Category Archives:Small Business

Advanced Strategy To Transition From Creating A Successful Business To Creating Wealth

It is not uncommon to come across successful and profitable businesses that generate little meaningful wealth for their owners. For starters, businesses often face an array of expenses in addition to operating costs that sap revenue including administrative costs, leases and insurance. What profits remain are typically ravaged by taxes, weakening the business and hampering wealth accumulation by the owners.

Advanced strategies to outrun these challenges often include 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. This strategy enables the business owner to build meaningful wealth in real estate and equipment.

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.

As Advanced As It Gets

For many successful businesses, there is a highly advanced strategy to form a second, profitable business that can facilitate significant wealth creation for its owners. The advanced strategy is to start its own insurance company, known as a 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.

A captive insurance company can serve as the backbone of an Enterprise Risk Management strategy (ERM). ERM is a more sophisticated approach to risk management that holistically expands its risk management approach in 2 dimensions – time and space. In the time dimension, a company implementing ERM shifts from managing risk year-to-year to managing risk over a 10 to 50 year horizon. This is possible because an ERM strategy with one or more captive insurance companies in place will usually accumulate loss reserves, providing increased risk management flexibility in the future. In the space dimension, an ERM approach results in a wider risk management and insurance umbrella. This occurs because the business conducts a broad risk assessment of all threats the business faces. An ERM strategy is developed and includes broader (or more) lines of insurance coverage. Typically, this larger insurance umbrella includes a blend of third party commercial insurance coverage and insurance coverage provided by the captive insurance company.

How Does This Advanced Strategy Protect & Grow Wealth?

First, the parent company is now able to insure risks that were previously uninsured. The added insurance protection provided by the captive plugs gaps in commercial coverage and addresses operational and existential threats that can threaten the very survival of the business.

Second, Enterprise Risk Management with a captive can create wealth by reducing third party insurance costs. As the captive matures and builds up loss reserves, it can help lower commercial insurance costs by taking over a portion of the core risks faced by the business. One approach is to increase deductibles on commercial policies and purchase deductible insurance from the captive. As the business and captive develop a reliable loss history and the captive builds loss reserves, the captive can also be in a position to provide “first dollar” coverage to the business for core risk. In these cases, the captive will likely purchase reinsurance.

Third, the overall (or aggregate) wealth of one or more companies with a captive insurance company is higher than the overall (or aggregate) 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 may make an 831(b) tax election if it qualifies as a “small” insurance company, so that its underwriting profits are taxed at a rate of 0%. A “small” insurance company is defined as an insurer that receives less than $1.2 million in premiums 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 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. As such, a captive can form the backbone of a comprehensive ERM approach as outlined above. 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.

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 ERM and a captive insurance company in place, businesses can formally insure risks not normally insured by third party insurers.

Premiums are paid from the parent company to the captive with pre-tax dollars (up to $1.2 million annually if the captive makes an 831 (b) tax election). 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 an advanced strategy that helps successful businesses transition into successful wealth engines.

The Window For Successful Businesses To Implement The Advanced Strategy Of Forming A Captive And Paying Premiums In 2015 Is 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.


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 or (800) 517-0236 Captive services powered by: image

Game Changing Business Strategy That Turns Sunk Costs Into Sunk Profits

2015 CAPTIVE COUNT-DOWN:

There are 31 Days remaining to start the process to form a captive and pay tax-deductible premiums in 2015!


 

Today’s economic climate is challenging and earning (and holding onto) profits is not easy, making wealth accumulation and long term business survivability more daunting tasks. For this reason, business owners, CFOs and advisors including CPAs, Property & Casualty Brokers, Wealth Managers and Attorneys owe it to themselves to be vigilant in pursuing strategies that will safeguard the viability and wealth of the business and its owners. The sort of vigilance in view often requires rethinking business paradigms to look for “both – and” versus “either – or” solutions. “Both – and” thinking seeks to avoid trade-offs, equivalent to “having your cake and eating it too.”

For example, an old paradigm in the automobile market was the assumption that large, heavier cars were inherently safer. Hence, moves to improve fuel efficiency would likely come at the expense (or trade-off) of safety. The automobile industry has rejected “either-or” thinking and produced innovative vehicles that make great strides in both safety and fuel efficiency. The development of lower weight, energy absorbing auto bodies, aerodynamic designs, air bags, computer controlled engines and hybrid electric engines have combined to produce “both-and” results.

