Unsure how to set up your captive insurance company structure? Luckily, there is a typical structure to follow.
As a reminder, a captive company is a business that sets up its own insurances to cover its own risks, and the majority of captive insurance companies are structured in a certain way. The primary captive insurance structure is a C-corp, or a LLC that is taxed as a C-corp. A c-corp (C corporation) is a legal structure for a corporation in which the owners, or shareholders, are taxed separately from the entity
So the main point is that the business must be a separate entity from the captive company. Broken down further, a typical capture insurance structure looks like this:
The business, which is on top, pays premium to the captive. The captive insurance company is in the middle. When dividing dividends, it goes to the shareholders. Shareholders are the ones who own the captive insurance company, and in the vast majority of cases the shareholders of the captive are the same shareholders as the original business.
Common Characteristics
Regardless of the structure chosen, there are some basics common to all captive structures. One of these is the participation of a risk sharing partner, or traditional insurer. Risk sharing partners offer such necessary and desirable services as certification of coverage and limits; reinsurance; loss control and mitigation; claims reserving, adjustment, and oversight; risk management; underwriting and regulatory response and assistance. This often-overlooked service has become one of the most valuable services offered by insurers to captives today.
When a business needs establish a captive that business must carefully choose a risk sharing partner as providing certificates to outside parties is usually a material service. The risk sharing partner should be chosen carefully.
The PATH Act
The rules around captive insurance company structure has changed within the last few years. The Protecting Americans from Tax Hikes (PATH) act was legislation issued in 2017. The law changed how captive insurance companies could be structured. Before the PATH act came to be, the owners of the business and the owners of the captive could have been separate people. Some in some circumstances you have captive management partners and then a patriarch or matriarch controlling the top-level business. This was commonly seen in families. This allowed parents to get money past the estate and gift tax line to their children.
This IRS did not accept this as a legitimate means of intergenerational wealth transfer. The PATH act was created to protect taxpayers and their families against fraud and permanently extend many expiring tax laws. Under the law the children, spouses or other descendants of the business owners can own up to 2% of the captive. Capital insurance arrangements are typically deductible, so there is still a tax benefit.
New captive structures are being created every day, and diversity in approach will be beneficial to the whole industry. In the end, however, any structure will need to reflect the information above.
