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Succession Resource Group is a boutique succession consulting firm based in the Pacific Northwest, serving clients across the country. SRG was founded by David Grau Jr., MBA in 2012 after nearly a decade of helping advisors with valuation and succession planning. SRG's team of experts leverage their industry expertise, combined with best-in-class resources, to help advisors, agents, and accountants manage the equity in their businesses...

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3 min read

The Importance of Formalizing Your Entity Structure

Aug 28, 2023 4:53:31 PM

The decision to form an entity structure for your financial practice is a critical step for experienced independent financial advisors. Many advisors address this topic after a specific need for it has arisen, but addressing it proactively allows you to establish the right structure with less stress and take advantage of numerous other benefits along the way. This article highlights the signs indicating when it's time to establish an entity and the risks associated with not doing so.

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Business Growth and Liability Protection:

As an advisor, you likely have errors & omissions insurance to protect your business. But, that only covers you as an advisor, not as a business owner. As your practice grows, you will hire/fire more frequently, your business will become increasingly complex, and thus it becomes imperative to establish an entity structure (e.g., a limited liability company (LLC) or a corporation). This is even more true if you are operating or setting up your own independent Registered Investment Advisor. By doing so, you separate your personal assets from business liabilities, providing a layer of protection against potential legal claims and financial risks. Without an entity structure, your personal assets are vulnerable, putting your hard-earned wealth at stake.

Professional Credibility and Permanence:

Forming an entity lends professionalism and permanence to your financial practice. It demonstrates to clients, colleagues, and potential partners that you are committed to a long-term business venture and take your profession seriously. Without a formal entity structure, your practice may be perceived as a lifestyle practice or temporary endeavor, raising doubts about its stability and sustainability.

Tax Efficiency and Flexibility:

Establishing an entity structure allows you to optimize your tax situation and take advantage of potential deductions, credits, and other tax benefits. Different entity structures offer varying tax advantages, so it's essential to consult with a professional to determine the most suitable structure for your practice. Operating without an entity structure can result in missed tax-saving opportunities, potentially leading to higher tax liabilities and reduced profitability. It is important to consider your short and long-term growth plans as part of this consideration, as some structures may make your ability to merge/purchase/tuck-in other practices more or less difficult.

Extended reading: First DOL, Now IRS Gunning for Advisors

Succession Planning and Business Continuity:

Planning for the future is crucial for any financial advisor, including establishing a workable succession plan and ensuring business continuity. An entity structure enables you to more easily transfer ownership, sell the practice, or pass it on to a successor, maintaining continuity for clients and preserving the value you've built. Operating without an entity structure can complicate or hinder the succession process, potentially leading to disruptions and client attrition.

For experienced independent financial advisors, the decision to form an entity structure for their practice should not be overlooked or dealt with as a quick “check the box” issue. Establishing the appropriate entity structure will ensure your business is futureproofed and avoid having to rework your entity later. It also provides crucial benefits such as liability protection, enhanced credibility, tax efficiency, and a solid foundation for succession planning. Failing to form an entity structure exposes personal assets to risk, limits professional credibility, and may result in missed tax benefits and future succession challenges. Whether you are a Registered Investment Advisor, a dually registered advisor under a broker dealer, or a hybrid, SRG’s team of experts has worked with financial advisors nationwide to evaluate the options and provide recommendations designed to support their business while navigating the nuances of the financial services industry.

Your Guide to Proper Entity Structure