“Both-And” Thinking For Mid-Size And Small Businesses

For small and medium sized business owners in a challenging economy, a particular area the demands “both-and” thinking is insurance. Insurance is often viewed through an “either-or” lens. A well- conceived risk management and insurance strategy is a necessity. However, insurance is almost always a sunk cost. It is certainly a necessity and often critical to the survival of a business, but it remains a sunk cost. Each year, precious dollars spent on insurance premiums are gone. It is a mere cost of doing business. And, while most businesses would benefit from purchasing a broader range of insurance coverages, many don’t, because more insurance coverage means less money in the business and less wealth at the disposal of the business owner or CFO.

The Power of “Both-And” Thinking = More Insurance Protection and Significantly More Wealth

The paradigm shift required to overcome this “either-or” scenario is for business owners to make the choice to own their own insurance company. Specifically, a business can set-up and operate what is known as a captive insurance company. Large corporations have been utilizing captive insurance companies for decades, and recent laws favoring “small” captives and competition among domiciles have made captive ownership a powerful and accessible risk management tool and financial vehicle for a growing number of small and mid-size businesses. Such a decision propels a business from “either-or” to “both-and” thinking because a business that owns its own insurance company can benefit from both more insurance coverage and more wealth at its disposal simultaneously.

“Both-And” Benefit: More Insurance Coverage

Most businesses are under-insured. If a business owner, CFO or risk manager were to take an hour or so and write down every threat to the business, it is likely the list would fill up several pages. And in most cases, businesses purchase third party commercial insurance for a fraction of the risks they face. The reality is that it’s not practical or remotely affordable to purchase third party insurance for many of the threats a business faces. However, by choosing to formally self-insure many of the risks facing a business through a captive insurance company, a business owner is able to provide a much broader umbrella of insurance coverage. This improved risk management approach does not require the business to replace existing third party commercial insurance policies, although a captive can be used to replace third party coverage if it is prudent and expedient to do so. For small and mid-size businesses, the best risk management approach is usually achieved by blending third party commercial insurance with broad lines of insurance coverage afforded by one or more captive insurance companies.

Captive insurance companies have the unique ability to write customizable insurance coverage. So, they can write policies that are specifically tailored for the specific needs and challenges faced by the parent company. It is often difficult and inefficient for third party commercial insurers to write customized policies. This reality often renders customizable coverage unaffordable or impossible to acquire. Another benefit of providing insurance coverage via a captive arrangement is that captive policies do not have to include the exclusions that characterize most commercial insurance policies. In this sense, policies issued by a captive can be “wide open,” which is particularly important when a business has a loss and needs the money. Also, claims approval and processing for captive claims is simpler, more timely and more certain. For these reasons, a captive insurance company is a powerful vehicle to:

– Provide blended insurance coverage with existing third party insurance coverage

– Fill gaps in existing third party insurance policies including covering exclusions

– Insure risks that were previously uninsured

“Both-And” Benefit: Significantly More Wealth

By choosing to own a captive insurance company, a business owner or CFO is also choosing to enjoy some of the benefits of insurance law and taxation. It’s no secret that most insurance companies are very profitable. The skylines of most major cities in America are dominated by stadiums, banks, and… you guessed it, insurance buildings. Large commercial insurance companies receive millions of dollars in premiums, and in return, issue policies promising to pay in the event an insured adverse event occurs. Large insurers use actuarial calculations to reserve a large portion of premiums collected for future obligations or claims. It is important to note that these reserves are not taxed. Insurance companies are taxed on their profits, essentially computed as premiums received plus investment income less reserves for future losses, less expenses. Expenses essentially include operational, administrative, marketing and sales costs of doing business. At their core, large insurers are a lot like banks. They have a large pool of untaxed assets to invest and grow.

Small captive insurance companies are quite similar to large insurance companies as described above. However, small captive insurance companies can benefit from an addition to the tax code that was added in 1986 by Congress and signed into law by President Reagan. Small captive insurance companies can make an 831 (b) tax election if they receive $1.2 million or less in annual premiums. When a small captive insurance company makes an 831(b) election, it is taxed at a rate of zero percent (0%) on its underwriting profits. Hence, premiums received less claims paid, less expenses result in underwriting profit which is taxed at zero percent. Similar to large insurance companies, small captives will almost always have a large pool of assets to invest and grow.

The parent company or companies deduct insurance premiums paid to the captive insurance company as a business expense. This lowers operating profit and reduces taxes paid by the parent company or business owner. Also, a captive insurance company may be owned by the business, the business owner, related parties, key employees or heirs. By complying with insurance law, a captive enables a business owner to achieve the “both-and” benefit of retaining and controlling more wealth.

