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Does anyone have experience setting up an LLC/RIA?


Sionnach
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I met with a well-regarded investor a few weeks ago. His advice for eventually launching a fund was to establish a LLC in order to have an audited track-record and to begin managing money for family & friends.

 

I'm curious if anyone has any experience with this and would have any thoughts or advice? Even some good resources for the steps for setting up the LLC or RIA would be great. I'm sort of thinking something along the lines of what Dave Waters has done at Alluvial Capital.

 

Thanks Everyone!

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There's a lot of us that have done this.  So probably just start asking specific questions.

 

First off, where are you, as that will narrow down answer the most to start off.

 

Ok good to know, thanks. I will be registering in Illinois. Also - I have completed the Series 7/Series 66 for the RIA side. I will also be managing under 25m so no SEC registration.

 

Where's the best place to start? Do I start by registering through a Form ADV or what do you recommend? Thanks.

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Well, I'm set up in Texas, so I only know those rules (I understand them to be mostly like the SEC rules and more stringent than some other places).  So I can't speak to your state.

 

In any event, setting up an LLC shouldn't be too hard.  I can do it in Texas in an afternoon and a minimal fee. 

 

But before you do that, you have to decide:

 

1) are you just doing an RIA and managing separate accounts?  If so, probably just go find one of those setup companies that do this, I think you can for 3-5k, and not too much hassle on your end.  I set up a fund, so I don't know the specifics.  I just know it would have been cheaper.

 

2) Alternatively, are you setting up a fund/incubator for a fund?  If so, then you'll need a lawyer for sure.  And expect it to be 15-25k total.  Well maybe it will be less for just an incubator, but I think you need most of the paperwork done still anyway?  It cost 25k for us to set up a fund, counting the extended setup costs that happened a year later.

 

My process was to go read everything on hedgefundlawblog (actually a really good resource), then go find a couple of lawyers to talk to, and then just engage one that seemed reasonable.  Narrow down the above, and hopefully we can help.  In particular, it would be most helpful to find someone 1) setting up the exact same structure you are after; and/or 2) in the same state.  I think I'm probably not either of those, but trying to be helpful to start.

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My process was to go read everything on hedgefundlawblog (actually a really good resource), then go find a couple of lawyers to talk to, and then just engage one that seemed reasonable.  Narrow down the above, and hopefully we can help.  In particular, it would be most helpful to find someone 1) setting up the exact same structure you are after; and/or 2) in the same state.  I think I'm probably not either of those, but trying to be helpful to start.

 

Thanks very much racemize. I greatly appreciate the help.

 

I would like to keep my startup costs minimal so I think the RIA/SMA route is better for me.

 

Is this an example of a setup company you're talking about?:

 

http://www.ria-compliance-consultants.com/cost_expense_setup_start_register_investment_advisor_adviser.html

 

Are those the only two options? And once I either set up an RIA or Fund I should start thinking about setting up the LLC? Thanks again.

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I have gone through the process. There are a few steps

 

1. Set up the LLC

2. Go through Finra Entitlement and file the ADV online through there

3. Register as RIA through your state.

 

Doing all the paperwork is yourself is the cheapest option. Or you can pay someone $3K to do it for you. Whole process can take a few months.

 

You can go through

 

http://brokercheck.finra.org/

 

Look up some funds and then use their ADV part 2 as a template.

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I have gone through the process. There are a few steps

 

1. Set up the LLC

2. Go through Finra Entitlement and file the ADV online through there

3. Register as RIA through your state.

 

Doing all the paperwork is yourself is the cheapest option. Or you can pay someone $3K to do it for you. Whole process can take a few months.

 

You can go through

 

http://brokercheck.finra.org/

 

Look up some funds and then use their ADV part 2 as a template.

 

Thanks everyone for the responses. Very helpful.

 

I will be managing < $1m so keeping the upfront costs minimal will mean bps in expenses. Is the paper work difficult for someone without much knowledge of finra/sec laws? Or is the $3k expense mainly for the time it takes to do on your own?

 

Has anyone done all the paperwork on their own?

 

 

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I have gone through the process. There are a few steps

 

1. Set up the LLC

2. Go through Finra Entitlement and file the ADV online through there

3. Register as RIA through your state.

 

Doing all the paperwork is yourself is the cheapest option. Or you can pay someone $3K to do it for you. Whole process can take a few months.

