Diversifying Dealership Income with NCFC (Non-Controlled Foreign Corporation)

Understanding Non-Controlled Foreign Corporations (NCFC)

As the name implies, in an NCFC, your dealership won't have much control over the corporation’s operations and the company and funds are domiciled offshore. Large dealership groups wanting to grow and develop can get approval from an NCFC's Board of Directors to participate via issuance of preferred shares of company stock. This can remove some administrative burden from your shoulders, but it also means you can't step in and make big changes if you don't like the direction that's being taken.

How NCFC Compares to Other Structures

There are many reinsurance programs for dealers offering everything from near full control to almost no control. Many dealers like something in between, or they want to have more overall control of what they're doing with their automotive finance strategies. However, if you have a big dealership and desire more of a turnkey approach, then an NCFC may be an excellent option.

Advantages of NCFC Structures in Auto Dealerships

Before saying yes or no to this option, consider the benefits you'll receive. The two largest perks have to do with how this choice will diversify your dealership's risk and what kind of potential you can expect for returns, since ownership is shared.

Diversification of Risk

Putting all your proverbial eggs in one risk-sharing basket may seem risky. However, JM&A Group acts as a gatekeeper of sorts to minimize the inherent uncertainty posed by diversifying risk with other dealer groups. An NCFC profit participation structure can also provide better tax treatment than other profit participation programs. With the additional benefits of no annual premium limits and the ability to receive a distribution without redeeming your shares, the NCFC is a compelling option.

Potential for Higher Returns Through Shared Ownership

The potential you'll have for higher returns also matters. When compared to a CFC, you'll have a stronger investment policy statement, allowing your dealership to do more and possibly see stronger returns over time. While not guaranteed, this profit participation structure has real potential to help your dealership experience stable growth.

A Great Choice for Bigger Dealerships

When you own one or many large, well-established dealerships, you can start diversifying your income. The NCFC option is a tried-and-true choice when it comes to the potential for steady, secure growth that doesn't require a lot of oversight on your end.

Challenges in Managing NCFC Profit Participation

As with any reinsurance dealer participation program, there are factors to understand and acknowledge before making a selection.

Complexity in Administration and Compliance

The reinsured premiums from an NCFC profit participation program have a federal excise tax requirement, and the personal income tax returns of shareholders are subject to additional disclosures, as well. Additionally, if there are changes to the tax code, it could become more difficult to manage this program and may affect tax benefits.

Shared Control and Decision-Making

Being required to share control and decision-making activities isn't for everyone. Your dealership will have to follow the NCFC Board of Directors’ decisions and strategies. Even if you're seeing good returns, there could be unaffiliated losses that come about with the NCFC, and those may impact your bottom line.

Best Use Case for Diversifying Dealership Income with an NCFC

A large-volume dealership or dealer group that wishes to defer income, receive flexibility in premiums ceded monthly and partake in a limited-risk structure could be a great fit for an NCFC, so long as they are comfortable with a segregated structure that involves multiple dealers. Dealers in growth mode also have the advantage of administrative scales set by the board, so as they grow in volume, fees may be reduced based on this metric.