongoing management. He has written countless business plans and has managed assets for both institutions and high net worth clients. Email us with any questions. Call us at: 1 (800) 517-0CFO 1 (800) 517-0236 Captive services powered by: image

Own Your Own Insurance Company- Free Webinar

Greetings!

You are cordially invited to attend a complimentary webinar about the tremendous benefits of owning your own captive insurance company.

Topic: Own Your Own Insurance Company – Enterprise Risk Management Utilizing a Captive Insurance Company for Small and Mid-Market Businesses

Date: Friday, August 28 at 10:00 AM ET

RSVP: Simply send me an e-mail, and I will send you a link to attend the webinar.


My Professional CFO, LLC, is a Business Management firm providing the highest level of service in three key areas of importance to Independent Contractor Physicians, Attorneys and Information Technology Professionals. We specialize in Corporation and LLC filings and ongoing Compliance, Accounting and Payroll, and Investment Management. Our professionals will assist you in forming the appropriate type of company for your situation and work with you to make sure your company remains compliant. We provide ongoing Accounting and Payroll services to make certain all bills are paid and necessary tax forms and withholding payments are made in a timely manner, as well as the set up and management of your retirement accounts. We are not simply a document filing service, we are here to help you with the part of the business that you have to do, so you can focus on what you love to do. For more information visit our website www.myprofessionalcfo.com Alan Conner, MBA – President of My Professional CFO, LLC has nearly 2 decades of experience working with professionals and small business during both the start-up and ongoing management. He has written countless business plans and has managed assets for both institutions and high net worth clients. Email us with any questions. Call us at: 1 (800) 517-0CFO 1 (800) 517-0236 Captive services powered by: image

How To Turn Risk Management Into A True Profit Center

Here is a captivating question.  How can a small or medium-sized business turn its risk management into a true profit center?

It sounds impossible – turning risk management into a profit center.  Risk management pays insurance premiums, develops workplace safety guidelines and implements loss control programs.  How could it possibly be a profit center?

Furthermore, this is not simply a question about cost containment or even cost reduction.  To succeed, the business’ risk management strategy must give the business’ owners access to more money than they would have had otherwise, including completely offsetting the cost of commercial insurance and loss control programs. Clearly, a question this challenging requires some captivating thinking.

Consider the example below of a hypothetical small manufacturing business.  This is merely an example.  The captivating risk management approach I will outline could apply to many types of profitable small and mid-size businesses in a variety of circumstances.  As the first table below illustrates, risk management is a cost center, and the business pays $210,000 in annual commercial insurance premiums and $40,000 annually is loss control and safety programs.

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It’s time for some captivating thinking.  The table below illustrates the exact same business with an Enterprise Risk Management (ERM) strategy in place.  ERM is a discipline, whereby a business assesses all the threats it faces and develops a comprehensive risk management plan.  To read more about ERM for small and mid-size businesses, CLICK HERE.

As part of its ERM approach, the business implements steps to reduce risk and mitigate risk.  Keep in mind that insurance is a financial risk mitigation approach.  As part of its ERM strategy the business owners set-up, operate and own their own insurance company, known as a Captive Insurance Company (CIC).  The CIC forms the backbone of the ERM strategy.  The CIC significantly increases the business’ insurance coverage, addressing many of the risks identified in the comprehensive risk assessment.  To read more about Captive Insurance Companies, CLICK HERE.

The CIC is owned by the business’ owners. So the owners and the business effectively retain the profits in the captive insurance company.  Because this CIC takes in annual premiums of less than $1.2 million, it can make an 831(b) tax election and be taxed at a rate of zero percent (0%) on its underwriting profit.  In the illustration below, this results in $460,600 in annual tax savings.  This assumes a combined federal and state tax rate of 47%.

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Finally, the table below illustrates how ERM with a CIC turns risk management into a true profit center that – in effect – pays the business’ owners or increases the total wealth of the owners.  The ERM Program results in $460,600 in tax savings.  The tax savings generates an estimated $13,818 in investment income (assumes 5% return and 3% after tax return).  The CIC pays $75,000 to operate, renew its actuarial pricing of policies, issue policies, renew its insurance license, conduct an annual audit and purchase reinsurance for its policies.  As we have already established, the business spends $210,000 on commercial insurance.  As part of its ERM strategy, the business is investing $40,000 in loss control and safety programs.

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As can be seen, ERM with a CIC produces a dramatic result.  This business’ risk management strategy was a drain on the business, costing it $250,000 annually.  With ERM in place, the business’ risk management program created $149,418 incremental wealth to the business owners after offsetting: the cost to operate the CIC, the cost to reinsure the CIC, the total cost of commercial insurance, and the cost of implementing a loss control program.  Captivating Thinking enables successful business owners to convert risk management from a cost center into a powerful profit center.