 

You can go through

 

http://brokercheck.finra.org/

 

Look up some funds and then use their ADV part 2 as a template.

 

Thanks everyone for the responses. Very helpful.

 

I will be managing < $1m so keeping the upfront costs minimal will mean bps in expenses. Is the paper work difficult for someone without much knowledge of finra/sec laws? Or is the $3k expense mainly for the time it takes to do on your own?

 

Has anyone done all the paperwork on their own?

 

I obviously don't know your situation at all, but I'll give you a few opinions.

 

I would pick the setup you want to use for the long-term. As in, if you want to run a fund, use that structure up front. From a performance standpoint, bill the expenses to the management company, not the fund. That way you will have 'normal' performance like you were using your personal brokerage account.

 

I haven't ever established an RIA, but from the fund side of things, I can't fathom 'doing it myself'. I'm very cheap (preaching to the choir), but from a liability standpoint alone, I think it is worth the cost for the docs.

 

I would guess almost no professionals have written their own legal documents, which goes back to the point about attempting to establish yourself early for your long-term structure. That should position you better for success.

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Just to add on to jmp's comments, my partner is a lawyer, and I'm a patent agent.  We initially tried to write our own legal documents for the fund, but gave up and got a lawyer after spending quite a bit of time.  Basically, you have to do the entire set of documents yourself, and no lawyer will really come in and "fix" your documents, since they just want to use their own.  (It makes sense really, they know their documents, so reviewing yours actually takes more work than just using what they have)

 

I would have loved if it were only 3k to get someone to do everything.

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benhacker is an awesome guy. He gave me a lot of help to DIY the RIA documents.

 

I'd like to share a few tips:

1. Use a cheap lawyer for LLC registration or even DIY yourself. It is no big deal! I paid like $800 to http://www.bizfilings.com/ to setup the LLC but I regret it.

2. Get a domain from godaddy.com. No need to buy its email or web hosting service.

3. Get your email and web hosting from zoho.com. It is free. Once you complete step #2, you can transfer the domain to zoho so you can get your corporate email account.

 

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I have an RIA and highly recommend hiring a compliance consultant for the $2-5k to guide you through registration.  Usually the fee also includes a years-worth of consulting, which is valuable come renewal time or when the state regulators want to audit you.

 

The Form ADV (esp. Part 2A) is difficult enough for someone not trained in compliance, but you also need other contracts (for example your advisory agreement) that one should definitely not write themselves or blindly copy someone else's.  States differ in how they like their documents prepared -- when I moved from New York to Texas last year, the Texas regulators required several detailed changes to my advisory contract, and later came to my office to perform an audit.  My compliance guy helped me through this.

 

Sionnach, feel free to PM if you would like a referral.  Otherwise good info here.

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Thanks everyone very much for the replies. Always impressed with the generosity and the willingness to help seen on CB&F.

 

I will certainly be using you guys more for references and questions as I get deeper into the process, but this has been great info to get me started and familiarized with the registration processes. Thanks again everyone!

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Mostly just wanted it all in one pool so I wasn't worried about doing different things in different accounts.  I just wanted to do the same thing I was doing for myself, but for a group of people.

 

Also, clients can look at positions and leave a lot easier (at least I think) with the separate accounts.  Tracking performance sounded annoying, e.g., if there were different fee structures/entry points/fund additions, etc.

 

And probably, I just liked the idea of a fund better.

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Mostly just wanted it all in one pool so I wasn't worried about doing different things in different accounts.  I just wanted to do the same thing I was doing for myself, but for a group of people.

 

Also, clients can look at positions and leave a lot easier (at least I think) with the separate accounts.  Tracking performance sounded annoying, e.g., if there were different fee structures/entry points/fund additions, etc.

 

And probably, I just liked the idea of a fund better.

 

so 25K to startup...what are you're ongoing costs per year?  Possible/feasible to do this with only 100K AUM?

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Are you guys planning on targeting institutional investors in the near future? If not, is this an option that you feel is currently closed to you based on background/experience (i.e. would you have wished you had a wall street pedigree)?

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Definitely not possible with 100k AUM, if you are using an auditor and administrator. Ongoing costs were about 17k this year.  It isn't cheap to run sadly.

