• Employment practices.

The list could go on and on. You probably have one or more uninsured risks peculiar to your business. Go ahead, add ’em on.

Let’s face it, your business is self-insured for all of the above risks, either by choice or because the risk just can’t be insured commercially. A captive reduces the amount needed to fund such possible future losses. How? The premiums paid to your captive are immediately deductible.

There are many more s that the use of a captive can save your business significant insurance costs. Following are two of dozens of possible examples:

Example No. 1—You own a new (or very up-to-date) building in an area with “zone coverage.” Your building is in total compliance with stringent building codes, while many older buildings in the zone are not complaint. Your building can obtain lower rates from your captive if you can show that your building is a better risk than the zone’s rating./p>

Example No. 2—Success Co. pays premiums to the captive to insure for litigation defense, strikes and product warranty. Remember that with a commercial insurance company (CIC), if the insured has no losses, the CIC keeps the entire premium. No refunds.

Even though a captive cannot reduce (actuarially determined) premiums, a financial windfall results (unused reserve) if the insured’s actual losses are less than actuarially predicted. For example, suppose Joe’s captive New Co. has an unused reserve. A portion of the unused reserve can be:

a) Refunded to Success Co.;

b) Reduce future premiums; or

c) Paid to the captive’s shareholders (Joe’s children) as a dividend. Three nice fringe benefits.

There are a number of other fringe benefits to a captive structure. Following are a few:

a) Someday liquidate your captive and take out the unused reserve at capital gains rates;

b) Have the captive invest a portion of its reserve funds to pay premiums for life insurance on the captive’s founder or his family members (in effect, deducting the life insurance premiums);

c) Use the captive as an estate-planning strategy, passing the captive (and any life-insurance proceeds) to your heirs.

Make no mistake, your captive must be formed and operated for a business purpose. The captive must demonstrate that it is, in fact, acting as a proper insurance company. Follow the rules and the IRS is not a problem. Trying to fool the IRS by forming your captive to take advantage of only the tax-advantaged fringe benefits, without a real business purpose, is almost certain to cause the loss of the sought-after benefits.

No attempt is made in this article to explore all of the rules, traps and opportunities in forming your own captive. It is essential that you work only with qualified, experienced advisors that specialize in captives. The right advisors can easily tailor your captive to fit you, your business and your circumstances perfectly.

Now the key question: Is a captive for you? If costs were not an issue, the answer would be a resounding “Yes” for almost every business. Unfortunately, costs are a factor. For a Fortune 500 company, it’s a slam dunk: The insurance cost savings and tax benefits are well worth the required costs to create and administer a captive.

If you can answer “Yes” to any of the following questions, you should strongly consider forming a captive:

1) Is your before-tax profit $1 million or more per year?

2) Are your traditional insured property and casualty expenses $1 million or more per year?

3) Is one or more of the “uninsured risks” listed above (or one you added) a significant factor in your business and worth a premium of about $200,000 per year or more?

Logic tells you that the larger your business, the more likely a captive should be a top priority for your next year’s business plan (i.e. make $1 million —before-tax—or more, captive is a must). Costs are easily covered by captive benefits.

But what about smaller family businesses? The answer can be “Yes” with a new strategy the experts have perfected, if your before-tax profits are in the $250,000 per year range. Benefits are the same as for a larger company but costs are substantially reduced.

What, you are even smaller? Well, we need your help. Show this article to the decision maker(s) of your trade association. Have your trade association adopt a captive program, then you and the other members can participate. The cost is minimal.

Finally, if you are lucky enough to be a Florida resident and your business is located in any other state, there is a little known, legal tax strategy that enhances your tax savings.

How can you learn if a captive will work for your business? Please fax the following (on your company letterhead) to 847/674-5299: Your name, title, type of business, total number of employees and any other information you think would be helpful. Also include all phone numbers where you can be reached (business, home, cell). If a trade association, please fax on your letterhead and include number of members and name of decision maker. Please mark “captive” at the top of your fax. MF

Technologies: Management

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