business-registration, investment, business-structureMy partner and I have developed a piece of software that acts as an algorithmic security trading platform. It executes short term trades according to some proprietary technology.
I have a few questions regarding setting up the business entity for us to trade with. We are basically looking for the simplest, and cheapest legal structure to allow us to invest our money together.
So we are going to fall under a loose distinction of a hedge fund, but we are different than normal hedge funds in that we are not investing money for other people. The “fund” will simply be money from my partner and I. From some research I have learned that most hedge funds are typically two parts: an LP and an LLC, where the LP represents the fund and the LLC represents the fund manager. Because we are not taking money from a fund, can we simply use an LLC and call it good?
From what I understand, you have to register your business in the state that it does business in. But as a company that strictly deals in securities, although we are based out of Illinois where we live, we don’t really do business here, or anywhere for that matter. It is all done over the internet. Are we allowed to establish our business through an agent to a more business suitable state like Nevada or Wyoming? Illinois charges $600 to file an LLC, more than we want to pay.
I appreciate any insight that can be provided.
First off, you potentially are an actual fund: the moment you form a partnership with someone else, you’re no longer your company. And the company is investing someone else’s money – yours. I’d double-check where you fall with an accountant or a lawyer, because to me it’s unclear and it can be argued your way or the way I just noted. It wouldn’t matter in some countries, but finance is (mostly) regulated in the US: any number of special regulations may apply to you for delivering financial services to yourselves, and any number of exceptions might apply when you deliver them only to yourselves.
Regarding separating fund management and funds, this is actual typical of fund managers – be them hedge funds or VCs. The way it works is, the fund management company manages one or more funds, each of which is a company with share holders, and fund subscribers are (non-voting) share holders or limited partners of those funds. This setup is, imho, a desirable one: it adds administrative overhead, but it leaves the door open for your partner or for yourself to subscribe to a new fund after closing the current one if you need the money or if you change your mind and decide you want to let your families or your buddies in.
As for incorporating the company in a different state, your argument makes sense, but I’d double check with an accountant or a lawyer. (Usually, you’d still need to register the company in Illinois if that is where the magic is happening, and I’d this may end up applying to you as well when a taxman looks into it.)
With all that said, why not forgoe incorporating altogether, and manage your own money under your name using the algo, while your friend manages his using the same? It seems to me that by incorporating, you’re about to add overhead with very little upside.
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