Spring Clean Your Business | Annual Entity Maintenance Checklist
An RIA firm owner’s roadmap to increasing your firm’s value in a sustainable way that enhance your firm’s market value now and in the long-run. Succession Resource Group shares six ways firms can carve a path towards smarter growth, identifying levers for better business decisions that retain talented employees as well as ideal profit margins.
Set Your Firm Up for Success — Using Entity Structure to Unleash Growth
Introduction Starting your business as a financial advisor is an exciting prospect. You’re setting the foundation for a successful future and commitment to growth. Whether you are creating a platform to last the duration of your career or working to formalize/upgrade your established enterprise, effective entity planning and setup will serve as the base on which you can build and hopefully as a springboard for future generations. But there are important considerations to navigate when setting up an entity that are almost always overlooked and go beyond using your state’s website or an online filing service to establish an entity. Financial advisors have unique considerations and constraints when it comes to forming business entities, which are even more important to get right as you grow and scale your business. Here are the areas that you need to examine when choosing an entity type. Getting the Basics of Entity Right Why Financial Advisors Set Up a Legal Business Entity Business goals play a major role in choosing the ideal structure for an entity. Short-term needs and long-term goals are important to consider, but there are also highly specific reasons unique to financial advisors for choosing an entity. Entity Structure as a Personal Liability Shield Protecting yourself and your personal assets from business risks is paramount. Your E&O insurance is great but won’t address your other liabilities as a business owner. Personal liability protection becomes a concern when your firm grows, you hire/fire, sign contracts, retain outside experts, and you take on larger amounts of more complex engagements. If you have business partners, you could potentially be held liable for their actions. Creating an entity is a simple and effective way to ensure that liabilities stay with your firm, not you as an individual. Equity Sharing Enables Firm Growth When you grow your financial advisory firm, equity sharing is another factor to consider. More firms attract and retain quality talent by structuring incentive programs that leverage the value and equity in the business. Equity sharing can be an effective way to fulfill promises of advancement to rising stars as part of your firm’s career path. It can also be used to add new business partners and merge with other advisors as your firm grows and evolves. Having an entity and the related governance agreements in place gives you something that is easily divisible and helps ensure you can get the equity back should you need to. When operating as a sole proprietor, equity sharing is effectively impossible since a sole proprietor consists of only one professional, and adding a second then creates a defacto partnership with no liability protection or tax savings, which isn’t the intended outcome for most advisors adding a partner or junior partner. Tax Advantages of Proper Setup Setting up an entity will not guarantee you’ll save money on taxes, but when done right, most advisors do have tax savings – which, as you grow, becomes more and more material. But beyond the typical tax savings (again, when done right), you will find major tax savings as you leverage the entity to buy practices, sell equity internally, or merge outside practices in. Extended reading: First DOL, Now IRS Gunning for Advisors Advisory Firm Entity Structures and Taxation Understanding the Difference Between Legal Form and Tax Status When setting up an entity, there are two different aspects to keep in mind that can be confusing: the basic legal form and the tax status. The legal structure is registered with your state, such as a limited liability company (LLC) or corporation. This legal form determines which laws in that state apply to the entity. This may mean that there are statutes regarding how that entity can be managed and operated, and business formalities that must be followed. The tax status pertains to how tax authorities like the IRS view your entity. For instance, you’ll notice on the tax forms that there is no box to check for an LLC, because an LLC is only a legal form, not a tax status. In the example of an LLC, you must then choose how the LLC will be taxed. A single-member LLC, for example, is usually taxed as a sole proprietorship (a disregarded entity) where the income and deductions are reported on your personal tax return. Multiple-member LLCs are usually taxed as partnerships, unless you elect to have your LLC taxed as an S-corporation (but it’s still an LLC in the legal sense). If you form a corporation, the IRS needs to make a distinction whether it’s a C or S corporation, because it makes a dramatic difference tax-wise. There are also nuances to consider, such as who will/can own an interest in your LLC or S-Corp, and understanding the pros and cons of each entity type as it pertains to the legal and tax implications. Pass-Through Taxation for Financial Advisors To further elaborate on tax status, most entities have what’s called pass-through taxation. This means that the income isn’t taxed at the entity level, but your share of the income and deductions passes through to the personal level. This makes the income subject to Social Security and Medicare taxes. If you own an S-corporation, the taxation is also pass-through, but with some differences. S-corporation shareholders need to pay themselves a “reasonable” salary that satisfies the IRS. This salary is reported on Form W-2 with payroll and income taxes withheld. However, the profit distributions to the owners are not subject to Social Security and Medicare taxes. C-corporations are not pass-through. The income is taxed at both the entity and shareholder levels. Officers of C-corporations need to be paid salaries reported on Form W-2 with payroll and income taxes withheld. Dividend payments are taxed at the dividend rate and are not subject to Social Security and Medicare taxes. Choose the Right Entity Structure Advisors Should Consider More than LLC vs S-corp Selecting the right entity type often seems easy, it’s likely a limited liability company or S-corporation. You do a quick Google search, or hopefully have a conversation with your local CPA or attorney, and they’ll share their recommendation. However, before making such an important decision, it is critical to make the selection in the context of
4 Reasons to Formalize Your Business Entity as a Corporation or LLC
Introduction 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. 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. If you fail to establish or maintain 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 entity 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. Learn more about SRG’s Business Entity Services for Financial Advisors
Fueling Your Future: Unleashing Growth Potential through Entity Planning