Paradigm Shift: From Sunk Costs To Sunk Profits

“Both-and” thinking can transform a business’ total insurance portfolio from a “sunk cost” to a “sunk profit.” As an example, consider a profitable business that spends $250,000 per year on commercial insurance policies covering general liability, property and auto. In a year with no claims, the $250,000 spent on insurance premiums is a “sunk cost.” Now consider the same company with an improved risk management strategy and a captive insurance company in place. The business still pays $250,000 on commercial policies for general liability, property and auto.

However, the business also pays $1,000,000 in premiums to its captive insurance company to acquire a wide range of additional coverages including reputational risk, administrative actions, legal expenses, cyber breach and data loss, loss of key employee, loss of key account, supply chain, directors and officers, employment practices, terrorism and a large umbrella policy. Assuming a year with no claims, the business owner or business ends the year with $1,000,000 in his or her captive insurance company. The parent company deducted $1,000,000 in insurance premiums and reduced taxes paid by the owner by $500,000 assuming 50% combined state and federal income taxes. The $500,000 in tax savings less $250,000 in third party commercial insurance premiums nets $250,000 in additional wealth retained and controlled by the owner in the total insurance portfolio strategy for the business.

By choosing to own a captive insurance company and applying “both-and” thinking, a business owner can turn risk management into a profit center, transforming sunk costs of third party insurance into overall sunk profits in a captive owned and controlled by the business owner.


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:

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Did You Or Your Business Just Write A Large Check To The IRS?

2015 CAPTIVE COUNT-DOWN

There are 60 Days remaining to start the process to form a captive and pay tax-deductible premiums in 2015.

A better question might be, “Did you just weaken your business by sending a large check to the IRS?”

And, if you answered, “yes” to that question, would you instead like to strengthen your business by sending far smaller checks to the IRS?

If you can affirmatively say, “yes” to the following statement, “I want to make my business stronger and more survivable by sending smaller checks to the IRS,” then this article is for you.

At the outset I want to be very clear that I am not advocating tax evasion. CLICK HERE to read Tax Avoidance Is Perfectly Legal, But Tax Evasion Is Against The Law.

I am advocating one of the most responsible strategies that small and mid-sized business owners can implement to ensure the long-term survival of their enterprise. This strategy has legitimate business purpose, provides significant tax savings, and is encouraged by Congress. CLICK HERE to read Congress Wants You To Own A Captive Insurance Company.

What is this responsible strategy that is also a financial game-changer? Well, I partially tipped my hand in the link provided above. This wealth-preserving, business survival strategy is Enterprise Risk Management Utilizing A Small Captive Insurance Company.

BACKGROUND: Congress And Small Captive Insurance Companies

Over time, taxes can take a heavy toll on a business and its owners. Year after year, profits are stripped away to pay taxes often resulting in a business that is less prepared for the challenges and risks it may face in the future. Congress doesn’t want small and mid-size businesses and business owners to be hollowed out by excessive taxation either.

In the mid-1980s, Congress passed legislation creating the 831 (b) “small” insurance company tax election. A small insurance company is defined as an insurance company that collects $1.2 million or less in premiums. In most captive insurance company arrangements, premiums are paid by the parent company to the captive insurance company. In return, the captive provides insurance policies to the parent company. The 831(b) tax election allows small insurance companies to be taxed at a zero percent (0%) tax rate on underwriting profit. Underwriting profit is simply defined as premiums collected less claims paid. Hence, a small business could pay up to $1.2 million in premiums to its captive insurance company and the captive would pay no taxes. The captive can be owned by the business, the business owner, business owners, heirs or other related parties. Depending on claims, a captive can save up to $600,000 per year in taxes.

It’s worth noting that “small” captive insurance company legislation was a bi-partisan effort passed by a Democratic controlled Congress and signed into law by Republican President, Ronald Reagan. This issue united both sides of the political aisle in America because small captive insurance companies are good for small businesses, good for long term business sustainability and good for America.

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How Is Enterprise Risk Management With A Captive Insurance Company A Game Changer?

The illustration below shows why captive ownership is so often good for businesses and good for business owners. A captive can serve as the backbone or chassis of an Enterprise Risk Management (ERM) approach. ERM addresses risk holistically, expands insurance coverage to the business, takes a long-term approach to risk management, and simultaneously puts more wealth at the disposal of the business owner.