My Professional CFO, LLC, is a Business Management firm providing the highest level of service in three key areas of importance to Independent Contractor Physicians, Attorneys and Information Technology Professionals. We specialize in Corporation and LLC filings and ongoing Compliance, Accounting and Payroll, and Investment Management. Our professionals will assist you in forming the appropriate type of company for your situation and work with you to make sure your company remains compliant. We provide ongoing Accounting and Payroll services to make certain all bills are paid and necessary tax forms and withholding payments are made in a timely manner, as well as the set up and management of your retirement accounts. We are not simply a document filing service, we are here to help you with the part of the business that you have to do, so you can focus on what you love to do. For more information visit our website www.myprofessionalcfo.com

Alan Conner, MBA – President of My Professional CFO, LLC has nearly 2 decades of experience working with professionals and small business during both the start-up and ongoing management. He has written countless business plans and has managed assets for both institutions and high net worth clients.

Email us with any questions.

Call us at: 1 (800) 517-0CFO 1 (800) 517-0236

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How To Significantly Grow Wealth By Starting Another Business

As a business grows and matures, its owners may look for additional means to grow revenue and boost business wealth.  A common approach is to start or acquire an additional business that serves the core 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.  Also, the parent company is “staying close to home,” and usually not straying too far from its core competencies.

As an example, a manufacturer may choose to purchases or start a business within its own supply chain.  Not only does this give the manufacturer greater control of its supply chain, it also enables the manufacturer to earn additional profits.  Another benefit is that the business owner may gain better control of his or her risks, including the risk of a key supplier folding or choosing to sell to a competitor.

Clearly, this business move is not without risk.  In some cases, the manufacturer may be ill-prepared to run another company.  The owners may not understand the pitfalls that their supplier has already overcome.  Their supplier may have expertise or sourcing advantages that the manufacturer is unable to replicate.  And, choosing to compete with a supplier may embolden them to “pull out all stops” to support a business’ competitor.  A lot can go wrong.

Is There A Low Risk AND Low Effort Way To Set Up Another Profitable Business?

Actually, there is.  A successful business can turn its risk management into a separate business.  Furthermore, a well-run risk management business can function as an additional profit center.  To achieve this break-through result, the business owner implements Enterprise Risk Management (ERM) and sets up and owns an insurance company, specifically, a captive insurance company (CIC).  Captive insurance companies are a separate company, and the form the backbone or chassis of ERM for small and mid-size businesses.

Low Risk

Implementing ERM with a CIC can be a low risk endeavor because the business can choose to keep existing third party insurance coverage intact and utilize the captive to cover gaps in its existing risk profile.  ERM for small and mid-size businesses is most effective when it blends third party commercial insurance coverage with insurance coverage provided by the CIC.  In this manner, a business owner is able to enjoy a comprehensive blanket of protection.

Low Effort

Also, by working with an experienced and proven captive manager, a business does not need expertise in operating its own insurance company.  The captive manager oversees and coordinates most all of the work.  The business owner is able to own his or her own risk management business, while capable hands carry-out set up and operations on the owner’s behalf.

What Is A Captive Insurance Company?

Simply put, a captive insurance company is an insurance company.  It is a C corporation and is licensed and domiciled like any large insurance company.  Captives also have their own reserves, policies, policyholders, and claims.  Owning a captive insurance company is a sophisticated way to self-insure, and captives are generally formed to insure the risks of a business, group of businesses and related or affiliated third parties.

What Are The Benefits Of Enterprise Risk Management With A Captive Insurance Company? 

First, the parent company is able to benefit from a far more robust, holistic approach to risk management.  Specifically, the parent company or companies can now formally insure risks that may have previously been uninsured or under-insured.  The parent company can also insure deductibles where it has third party commercial insurance in place.

Second, the overall (or aggregate) wealth of one or more businesses with ERM and a CIC in place is almost always higher – significantly higher– than the overall wealth of companies without ERM and a CIC.  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 can make an 831(b) election and be taxed at a zero percent (0%) rate on its underwriting profits, provided the premiums it receives are less than $1.2 million annually.  Second, the captive is able to earn a return on its reserve pool (or assets).  And, the captive’s asset pool has been amassed with pre-tax dollars, enabling asset growth on a larger starting base.

How Can Starting Another Business Significantly Grow Wealth? 

Adverse events are going to occur whether or not a business has ERM in place.  Businesses with a captive have a much larger pool of funds to address adverse events (typically 80% to 100% more) because captive assets are comprised of pre-tax dollars.  Hence, 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), ERM with a CIC is quite often a successful and profitable “second business.”  Over time, ERM with a well- structured captive can often double the wealth accumulation of its owners.


My Professional CFO, LLC, is a Business Management firm providing the highest level of service in three key areas of importance to Independent Contractor Physicians, Attorneys and Information Technology Professionals. We specialize in Corporation and LLC filings and ongoing Compliance, Accounting and Payroll, and Investment Management. Our professionals will assist you in forming the appropriate type of company for your situation and work with you to make sure your company remains compliant. We provide ongoing Accounting and Payroll services to make certain all bills are paid and necessary tax forms and withholding payments are made in a timely manner, as well as the set up and management of your retirement accounts. We are not simply a document filing service, we are here to help you with the part of the business that you have to do, so you can focus on what you love to do. For more information visit our website www.myprofessionalcfo.com

Alan Conner, MBA – President of My Professional CFO, LLC has nearly 2 decades of experience working with professionals and small business during both the start-up and ongoing management. He has written countless business plans and has managed assets for both institutions and high net worth clients.

Email us with any questions

Call us at: 1 (800) 517-0CFO 1 (800) 517-0236

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