Should I Start an LLC for My Stock Brokerage Firm?

Starting a limited liability company (LLC) for your stock brokerage firm can provide several benefits.

Most importantly, an LLC structure offers limited liability to its owners, which can protect their personal assets from lawsuits and creditors.

For a stock brokerage firm, lawsuits can arise from things like misleading clients about the level of risk involved in their investments, ignoring a client’s investment instructions, or providing clients with poor financial advice.

LLCs are also affordable, highly flexible (from a tax point-of-view), and can make your stock brokerage firm seem more credible.

Recommended: Use Northwest to form an LLC for $29 (plus state fees).

Do I Need an LLC for a Stock Brokerage Firm?

LLCs are a simple and inexpensive way to protect your personal assets and save money on taxes.

You should start an LLC when there's any risk involved in your business and/or when your business could benefit from tax options and increased credibility.

LLC Benefits for a Stock Brokerage Firm

By starting an LLC for your stock brokerage firm, you can:

Protect your savings, car, and house with limited liability protection
Have more tax benefits and options
Increase your business’s credibility

Limited Liability Protection

LLCs provide limited liability protection. This means your personal assets (e.g., car, house, bank account) are protected in the event your business is sued or if it defaults on a debt.

Stock brokerage firms will benefit from liability protection because of the risk of negligence or fraud claims, trademark infringement, financial data breaches, and workplace accidents.

Example 1: A customer decided to file a lawsuit for fraud against your stock brokerage firm after it made misleading statements about the level of risk involved with the customer’s investments. In the following lawsuit, any responsibility to pay the plaintiff damages cannot be imposed on your personal assets.

Example 2: After following the investment advice of your stock brokerage firm, a customer suffered great financial losses that they blame your business for. As a result, the customer decided to sue your business for negligence. In the ensuing litigation, your personal assets are precluded from being used to satisfy any business obligation to compensate the plaintiff.

Example 3: Your stock brokerage firm failed to follow the investment instructions of a client included in the agreement made between the two parties. This prompted the client to sue your business for breach of contract. Limited liability protects you from being held personally liable to satisfy the plaintiff’s settlement.

An LLC will also protect your personal assets in the event of commercial bankruptcy or loan default.

To maintain your LLC's limited liability protection, you must maintain your LLC's corporate veil.

LLC Tax Benefits and Options for a Stock Brokerage Firm

LLCs, by default, are taxed as a pass-through entity, just like a sole proprietorship or partnership. This means that the business's net income passes through to the owner's individual tax return.

The business’s net income is then subject to income taxes (based on the owner's tax bracket) and self-employment taxes.

Sole proprietorships and partnerships are taxed in a similar way to LLCs, but they do not offer limited liability protection or other tax options.

S Corp Option for LLCs

An S corporation (S corp) is an IRS tax status that an LLC can elect. S corp status allows business owners to be treated as employees of the business (for tax purposes).

S corp tax status can reduce self-employment taxes and will allow business owners to contribute pre-tax dollars to 401k or health insurance premiums.

The S corp status requires that the business pay the employee-owner(s) a reasonable salary for the work they perform.

In addition, the business might need to spend more on accounting, bookkeeping, and payroll services. To offset these costs, you'd need to be saving about $2,000 a year on taxes.

We estimate that if a stock brokerage firm owner can pay themselves a reasonable salary and at least $10,000 in distributions each year, they could benefit from S corp status.

You can start an S corp when you form your LLC. Our How to Start an S Corp guide will lead you through the process.

Credibility and Consumer Trust

Stock brokerage firms rely on consumer trust. Credibility plays a key role in creating and maintaining any business.

Businesses gain consumer trust simply by forming an LLC.

A growing business can also benefit from the credibility of an LLC when applying for small business loans, grants, and credit.

Northwest will start an LLC for you for just $29 (plus state fees).