The illustration below compares the status quo on the left with ERM implementation and captive ownership on the right. This illustration covers a 10 year period and assumes a 4% rate of investment return for both scenarios. Both businesses have third party insurance coverage in place to insure core risks. The business on the right which implemented ERM with a captive insurance company has more insurance coverage and more money. In fact, over a ten year period, the business on the right has almost 80% more wealth than the business on the left.

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Clearly, the business that implemented ERM with a Captive Insurance Company is better prepared for the future. Remember, small insurance company legislation united both sides of the political aisle in America because small captive insurance companies are good for small businesses, good for long term business sustainability, good for employment, and good for America. Don’t just pay more taxes if your business would benefit from owning its own insurance company!

What Is Enterprise Risk Management (ERM)

ERM is the discipline by which an organization in any industry assesses, controls, exploits, finances and monitors risks from all sources for the purpose of increasing the organization’s short and long-term value to its stakeholders. Beginning in the mid-80s, many businesses continued down an entrepreneurial path and shifted their mindset from risk management simply as a form of cost containment to risk management as a profit center. Indeed, a more mature approach to risk management can be quite creative and entrepreneurial. Making a paradigm shift from viewing risk management purely as a cost center to viewing risk management as a profit center and strategic pillar of the business can be very rewarding from a financial standpoint.

ERM is the paradigm shift that transforms risk management from a cost center to a profit center. Large corporations have employed ERM for some time, and this mature approach to risk management can also be adopted by small and mid-size companies. The chassis of an ERM approach is a captive insurance company (or companies). Captive insurance companies give business owners or CFOs the ability to take an active versus a passive approach to risk management. ERM increases depth of coverage and is a forward-looking approach to risk management. Furthermore, as a company’s ERM strategy matures, risk management can transition from being a cost center to serving as an entrepreneurial profit center.

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Ownership of one or more captive insurance companies makes ERM possible, because a business is able to both:

– Increase depth of insurance coverage
– Increase the time horizon of its risk management approach

Increase Depth Of Insurance Coverage

When employing a mature ERM model, business owners can categorize risk as core risk, operational risk and strategic risk. Most businesses and individuals simply insure core risk and usually do so via third party commercial coverage. Utilizing an ERM approach, a captive insurance company, in its formative years, gives businesses depth of cover by addressing the second and third layers of risk management (operational risk and strategic risk). As the captive matures and amasses reserves, it can also play a role in addressing core risk. It’s worth noting that many non-core risks evolve into core risks. Examples include: cyber, supply-chain risk, extended warranties, administrative action, terrorism, receivables, key contracts, key employees and employment risk. Operational and strategic risks and the existential threat that can pose to small and mid-size business owners are outlined in detail at FEMA’s Ready.Gov web site (CLICK HERE to read more).

Increase The Time Horizon Of Risk Management

Another characteristic of a mature risk management approach is taking a forward looking stance. A short term approach to risk management typically buys insurance from year-to-year with the goal of keeping costs as low as possible. Each year, all premiums paid for third party commercial coverage are a “sunk cost.” At the end of the year, if there are no claims, the money is gone. Because a captive insurance company is owned by the business owner(s) or the parent company, premiums paid to the captive insurance company are retained after claims are paid. Wealth accumulates in the captive as insurance reserves and provides flexibility to the business in its risk management in future years. A captive facilitates an ERM strategy because it enables a multi-year approach to risk management.

Summary: Financial Impact Of ERM With A CIC

Adopting an ERM approach with a captive insurance company as the chassis can be a financial game changer for business owners. Because the business owner and/or company can reap additional profits from its captive insurance company, the organization will inevitably make risk management and risk mitigation a higher priority. Furthermore, as the CIC grows its reserves, it is in a position to help reduce total reliance on third party commercial cover for core risks. This can often be achieved by reinsuring deductibles and insuring additional potential losses not covered by commercial insurance (including losses above third party insurance policy limits). Finally, CIC ownership enables the business owner or owners to capitalize on the favorable tax treatment that insurance companies receive on their reserves set aside for future claims. As noted already, a well-structured ERM strategy with a CIC can save a business owner up to $600,000 per year in taxes.

Because a captive insurance company is owned by the business owner(s) or the parent company, premiums paid to the captive insurance company are retained after claims are paid. Wealth accumulates in the captive as insurance reserves and provides flexibility to the business in its risk management in future years. A captive facilitates an ERM strategy because it enables a multi-year approach to risk management.

