Brian Hamburger: Key steps to forming a business
[Key Steps to Forming a Business]
[with Brian Hamburger]
[Brian S. Hamburger, JD, CRCP, AIFA®
[Founder and Managing Director | MarketCounsel]
Determining the best type of entity for your new business means really having a vision for what this business is going to become: How many owners is going to have? Where are you going to be conducting business, what states are you going to be conducting business in? What type of business will you be conducting aside from just investment advice?
It really requires not only legal counsel, but often tax counsel or your accountant to come in and weigh in on available options to you. The fact is… the fact remains that most new businesses that are formed today are limited liability companies, however not all. And just like there's an investment strategy for end clients, there are various strategies that apply… that are pertinent to advisors. So advisors are best to really have these discussions to determine are they one of the minority that may need to go out and form a C-corporation? Are any of the elements present that require an entity other than a limited liability company?
Most advisors form their RIA in their home state, where they're going to principally conduct their business. That being said, there are reasons to form an RIA in other states. There are some… some states that have really reached great popularity because of their friendliness to business, so there may be reasons to head to those states such as Delaware or perhaps Nevada, and there are some other states that are very difficult or lengthy to get businesses started up in, and so there's often strategies that employ the use of these alternative or neutral states to get the business started for timing purposes. But, generally, it's going to be the home state unless reasons exist to do otherwise.
There are core business agreements, such as an operating agreement for a limited liability company, or a shareholders agreement for a corporation that are really important to the success of the… and the governance of the firm, so long as there's more than one person. The only time that it's possible to do it without having a business agreement is really when there's one person, and then the state in which we've set it up has default rules in place in terms of how to govern. However, if this is an entity that's going to have disparate ownership or more than one owner, you're going to want to have that agreement in place. And the timing for that agreement is really important. We think that agreement needs to be negotiated and decided upon really contemporaneous with the startup of the entity.
My theory is that if you can agree upon the disposition of an asset that's worth exactly zero, there's no way once the business is rolling that those agreements become any easier. So it's a great time to sit around a kitchen table with potential partners, or partner or partners, and really go through these core and crucial issues to ensure that this is really going to be a viable partnership, that you're going to be able to discuss some of these thornier issues, some of these more difficult issues as the stakes are raised.
There are a number of ways that advisors can protect their business once they have this business formed and it's fully launched. Insurance is key among them. There are various types of insurance that protect the business. Errors and omissions insurance is the most specific to this particular industry. There's also directors and officers insurance that may be necessary depending upon the structure. Property and casualty insurance is important once the business actually has some type of physical space and assets that they need to protect. Insurance plays a significant role in mitigating risk.
The switch from an employee to an entrepreneur is not necessarily an easy one, and one of the things that an entrepreneur has to do is assume risk that they didn't otherwise have to assume or maybe wasn't apparent to them, or even probably closer to the truth, they didn't have a choice on what risk to assume, or control over it. That shift in mindset is crucial to the success of an investment advisor.
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