Small business owners have recently opted to form their own captive insurance companies to fill gaps in coverage while reaping tax benefits. Holland & Knight attorneys Gal Kaufman and Tom Morante weigh in on the potential benefits and pitfalls of these small captives.
"A business owner will primarily create a captive insurance company to provide a more robust risk management program for a business," said Mr. Kaufman. "The captive is designed to create a stronger, more efficient, or less costly risk management program for the business."
Small-scale captive insurance companies, also known as "microcaptives" are also being used, but have increasingly come under the microscope by the Internal Revenue Service.
"Some microcaptives ultimately never pay claims or pay few claims given the nature of the risk of the business of their parent," said Mr. Morante. "If premium income is preserved by such a captive because it never has to pay a claim, the captive may not be viewed as a true insurance company given that it bears little or no risk, or the premiums amounts paid are not consistent with the risk actually insured.
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