Operating the entity of your business as intended can not only significantly decrease the risk of an IRS audit, but also maximize your business growth potential. Join Nicole Frey, CFP®, to learn more about how you can properly set up and use your business entity to support your business decisions and growth. In this session, we covered: Why every advisor should use an entity to operate the business The most important steps to set up the entity The implications on commonly overlooked details How to use the entity correctly to avoid issues with the IRS and minimize audit risk The power of having the entity and what to do with it once established Watch now to learn the right way to set up and optimize the use of your entity or be reassured that your entity is formed correctly if you already have one. Watch Recording Resources [Blog Post] The Importance of Formalizing Your Entity Structure → [E-Book] Your Guide to Proper Entity Structure → [Article] First DOL, Now IRS Gunning for Advisors → Learn more about SRG’s Entity Support and Equity Sharing Services. Schedule your free consultation below! Presenters Nicole Frey, CFP® Director of Team Solutions
3 Reasons Every Advisor Should Have an Entity
https://youtu.be/hkRMRGrtqZs As an advisor and small business owner, you should use a formal equity structure, such as an LLC or corporation. This is a normal step for most independent RIAs, but is slightly more complicated for independent registered reps since you are personally licensed and compensated. In addition, the recent advisor IRS tax court case even further confused most advisors and their local tax/legal counsel. It is important (and indeed possible) to set up and use an entity as it will help you in almost all cases. The reasons why might surprise you. Join us as we talk about the 3 key reasons why you shouldn’t be operating as just a sole proprietor and most importantly, HOW you can set this up correctly the first time. Whether you already have an entity or looking into how you can set up and use one compliantly, join us to learn about why you need one, how to do it, and how SRG can make the process turnkey for you. About David Grau, Jr., MBA:David Grau Jr. is the founder and CEO of Succession Resource Group. He is currently one of the leading speakers in the financial services industry on mergers and acquisitions of independently owned financial services firms, as well as valuation strategies and practice continuity issues, with over 200 presentations to his credit. In the past five years, he has spoken at variety of the industry’s leading firms, including LPL Financial Services, Wells Fargo, Ameriprise Financial, MetLife, ING, AIG, Fidelity, Jackson National, Prudential, FSI and at many FPA chapters around the country. As an expert on advisor valuation, acquisition and succession planning, David has assisted hundreds of advisors and other professionals buy, merge, sell, and craft their transition plan for the sale of their business over the last decade.
S Corp or LLC: A Guide to Set Up Your Financial Services Company
https://youtu.be/VAok50-JQuk S Corp vs LLC: What you need to know For many advisors, setting up your business entity properly to support your future endeavors involves adopting a more formal business structure, whether it is a partnership, S corporation or LLC. In fact, the need to “button up” your business setup has become even more evident following the recent IRS Tax Court case involving an advisor. In this webinar, we will cover the nuances of establishing and using an entity correctly to take full advantage of the structure and not run afoul of the IRS. We will provide 2 specific reasons why and when you should consider being more than a sole proprietor, and the 3 things you need to be doing if you have an entity. Whether you already have a business or plan to, join us to learn the best practices and put your business entity formation on the right track.
Your Guide to Proper Entity Structure
Download Your eBook! Please enable JavaScript in your browser to complete this form.Please enable JavaScript in your browser to complete this form. Name * FirstLast Phone Work Email *How Did You Hear About SRG? *— Select Choice —ConferenceDirect MailExisting/Past ClientGoogle AdWordsOtherReferralSocial MediaSeminar/WorkshopWebinarWebsite Download What is best entity structure for financial advisors? For advisors affiliated with a broker-dealer, using a formal entity structure like a limited liability company or corporation can be challenging since you are paid directly as the licensed professional. But, as your book of business grows and you hire staff, sign a lease, and take on other business related liability, limiting your personal liability becomes increasingly important. In addition, using a more robust equity structure allows for a variety of other options that are helpful for succession planning and growth through acquisition. “Your Guide to Proper Entity Structure” contains: a cheat sheet covering the main advantages and disadvantages of the most commonly selected entity types. a bonus checklist for best practices in using an entity in the financial services industry. For entity formation services, please visit our Entity Support service for more information.
How and Why to Use an Entity With Your Broker-Dealer
https://youtu.be/-U1eq1LfNfk Using an Entity with a Broker Dealer Almost half of advisors affiliated with a broker-dealer use an LLC or S-Corp., but almost none are set up appropriately for the IRS. In this session, we will start with why every advisor should think about setting up an entity to operate their business, what are the most important steps and which are most often missed (and what the implications are), as well the toughest part – how to set up and use the entity correctly to avoid future issues and minimize audit risk. Whether you are thinking about setting up an entity or already have one, attendees will learn how to do it right or confirm they are part of the minority doing everything correctly! Entity Expert Speakers David Grau Jr., MBADavid Grau Jr. is the founder and CEO of Succession Resource Group, a succession and M&A consulting company for advisors. Prior to launching SRG, David was the leading M&A consultant for a well-known succession planning firm to advisors where he led and developed numerous programs for RIAs. David is a published author and accomplished speaker, and has been interviewed and cited in dozens of publications over the last decade. Nicole Frey, CFP®Nicole is the Senior Project Coordinator at Succession Resource Group. Until her relocation to Oregon in 2014, Nicole worked as a senior legal assistant for a law firm in Washington for seven years where she managed multiple cases, communicated with clients/courts/government agencies, as well as drafted pleadings and legal notices. Nicole brings extensive experience in contract preparation and project coordination to our SRG clients.
Audit Risk and Using S Corp for Financial Advisors – The Fleischer Case
As a small business owner and advisor, your attorney or accountant will provide many reasons why you should consider forming a corporation or limited liability company. These reasons include limiting personal liability, the ability to share equity, and possibly reduce taxes. For independent Registered Investment Advisory firms and insurance agencies, the setup and use of an entity is relatively routine – you file and form your business entity, and clients and/or carriers contract with that entity and pay that entity directly.