Limited liability for a financial advisory business

If you are selling financial advice, don't you at least have to be an enrolled agent in your state, or states where you do business? At any rate, you can start a LLC or Corporation to protect the business, but if you are giving the actual advice, then you are still liable at a personal level. You are always liable for the work that you do. You may be able to get errors & omissions insurance, or, if you incorporate, get officers insurance. If you are actually licensed and/or certified to give this type of advice, then there may be insurance available to you at a professional level. Sounds like to you need more experience in this area to get started, or hire a pro that knows what they are doing.

-john-

Given that this is going to be a business, you really should speak with a local attorney about all this because you are asking a lot of potentially complicated questions. Briefly: when you give specific advice about securities and charge for it, you're regulated as an investment adviser, either by the state or SEC (usually the state for what you're describing). But most newsletter publishers rely on a sort of "journalist" exemption, which requires that the advice given be general in nature. You are still subject to some securities laws, such as anti-fraud provisions, but would not be required to register as an adviser or for that matter have any qualifications whatsoever.

More complicated is the area of internet-based advice and there is a specific exemption written into federal laws that addresses that.

Separate and apart from all this is business formation and the tax and liability issues involved with that. "Saving on taxes" with a business is an entire topic to itself. I'd suggest starting with the Nolo Press books

-Tad

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As indicated by the Investment Advisers Act of 1940 anyone acting as a "investment adviser" must be registered as such and be subject to the compliance requirements of the SEC, FINRA, and any applicable state agencies.

So what constitutes an "investment adviser", you ask? According to setion 202(a)(11) "'Investment adviser' means any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities..."

Luckily, there are a number of exemptions and exclusions including "the publisher of any bona fide newspaper, news magazine or business or financial publication of general and regular circulation". That sounds like you. Yipee!!!

So it appears you should have little opposition to generating and selling an investement newletter. There are a couple of things of which to be aware: 1) your advice must be broad in scope and not specific to individual clients with unique situations. At that point you become an investment advisor and; 2) you must disclose any investments discussed that you are financially intertwined with or that you have been compensated for "touting". Failure to do so constitutes securities fraud.

In addition to the good advice offered by others here, let me add that you better have a product that people will buy.

The Hulbert newsletter (probably available at your local library), ranks investment newletters based on their performance. I believe stock newsletters are ranked seperately from mutual fund newsletters. Hulbert rates a lot of of newletters based on performance track records. Consider how will your newsletter differentiate itself from the many now available.

Frank

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There is some question as to whether a corporation would shield the owner's personal assets if the corporation consisted of an owner and no other employees. Any comments?

-HW "Skip" Weldon Columbia, SC

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A lawyer at a seminar I attended suggested that before going into business is to form an LLC and get about $1 million in liability insurance.

If you don't have the liability insurance, a court might find that you were just trying to escape from the consequences of risky behavior.

If you are making a product that has any medical impact, you will need much more liability insurance.

One of my b-i-l in going into the consulting business also formed an LLC.

-- Ron

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There are numerous cases in which courts have "unwound" sham LLCs on the basis that they had no intended purpose other than to shield assets from creditors, even when the LLCs had multiple members.

However, I believe an SMLLC still provides asset protection IF the corporation had legitimate purpose and was truly operated as a corporation. This usually involves keeping separate business records, avoiding comingling of personal and business assets, et cetera. For tax purposes a SMLLC can elect to be either a corporation or dieregarded entity (sole proprietorship). Perhaps someone else can chime in as to whether this tax election also serves as a legal election (I'm betting it doesn't).

In reality, this point can largely be rendered moot. Regardless of the above, an LLC member's torts will still allow for piercing of the corporate veil. Also, it has been my experience that most businesses that enter into formal agreements with an LLC will not do so unless they have both the personal and business gurantee of the LLC member. And lastly, high limit umbrella/liability policies can serve as a "catch-all" for the business. They are usually very inexpensive and considering the possible ramifications, it would seem foolish to be without one.

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In general, I'd assume the main protection provided by an LLC in the advisory business would be shielding member A from liabilities resulting from member B's actions. Perhaps from entity-level debts as well but in small businesses those often have personal guarantys anyway. A solo financial professional might see little or no protection via a single-member LLC...good question for a local lawyer.

-Tad

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Thank you. This reply was very helpful.

Yes, I will be publishing a financial newsletter that is of interest to a very large number of people. I will not be giving any personalized advice. Besides what you've written (which was very helpful), could you point me to any resources on

• which type of corporate entity would be best for me (llc, corporation, something else?), and

• in which state I should form it.

There are so many newsletters out there. I'm sure someone has already figured all this out. However, at this point, things seem a little complicated to me. Isn't there a way of making them simple? I register, fill out a couple of forms every year, pay my taxes, that's it. :)

As I've been reading more, I see that some people say that single- member LLC's can be dangerous. This makes it even more confusing since I thought LLC's were the best / easiest type of corporate entity for a small business.

Thanks.

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Thanks. I do believe that I have a great product. That's why I am starting the business.

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They are the easiest, which is often a major factor in determining that they are the best.

For you, business structure is important, but not for liability protection reasons. It doesn't matter what corporate structure you have if you are the individual that committed the wrong. Corporations don't protect you from your own mis-deeds, they protect your personal assets from the mis-deeds of your employees. If you are the sole employee, the best liability protection you have is the stuff between your ears.

Your concern with corporate structure SHOULD be based on taxation, governance expenses, benefit packages, expected future employees, etc. In general, if you're on your own trying and to get your financial newsletter startup company off the ground, I wouldn't think you would need an elaborate corporation. A simple LLC would probably suffice. If, however, you really want to start off with a bang (big corporate loan, marketing department, employed staff writers, printing press, etc) an actual corporation may better suit your needs. It all depends on your plans, really.

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