How to Start an Independent Insurance Agency in Illinois

If you are in a current relationship that may involve a non-compete agreement or other contractual issues you may need to consult an attorney.

A non-compete agreement forbids a producer or controlling employee from taking accounts for which they are responsible to another agency.

A non-solicitation or non-piracy agreement forbids a producer or other employee from soliciting the prior agency accounts or prospects for his or a competitor’s benefit.

Current Captives must look at their contact for language pertaining to non-compete or non-solicitation.

All non-compete agreements should contain a provision prohibiting the ex-employee from competing with the former agency for an appropriate period of time (usually one to three years) and within an appropriate geographic area. The non-compete provision also should prohibit the employee from soliciting the agency's customer accounts, especially the accounts of customers with whom the employee dealt during his employment and the accounts of any potential customers that the employee courted for the agency while he was employed. Non-compete agreements are scrutinized closely by the courts and will not be held enforceable if they are over broad. Any restrictions that could be interpreted to reduce or limit competition must be reasonable in scope and duration, not harmful to the general public, and reasonably tailored to protect the agency's interest in its book of business and related confidential information without unduly burdening the employee. Non-compete agreements that unfairly restrict an individual insurance agent or broker from earning a living in his profession will not be enforced.

Selecting the right legal structure is an important first step when starting an independent insurance agency. Your choice can affect taxes, personal liability, ownership, and how your business operates. Common business structures include:

• Sole Proprietorship – The simplest structure, owned by one individual. While easy to establish, it does not provide personal liability protection, meaning the owner's personal assets may be at risk.

• Partnership – A business owned by two or more individuals who share management responsibilities, profits, and losses. Partnerships should have a written agreement outlining each owner's roles and responsibilities.

• Limited Liability Company (LLC) – A popular choice for many small businesses, an LLC generally provides personal liability protection while offering flexibility in management and taxation.

• Corporation (S Corporation or C Corporation) – Corporations are separate legal entities that provide liability protection for owners. They typically involve more formal governance and recordkeeping requirements but may offer tax or operational advantages depending on the business.

Before selecting a business structure, consult with an attorney and tax advisor to determine which option best aligns with your business goals, ownership plans, and financial situation.  The IRS has a resource center to help inform your decision on business structure and the Illinois Department of Commerce and Economic Opportunity offers complete guide to starting a business in Illinois.

If you’ve opted for a Corporation or LLC, visit the Illinois Secretary of State to register your company here: https://www.ilsos.gov/departments/business-services/incorporation.html.

A business plan will help guide you through each stage of creating and developing your business. Many lenders, E&O insurers, and insurance carriers will request a business plan before doing business with your agency. The Small Business Administration (SBA) has developed a guide and provides templates here.

Apply for an Insurance Business Entity License: For sole proprietorship, a producer license is issued to the individual.  Partnerships and corporations must have a separate business entity license, obtained through NIPR.

Obtain Tax ID Number: Sole proprietorships will use their SSN/TIN. Partnerships and corporations will apply for an Employer Identification Number (EIN/FEIN) through the IRS here. No fee is required to obtain an FEIN through the IRS site.

Secure Errors & Omissions (E&O) Insurance: Prior to being appointed with an insurance company for access to markets, you need to purchase Errors & Omissions (Professional Liability) coverage. For a start-up agency, you’ll want to include information on any business you’ll be bringing with you if applicable, and your projections on the business you plan to write over the next 12 months. The E&O carriers will also request a business plan and résumé.

Big I Illinois offers insurance agents errors and omissions coverage from two exceptional companies, Swiss Re Corporate Solutions America, and Utica National Insurance Group. To learn more or obtain a quote, click here.

Purchase a Producer Bond: Illinois law requires any person who holds a producer license to carry a bond in amount of $2,500 (minimum) or 5% of the premiums brokered in the previous calendar year (not to exceed $50,000 in total aggregate liability) and any entity (except a sole proprietor) to hold an entity bond. Big I Illinois offers a member rate of $25 per licensee on our bond program and, if all licensees are covered, the agency bond is included at no additional fee. For details, click here.