 

We don't target institutional. We don't really target anyone honestly, we just do our thing and aren't charging a fee until we have a good long record. Haven't spent any effort on raising money at all really.  Half the fund is our own, so the focus is on good performance and that's about it.

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Mostly just wanted it all in one pool so I wasn't worried about doing different things in different accounts.  I just wanted to do the same thing I was doing for myself, but for a group of people.

 

Also, clients can look at positions and leave a lot easier (at least I think) with the separate accounts.  Tracking performance sounded annoying, e.g., if there were different fee structures/entry points/fund additions, etc.

 

And probably, I just liked the idea of a fund better.

 

These are all good reasons Race mentions.  A single tax situation is a big deal too.  In separate accounts, my clients need to do their own taxes, vs. just get a K-1.  Also, transparency cuts two ways - it's easy to pitch transparency as a benefit to the client for separate accounts, but also I think Race is right that it may allow folks to login / check their account too often or get scared by what you own. 

 

Also, measuring performance is easier with a fund, and also statement generation for clients (if you do that) is easier.  There are some other benefits of a fund too, activism is more simple since you are custodian and vote the shares, super illiquid positions, or positions with super high dollar values can be acquired for a fund in blocks where in separate accounts might not balance them equally / simply across clients.

 

The main downsides of the fund structure are cost, transparency, and added regulation (since you are a custodian) assuming you are registered as an advisor.

 

FYI, separate account setup all in is <$2k to start, and <$1k / year ongoing (for me at least)... so you can kind of walk through a table to figure out the pros/cons.

 

Also, final note, there is a misperception that performance fees can't be charged in separate accounts, but only in a fund... that is not true, but you have similar requirements for Qualified Investor, etc.  (I am not a lawyer).

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Quick question for you guys - how difficult is it to make the transition from RIA to fund? It seems to me the RIA is appropriate for my current needs, mainly due to a lower startup cost.

 

In the happy scenario that AUM grows, the benefits of a fund would start to outweigh those of an RIA. How difficult is it to make that transisiton? Is it essentially shutting the RIA down and starting a new fund?

 

The plan is to speak with some RIA registration consultants in the coming weeks. thanks everyone for the help and generosity

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+1 to basically everything benhacker has said. I set up my RIA completely on my own and agree with his insights. Interactive Brokers is great at performance reporting for separate accounts. It's a couple of mouse clicks to run performance reports that consolidate all separate accounts into overall numbers. They also automatically send activity statements to clients on a regular basis. In my opinion an RIA can't be beat for a small guy wanting to manage family and friends money while building a track record, but I can't wait for the day that I run a fund (again, for many of the reasons benhacker stated).

 

Sionnach,

 

I haven't transitioned from RIA to fund yet, but from what I've heard it's not a huge deal. A lot of investors will operate both at the same time because they have legacy clients that aren't able to invest in a hedge fund and it'd be pretty disrespectful to kick those early clients to the curb. You may want to shoot Dave Waters an email. In his recent letter he mentioned that he's in the process of opening a fund (in addition to the RIA he already has). He may have more specific advice in this area.

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Does anyone know if the regulatory/compliance aspect is minimized if you are just setting up an LP that only has one or two friends as investors?  For example, is there a requirement to become an RIA because you are managing money for someone else?

 

I work in a non-investing role at a PE fund.  If I were to invite two friends to buy interests in an LP for which I was the custodian of its investing account, I would disclose the holdings of that account regularly to my firm, for compliance purposes.  But I'm wondering if I would also be required to become an RIA or complete any other securities licensing?  I do have a CFA.

 

 

 

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Does anyone know if the regulatory/compliance aspect is minimized if you are just setting up an LP that only has one or two friends as investors?  For example, is there a requirement to become an RIA because you are managing money for someone else?

 

I work in a non-investing role at a PE fund.  If I were to invite two friends to buy interests in an LP for which I was the custodian of its investing account, I would disclose the holdings of that account regularly to my firm, for compliance purposes.  But I'm wondering if I would also be required to become an RIA or complete any other securities licensing?  I do have a CFA.

 

I think it depends on the state. In CA if you provide advisory services to anyone for compensation you have to register as an investment advisor. Other states may be different.

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