Insurance brokerage merger and acquisition (M&A) deal activity in 2025 outpaced the previous year, with preliminary year-end deal counts projected to put 2025 on pace to be the third highest year on record. This pace of M&A activity underscores the sector’s resilience, even as signs of softening market conditions continue to emerge. But quality firms are expected to continue to command elevated valuations as demand remains robust.
As rate stabilization looms, firms will need to focus on business-driven strategies rather than relying on market-driven tailwinds. Against this backdrop, larger firms may look to acquisitions to drive growth, creating additional opportunities for sellers.
For insurance brokerage owners contemplating growth, recapitalization, or sale, the correct corporate structure is not merely a compliance choice, it’s a strategic lever. Owners have several decisions to make in structuring their firms, and should ask themselves, “Is our corporate structure already negotiating against us?”
Corporate structure options
C corporations (C corps) and S corporations (S corps) are two of the more common types of corporate structures. In M&A it’s all about allocating risk, taxes, and value. Buyers want flexibility, tax efficiency, and protection from legacy liabilities. Sellers want simplicity, certainty, resources, and to maximize after-tax proceeds. Corporate structure sits at the center of this negotiation.
If a firm is a C corp, unnecessary tax issues and liability complications can arise in a transaction due to the preferred nature of asset transactions from buyers. Sellers may find a buyer’s asset preference costly depending on its own corporate structure and thus, may want to consider converting from a C corp to an S corp to optimize transaction value and minimize tax liabilities.
Tax related differences between C corps and S corps
The main difference between these two corporate structures is their tax treatment. S corp owners aren’t subject to corporate tax – but instead are taxed by personal income on business profits (pass-through). S corp are generally more seller-friendly in asset transactions because they are taxed only once at the shareholder level, generally avoiding the double taxation problem. It has the added benefit of being the preferred structure among most buyers (approximately 84% of all announced insurance transactions from 2016 to 2025 were asset deals).
C corp owners may be subject to double taxation if corporate income is distributed to owners as dividends, which are categorized as personal taxable income. For a C corp, an asset sale transaction can be punitive. The corporation pays tax on the gain from the sale of assets at the corporate level and again when the after-tax proceeds are distributed to shareholders as dividends or capital gains. A stock sale is far more attractive for C corp owners (taxed only once), however stock transactions only accounted for approximately 16% of announced insurance transactions from 2016-2025 and could severely limit an otherwise quality buyer pool.
Some considerations of the C corp structure:
- They are a preferred structure to attract institutional capital, reinvest profits aggressively, and offer broader equity participation.
- Are generally more flexible for complex ownership structures and can have more than one class of stock (e.g., common and preferred).
- The structure limits the liability of owners and investors with inefficient owner compensation mechanics.
- Business profits are double-taxed when dividends are paid out, leading to “trapped cash”.
Some considerations of the S corp structure:
- Owners have pass-through taxation on income, avoiding double taxation.
- Align well with the ownership profile of most agencies, which typically have a limited number of shareholders (must have less than 100 U.S. based owners) and do not require complex equity structures.
- Limited economic creativity due to “pro-rata” requirements (e.g., preferred equity, custom equity incentives, reinvestment limitations).
The critical five-year recognition period for C corp to S corp conversions
Firms can transition between different structures, but specific to C corp to S corp conversions, there is a five-year recognition period related to the built-in gains (BIG) tax where appreciated assets are still subject to a higher corporate level tax even after converting from a C corp to an S corp. The BIG tax was enacted in the 1980s to make sure that any gains a firm made when it was a C corp would still be subject to corporate-level taxation. Within the five-year period if an S corp sells assets it owned when it was previously a C corp, the firm is taxed at the current corporate rate on the unrealized gains the assets had at the point of conversion.
The intent of the five-year period is to avoid the seller being able to reap efficient tax benefits through a conversion the day before a transaction. It is important to note that the five-year waiting period is binary, not proportional, meaning prorated capital gains treatment is not applicable based on how much of the five-year window has elapsed. Because of this five-year recognition period, firms that are considering a sale in the next five years should have urgency around a potential corporate structure conversion.
Seller tax considerations based on structure of both transaction and entity
| Structure of Transaction | Seller’s Tax Ramifications (C Corp) | Seller’s Tax Ramifications (S Corp) |
|---|---|---|
| Asset Purchase | Double Tax | Capital Gain |
| Stock Purchase | Capital Gain | Capital Gain |
| Stock Purchase 338(h)(10) | Double Tax | Capital Gain |
Corporate structure should not be viewed as a static legal choice, but as a dynamic strategic decision. The “wrong” structure may not hinder day to day operations, but it can quietly siphon significant capital from shareholders at exit. Making informed decisions throughout the M&A process can help ensure that the transaction process is efficient while managing the tax implications for both parties. It’s crucial to be informed about the major differences in corporate structures and the repercussions of each to ensure effective decision-making. For firms that want to convert their corporate structures, time is of the essence to dust off those articles of incorporation and start planning today.