Get Started

How to Form an LLC

Forming an LLC is easy. There are two options for forming your LLC:

You can hire a professional LLC formation service to set up your LLC for a small fee
Or, you can choose your state from the list below to start an LLC yourself

Select Your State

For most new business owners, the best state to form an LLC in is the state where you live and where you plan to conduct your business.

Do LLCs Need Insurance?

All businesses need insurance to protect their business assets — even LLCs. This is because the limited liability protection from an LLC protects your personal assets, not your business assets.

Stock brokerage firms are exposed to excessive risks and liabilities that threaten their assets. Insurance provides a buffer that protects these assets in the event that any unforeseeable circumstances cause financial loss.

Common Situations Business Insurance May Cover for a Stock Brokerage Firm

Example 1: As a client sits down to discuss financial goals and investment plans, the base of the chair breaks, sending them onto the floor. A quick assessment determines that they need medical attention for their injuries. Your general liability insurance policy may help pay expenses that are related to the injury or any lawsuits that arise.

Example 2: In an effort to be hospitable and make your client feel comfortable, you retrieve a hot beverage for them from the employee break room. The client burns his or her mouth on the overly hot drink and drops it into their lap, causing first and second-degree burns that require medical attention. Your general liability insurance policy may help cover the costs associated with treating the burn and any lawsuits arising from the accidental injury.

Example 3: A client walking into your building on a rainy day slips and falls, hitting their head on your concrete floor. This injury requires immediate medical attention. Your general liability policy may pay the costs associated with any medical transport and treatment as well as any costs associated with a lawsuit due to the slip and fall.

Other Types of Coverage Stock Brokerage Firms Need

While general liability is the most important type of insurance to have, there are several other forms of coverage you should be aware of. Below are some other types of insurance all stock brokerage firms should obtain.

Professional Liability Insurance

If you or one of your stock brokers makes a professional mistake or gives advice that costs your client money, they could take legal action. Professional liability insurance may help pay the costs associated with the lawsuit.

Commercial Property Insurance

If your brokerage firm is housed in a commercial building, you will want to purchase a property insurance policy in order to protect your building and your physical property in the event of a fire, covered weather event, or vandalism.

Data Breach Insurance

If your client’s personal information or financial information is stolen by hackers, cyber liability insurance will help you pay the costs of any resulting lawsuits.

Workers’ Compensation Insurance

If you have employees working for your brokerage firm, you’ll need to have a workers’ compensation insurance policy in place to handle any injuries that happen to them while they are working.

Employee Theft Insurance

If one of your employees steals from the business or from a client account, employee theft insurance may help cover certain costs associated with the theft.

Should I Start an LLC FAQ

Choosing the right business structure depends on your business’s unique circumstances and needs. However, unless your business is very low risk (like a hobby), an LLC is likely the better option.

Visit our LLC vs. Sole Proprietorship guide to learn more.

At a minimum, you’ll need general liability insurance and professional liability insurance.

Read our Business Insurance article for more info.

You can expect to need up to $300,000 in order to launch your stock brokerage firm. FINRA will need minimum capital reserves of between $100,000–$150,000. The remainder of this sum will go towards your employees’ salaries, registration fees, consultants, and deposits for clearing firms.

Visit our How to Start a Stock Brokerage Firm guide to learn more about the costs of starting and maintaining this business.

Operating expenses for a stock brokerage firm include regulatory fees, payroll, and rent.

Learn more about running a stock brokerage firm.

Stock brokerage firms make money by charging a fee for managing their clients’ assets. They sometimes also provide other services like estate planning.

Learn more about starting a stock brokerage firm.

Many firms specialize in a particular type of investment. This could be one way to differentiate your firm from the competition to attract clients.

Stock brokerage firms require a considerable investment to start, even if you operate out of your home. But while they are expensive to get off the ground, stock brokerage firms have very high profit potential.

Profit margins can vary considerably for stock brokerage firms. With enough assets under management and successful investments, profits could total many millions of dollars.

Learn more about starting a stock brokerage firm.