With insurance premiums on the rise and the uncertain state of the federal tax system, middle market business owners may be looking for a source of stability that allocates the risks associated with operations. A “small” captive insurance company may provide such stability. Small captives are a unique way for a closely held, middle market business to take advantage of cost savings, tax planning and business succession planning all in one.
The idea of a captive insurance company has been around for a while. A captive insurance company is a company formed for the purpose of underwriting property and casualty insurance to a related insured. In other words, a captive insurance company is a way for a business to self insure against the risks of operations. A captive insurance company normally must be formed as a “C” corporation for tax purposes and is subject to subchapters L and C of the Internal Revenue Code (“IRC”). Effectively, a captive insurance company provides an alternative mechanism for a business to shift the risks of operations.
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