I just wanted to share my research on this topic (AZ specific) and am interested in feedback from those with actual experience on the matter. Please correct me if any statements are wrong! It is completely legal to form an LLC and manage money in AZ without a securities license within certain guidelines and restrictions. Read the whole way through, as there are some goodies herein. Here is the short version: 1. An LLC can be formed by simply completing the following form and sending a check for $95: $50 application + $35 expediting +$10 for certified copy. LLC Forms http://www.azcc.gov/divisions/corporations/filings/forms/index.asp 2. An LLC is governed by two documents: a. Articles of Organization. http://www.azcc.gov/divisions/corporations/filings/forms/ll0004.pdf Note the only real information you need include is the management structure. In this case it would be vested in managers. You can appoint yourself as the only manager & statutory agent for the initial filing. b. Operating Agreement. This governs who else is a manager, what their % cut is on profits, voting rules etc. You don't send in the operating agreement to the state. Just update the Articles when you add/remove managers with a simple amendment form. Mancuso's book gives a good template which you can have a local LLC atty review for ~$250: http://www.amazon.com/Form-Limited-...=sr_1_6?ie=UTF8&s=books&qid=1207498633&sr=8-6 Here is a link to get an idea of what it looks like: http://www.ilrg.com/forms/llc-opag-man/us/az An LLCs "Board of Directors" is the managers listed on the operating agreement. "Selling stock" is accomplished by adding a member or manager to the operating agreement. The new member or manager is said to have an "interest". Later below I'll explain raising capital. 3. LLC laws. The laws are all online. They essentially grant the operating agreement leeway to manage it as you like, as long as all the managers sign the agreement. http://www.azleg.state.az.us/ArizonaRevisedStatutes.asp?LinkType=htm&Title=29 4. Raising capital: Here is the tricky part. If you go to a friend or a family member and ask for money, they will become a "member", not a manager, and their contribution will be viewed as a security, subject to securities laws. Then you are limited to 10 total investors and a limit of $100,000 (law reprinted below). You can later collect up to $500,000 from these same investors as per "R14-4-101. Exempt Transactions -- Existing Stockholders and Employees" http://www.azsos.gov/public_services/Title_14/14-04.htm But wait, there's more: In order to do so, you need to file a financial statement with the Arizona Corporation Commission (ACC) per "R14-4-123. Financial Information Required by Applicants for Exemptions" http://www.azsos.gov/public_services/Title_14/14-04.htm You will need a CPA to audit your initial financial statement as part of this requirement. This can be even trickier, since now the CPA opens herself up to liability. She will need a good insurance policy, and may not see you as a great risk/reward investment to her business! Probably best if you have a CPA friend who already knows and trusts you, and even I don't like the feel of this. Read "R14-6-203. Dishonest and Unethical Practices" http://www.azsos.gov/public_services/Title_14/14-04.htm Now read the definition of Accredited Investors per the SEC: http://www.sec.gov/answers/accred.htm My assessment of all of this is simple. Get experienced traders/investors/financial personnel to become managers (not "members") of the LLC. Here are all the advantages: 1. Ethics & legalities. You know there is no ethical conflict now. Everyone has adequate training and experience and can competently assess each others performance and govern the LLC. They all co-manage the company and provide weekly input as to investments, asset allocation, and performance evaluation. All the securities laws are there to protect the unknowing and unwitting good citizen from greedy and unscrupulous business practices. Limit your company to sophisticated and experienced financial personnel and you will sleep well at night. 2. Transparency & democracy. The inherent checks and balances will provide objective evaluation of traders' performance. There will be no "rogue traders." All issues may be voted on, including the expulsion or inclusion of new manager-traders. Note: This also means it is not "your" company and you can get bounced too. I see this as a plus as it will keep you sharp and help to keep everyone honest and in check. How great if all corps were like this! 3. Pass-thru tax. Your percentage of profits "pass through" the LLC to you as an individual investor and go directly on your tax return. If you make $10k from the LLC, you add this to your personal return. If you lose $10k and are a professional trader per the IRS, you deduct $10k from your return. I don't want to speak to tax laws as they vary from state to state and each persons individual circumstances, so see a qualified CPA. 4. No securities licenses necessary. You ARE NOT offering professional investment services or selling a stake in the