Every decision has consequences. The decisions you make as a new RIA firm owner can have consequences for years to come, and many are likely to be tax-related. If you’re just now starting out on your own, it’s important to understand the tax implications of certain actions. To help you better understand and potentially minimize your tax liability for today and tomorrow, here are Elevate CPA Group’s top six tax considerations for new RIA firms.
1. Your Choice of Entity
Most RIA firms will choose an LLC or an S corporation as their entity type. I could go down a rabbit hole comparing the two—RIA firm have its pros and cons—but it’s critical to know that the entity you choose should fit your business plan and ownership structure. There are no hard-and-fast rules to follow. Before you set up your RIA firm’s entity, talk to your attorney and tax advisor to determine the most appropriate and tax-advantageous type for you.
Keep in mind: You’ll need to secure the proper agreements between you and the entity, and then ensure these are followed. For instance, in many cases a broker-dealer will pay you individually. How do you assign this income to the entity? These agreements, as you might imagine, have tax implications, too.
2. Your Payroll (Don’t Try This at Home)
Payroll is complicated. Not only do you have to worry about paying your employees, but you also have to worry about payroll tax filings. Getting these wrong can lead to steep penalties.
This is why I highly recommend working with a third-party payroll provider, even if you have only one employee. Most third-party payroll providers will indemnify you against late filings and payments. You’ll save time while essentially buying yourself an insurance policy.
3. Your Retirement Plan
When you’re evaluating retirement plans, be sure to consider out-of-pocket and after-tax costs, which employees should be covered, and what kind of flexibility the plan offers. Pay attention to non-discrimination rules, too, as these can substantially increase the cost of your plan if you don’t follow them.
To secure the right plan for your firm, consider working with a third-party administrator. This person can model retirement plan choices based on your business and, eventually, administer the plan for you. Similar to a payroll provider, a third-party administrator makes sure you’re providing the right disclosures and annual filings so that you stay in compliance.
4. Your Working Capital
In order to get tax basis (i.e., the value of your RIA firm, used to measure a gain or loss), an owner has to loan or contribute money to the entity. How you go about making a contribution or a loan can affect your ability to benefit from losses in the early years of your business. Consider consulting with your tax advisor to ensure you’re getting it right.
5. Your Books and Records
Be sure to keep your books and records clean. Failing to do so can imperil the limited liability afforded by your entity. What’s more, don’t muddy the waters between business and personal.
Pay all business expenses through your business accounts, and all personal expenses through your personal accounts. The more you co-mingle funds, the more time-consuming and riskier an IRS audit becomes.
Simply put, keeping your accounts clean and separated can go a long way toward avoiding hassles in the future.
6. Your Time
Your time is valuable when you’re growing a business. It’s also hard to come by. Working closely with knowledgeable professionals can help you properly address the items listed above without losing focus on your business.
At Elevate CPA Group, we’ve helped RIAs become independent and make the right decisions for their newly-formed firms. We’ve seen the long-term benefits of properly considering tax implications as well as the pitfalls of ignoring them. Our fractional CFO services help newer RIA firms focus on high-value items, like servicing and acquiring clients.
Ready to Grow with Confidence?
Let Elevate provide you with the information and advice you need to maximize the value of your business. Contact us today.