The Office of General Counsel issued the following opinion on March 8, 2005, representing the position of the New York State Insurance Department.
Re: Sharing Commissions' Limited Liability Company
1. May a licensed insurance agent form an LLC, to be licensed as an insurance agent, with a non-licensed member, such as a payroll company or benefit provider?
2. If so, may the non-licensed member of the LLC receive a share of the commissions?
1. Yes, a licensed insurance agent may form an LLC, to be licensed as an insurance agent, with a non-licensed entity, such as a payroll company or benefit provider provided that the LLC obtain an insurance agent license naming a qualified sublicense, such as the licensed insurance agent present in these facts.
2. No, the non-licensed member may not share the commissions generated by the sublicense for the insurance agency but may share in the net profits of the LLC.
An individual licensed as an insurance agent, hereinafter "Agent", would like to form an LLC with a non-licensed member; either a payroll company or benefit provider. The LLC would obtain an insurance agent license with Agent designated as sublicense on such license. Agent would do all the marketing, enrollments, application, customer service, billing and claims work. The non-licensed member of the LLC would not engage in any discussion of specific insurance policy terms and conditions with potential insureds.
Agent would also collect all the commissions and would pay forty percent of the net commissions to the LLC. The LLC would then pay all expenses related to the operation of the business and the members of the LLC would then split the profits of the LLC equally.
The inquirer stated that Agent is an "authorized insurance agent." Since there is no such term in the Insurance Law, it is assumed that what was meant is that the Agent is a licensed agent of the insurer(s) who will write the policies or annuities to be solicited, negotiated and sold by the LLC through Agent.
Because the provided facts did not indicate whether the agent would be writing insurance on the risk of a member, this opinion will not address that issue.
The New York Limited Liability Company Law was enacted in 1994 and shortly thereafter, the Department adopted a policy of granting the kinds of licenses authorized by Article 21 of the Insurance Law (such as insurance agent and insurance broker) to limited liability companies.
N.Y. Ins. Law § 2103(a) and (b) (McKinney 2000) provide, as follows:
(a) The superintendent may issue a license to any person, firm or corporation who or which has complied with the requirements of this chapter, authorizing such licensee to act as an insurance agent with respect to life insurance, including for this purpose annuity contracts and supplemental contracts of non-cancelable disability insurance, or with respect to accident and health insurance, including for this purpose, health maintenance organization contracts, legal services insurance or with respect to any combination of the above, as specified in such license, on behalf of any insurer, fraternal benefit society or health maintenance organization, which is authorized to do such kind or kinds of insurance or health maintenance organization business in this state.
(b) The superintendent may issue a license to any person, firm, association or corporation who or which has complied with the requirements of this chapter, authorizing the licensee to act as agent of any authorized insurer, other than an insurer specified in subsection (b) of section two thousand one hundred fifteen of this article, with reference to any kind or kinds of insurance business, as specified in the application for such license, which such insurer is authorized to do in this state.
Although the Insurance Law has not been amended to specifically provide for LLCs, the Department views an LLC as a kind of hybrid between a firm and a corporation. Thus, the Department recognizes LLCs as entities qualified to be issued the types of licenses authorized under Article 21 of the New York Insurance Law.
N.Y. Ins. Law § 2103(c) (McKinney 2000) provides, as follows:
(c) Any such license issued to a firm or association shall authorize only the members thereof, named in such license as sub-licensees, to act individually as agents thereunder, and any such license issued to a corporation shall authorize only the officers and directors thereof, named in such license as sub-licensees, to act individually as agents thereunder. Every sub-licensee, acting as insurance agent pursuant to such a license shall be authorized so to act only in the name of the licensee.
Hence, an LLC seeking to be issued an insurance agent's license may include a member who is not licensed as an insurance agent provided that the LLC has named a natural person (who meets the same requirements that a person seeking to be licensed as an individual for the same kind of license is required to meet) as its sub-licensee to act individually as its agent. The Department has also opined that a non-member manager of an LLC may also be a sub licensee provided that such individual is otherwise qualified. Opinion of General Counsel No. 02-10-04.
The commissions generated by Agent in his capacity as sub licensee belong to the LLC. However, since Agent is a licensed insurance agent, the LLC could compensate the Agent based upon a percentage of the sales. See N.Y. Ins. Law §§ 2114 and 2115.
A non-licensed member of the LLC may share in the profits of the LLC as well as the losses; however, it may not be compensated based upon a percentage of the commissions earned by the LLC. The profits may be shared with the members based on ownership interest or other methodology specified in the LLCs operating agreement provided that such methodology is not based upon sales.
For further information you may contact Assistant Counsel Brenda M. Gibbs at the Albany Office.