company to outside investors. You are just a company of qualified businessmen and women, trying to make an honest buck. 5. Easy to raise capital legitimately. With a limited offering of securities, which applies if you raise money from member-investors, you are limited in net capital and number of investors. Under this restriction, you also are not allowed to solicit investors without a 7/65 license and a sponsoring broker. With a manager-managed LLC, you can solicit all you want. You can bring on as many as 35 members in many states. Stick to truly qualified financial personnel and you can't go wrong. For example: -experienced, educated traders and investors -CPAs -Attorneys -Doctors -Engineers -CFPs -CTAs -Financial advisors -Business degreed professionals -Real estate investors with market experience -Retired individuals with successful investment track record -Entrepreneurs -Members of local investment clubs -Any accredited investor as defined per SEC These could be anyone with sufficient investment experience - but this is a must. Remember-these people are going to be managers of the company, have a say in asset allocation, hiring/firing, and have a vote in amending the LLC. This should keep you from grabbing anyone with a bunch of money yet lacking financial savvy. 6. Any lawful activity is allowed in the LLC. You don't actually need to list and limit the purpose of the LLC and can engage in a broad scope of practices. For example, you could teach trading, hold meditation retreats, and manage money all under this one LLC. Just don't go around giving financial advice! 7. LLCs are meant to inspire entrepreneurship, and are devoid of all the hassles of corporate procedures. Don't let a bunch of fear or hype stop you from honestly chasing your dream. Remember, this is America, the home of the brave and land of the free! Give back something everyday once you're doing well. This is the real reward in life. Feel free to pm me anytime with any questions/comments/suggestions. Best Wishes in all your endeavors! al : )
I'm not sure if SEGV is referring to the S-corp? Regarding the LLC, you can allocate any % profit to any member as long as its in the operating agreement. For example, you contribute $100k and I contribute $10k. You act as a manager of cash allocation whereas I just trade. I make 100% returns and get 50% of the net capital, or $55k. Perfectly legit.
How can one manage money without registering as a State Investment Advisor. I understand there are certain exemptions, upto 5 clients for come states, but after that to charge fees and performance based incentive one might need more paperwork via state securities offices. When talking about managing money we are saying investing in stocks and other publically traded instruments, not just buying some privately held corporation which is not traded at all in public exchanges. Even if you limit the amount of managed money to the members of LLC, the public traded securities might still be out of the reach.
That is why 'Private Equity' firms do not require to get registered with State Securities or SEC, because they do not transact in the 'Publically Traded or Exchange Listed' instruments. So this way only difference between LLC and Mutual Fund is that mutuals are allowed to advertise to public and LLCs are not. It has to be more clear than that.
Happens every day - a corporation solicits its employees capital and places it in a 401k or gets you to buy their stock/options. They do this without a securities license. Many traders start an LLC and solicit money mgmt to the general public. This is not the same thing. The difference is that, in the structure described herein, no one is offering money management services, or offering any kind of service. It's just a company with employees who all have a part in managing the company capital, that's all.
'gets you to buy their stock/options.' They do this without a securities license. There must be some difference between buying own stock (even if exchange traded) and investing in to dozens other stocks and other instruments...........also exchange traded. 'It's just a company with employees who all have a part in managing the company capital, that's all.' in other words, it is pretty much like an arrangement between two buddies who set up a joint account in a brokerage firm and trade and split profits and have some sort of agreement regarding various this or thats. only difference is the number of buddies/members can be upto 35 in the LLC arrangement. any further elaborations.........appreciate your inputs!
Just the obvious - consult with a local atty. My main point is that many traders believe that their own LLC is out of reach w/o a license. They also believe they need to trade prop to gain access to more capital. Investment pools exist but don't afford the protection, transparency, and management enforceable by an LLC operating agreement. I believe it's the most legitimate manifestation of a trader's talent. I have emailed the SEC and asked them to weigh in on this post! ; )
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