It lurks at the bottom of the to-do list — if it’s there at all. But ignoring the thorny question of taxes can cost a newly-independent advisor dearly, especially in those crucial early years.
For advisors fleeing Wall Street banks to grubstake independent firms, making smart tax moves in addition to wrangling clients, a custodian, technology and payroll can boost the bottom line. Mess things up on the tax front, and the losses to a fledgling RIA “easily could be in the thousands or tens of thousands of dollars” a year, says Brian Nuttall, a CPA and lawyer at Kingsbery CPAs in Boulder, Colorado.
The biggest issue in going from employee to business owner involves figuring out which type of legal entity the new venture will take. Whether an advisor is fee-only or hybrid — earning fees for fiduciary-level service as well as commissions for transactions through a broker-dealer — the entity question is basically the same, according to Rick Wilkens, a CPA and partner at DeMarco Sciaccotta Wilkens & Dunleavy, an accounting and business advisory firm in Tinley Park, Illinois.
LLC or S corporation?
Many RIAs establish a limited liability company, a type of “pass-through entity” that doesn’t itself pay tax but instead funnels its profits to the owner, who pays…