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ERM with a captive insurance company is particularly powerful, because this approach enables a business or business owner to capitalize on insurance law. Fortune 500 companies and other large company CFOs have been capitalizing on insurance law and tax treatment since the 1950s. The exact same strategies are available to small and mid-size companies. As part of its ERM, a business can purchase insurance from its captive insurance company (ies). Premiums paid to the captive are a tax deductible expense to the parent company. The captive insurance company receives the premiums in a tax-favored manner as a large portion are set aside as reserves for future claims.

Reserves are not taxed, hence the insurance company is able to invest and grow a large pool of money. Insurance companies amass wealth by investing large amounts of pre-tax reserves. As already covered, if the insurance company qualifies as a “small” insurance company (defined as receiving annual premiums of $1.2 million or less), it can make an 831 (b) tax election and be taxed at a 0% (zero percent) rate on its underwriting profits. Hence, a well-structured ERM strategy with a CIC can save a business owner up to $600,000 per year in taxes. Most importantly, rather than being weakened by taxation, the business is strengthened and better prepared for long term survival.


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

Captive services powered by:
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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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Captivating Thinking- Game Changing Financial Vehicle For Mid-Size And Small Business Owners

The term “game changer” has often been used to describe people or entities that break from the established or expected norms.  A “game changer” often defies existing paradigms or creates new paradigms.  In sports, a “game changer” is often an athlete that is far superior to his or her contemporaries, is very versatile or seems to always deliver in high impact situations.

The same can be said of “game changers” in business.  However, in business, “game changing” behavior is often a matter of discovery or invention, unlike sports where “game changing” behavior is almost always the result of raw talent and hard work.

Our passion is discovery and invention.  Since our inception, we have been in the business of helping clients invent a superior risk management strategy and discover their own game changing financial vehicle.  Our superior risk management approach is Enterprise Risk Management (ERM) adapted for mid-size and small businesses.  While implementing ERM, clients discover the powerful financial advantages afforded to them by owning their own insurance company.  An insurance company is a powerful financial vehicle that can provide tremendous added value to businesses and business owners.  In this case, we are describing what is known as a captive insurance company or small casualty insurance company under the Internal Revenue Code section 831 (b).

First and foremost, a captive insurance company can provide more effective risk management and casualty insurance protection to a parent company or companies.  It forms the backbone or chassis of ERM for mid-size and small businesses.  To read more about ERM, CLICK HERE.  Not surprisingly, improved risk management is the primary purpose for creating a captive insurance company.

However, a captive insurance company also affords many ancillary benefits to the business, its owners and its CFO.  Owning one or more captive insurance companies enables business owners to solve for many other financial needs and wants.  We know of no other financial vehicle that delivers such a wide range of benefits.

Owning a captive insurance company as part of an ERM strategy can enable business owners and professionals to more effectively address the following wants and needs:

It is important to keep in mind, that while all the above ancillary benefits have significant value, when forming a captive insurance company, one CANNOT choose to do so primarily for the ancillary reasons above. The captive must be formed for the primary reason of enhanced risk management, insurance protection, and asset protection. An experienced attorney and captive management firm can ensure captives are set up properly with an operating plan and procedures that meet the requirements necessary to function as a licensed insurance company.

What Is A Captive Insurance Company?

A captive is a unique but REAL casualty insurance company.  It includes its own corporation, insurance license, reserves, policies, policyholders, and claims.  In addition to forming the backbone of an ERM strategy, it is a formal way for business owners to self-insure, and captives are generally formed to insure the risks of owners and related or affiliated third parties.

There are many risks that all businesses regularly face and informally self-insure.  It’s worth noting that businesses informally self-insure with after tax dollars, meaning that a business’ “rainy day fund” is usually comprised of retained earnings that have already been taxed.  With ERM and a captive in place, businesses can formally insure risks not normally insured by third party insurers.

Premiums are paid from the parent company to the captive with tax deductible or pre-tax dollars, and can accumulate tax-free as reserves of the captive (up to $1.2 million annually).  Reserves can be transferred into virtually any other type of asset (some domiciles have restrictions).  Hence premiums paid are in effect a “transfer of wealth” and are protected from the parent company’s creditors and lawsuits.

While ERM with a captive don’t fit all business situations, countless business owners are missing out on the game changing benefits that ERM with a captive insurance company can provide them.  Discovery is the first step.


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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Why All Small Businesses Need A Business Manager

As a small business owner, regardless of the product or service you offer, your time is the most precious commodity you have. Since you only have a limited number of hours in each day, managing the amount of time you spend on various projects is critical. You want to make certain that these hours are as productive as possible, meaning they generate the greatest level of income possible.