I am looking to understand everything there is, specially from legal and statutory point of view to form an LLP with 100 partners each being a partner of 1% and contributing 1 lakh investing.
We form an LLP with 100L raised from the 100 partners. We trade in F&O using LLP trading account on Zerodha.
The managing partner gets a salary each month for managing the show. The rest of the partners get their share of profit at the end of each month.
We will not take a loan or raise money from outsiders. Any money to be raised will be raised in equal from all partners.
Would it be legal to do something like this ? Has anyone done this successfully ?
Neha, leverage is something else, it’s someone else’s money (brokers). And your actual trading capital is something else. The power and confidence you get to trade with your own money is not comparable to margin money.
True, I get that. But the idea of 100 stakeholders (and the task of managing their expectations/emotions) sounds harder than managing risk while taking reasonable leverage.
May be I am just thinking like a trader…need to think like a businessman, I guess
Anyway, sorry @Priyank_Nevatia. Didn’t mean to hijack your thread.
F&O trading should be your LLP’s secondary object/Business activity. You should have something as your primary business activity. Choose the less compliance one as primary business activity like ‘Computer and related activities’
You can payout salary/remuneration to managing partner i.e in your case who is going to trade on behalf of others.
Profit sharing will be done at the end of FY not at the end of every month.
You need to be aware of SEBI’s guidelines on Collective investment schemes. Check out the order against HBJ capital by SEBI. They banned them from the market, one of the reasons was also because of running a similar scheme.
If you are looking at running this as a business model to raise capital by advertising and then put into markets, advise you against it. The only legal way to do is through PMS or AIF.
I don’t understand what is SEBI’s problem here. They are not raising money from outside. All the 100 people are partners and have an agreement. SEBI cares about retail investors
Not legal if you go out and there and put out a prospectus/advertisement to come be part of a LLP which invests in the market. If it was legal, there wouldn’t be any portfolio managers, everyone would take this route for convenience purposes.
If a bunch of people come together to form a business and that business also invests/trades, nothing wrong with it. But if this business is formed with the idea to raise capital from people to trade the markets and active source new people, yeah problem.
The only legal way arround PMS is to get an investor advisor license and manage 100 demat acccounts via a AP terminal with 100 different bilateral agreements on fees. The challenge is compliance of recorded confirmations before each trade is executed.
@nithin: this is based on my understanding without any legal opinion. Will defer to your knowhow in this if this is indeed allowed as I think.
As long as you are getting a client to confirm before every trade and record it via voice as a proof, yeah this route can be taken. The challenge here though is that as an RIA, you need to charge your fees separately and collect it separately. Whereas in a PMS you charge it on the funds you already hold. We Indians are extremely finicky when paying a fees separately. Btw, managing 100 different portfolios and executing them separately while getting confirmations is almost an impossible task.
Yes sure, managing any business with 100 accounts that needs same transactions or confirmation is an issue without technology. Totally agree.
@nithin: Cant someone just keep a voice copy of yes/no for each client and have a platform replay that as a confirmation ? Are the compliance rules only about having a recorded confirmation or does it also state that these have to be recorded real time telephonic conversations ? Can someone automate it legitimately ?
nah that would defeat the purpose right? Over 90% of all complaints to SEBI is around unauthorized trading. SEBI is trying whatever it can to stop it from happening. So automating a yes, wouldn’t be in the spirit of the law. That person can always go back and say he never authorized.
The partnership firm will have no client. It will only trade on its own account (prop trading). The capital is already raised via all partners contributing in ratio to their partnership % …
If this is a problem, then technically if my wife and I form an LLP and I open a trading / investing / dmat / commodity account with Zerodha for the LLP and trade through it. That should be illegal too rite ? Why would it be legal to trade through LLP having 2 partners and be illegal to trade via LLP having 10-100 partners.
Hi Nitin, I am not looking to advertise or raise money from strangers. The numbers I gave were just example. What I am looking to do is speak to 10-12 friends / family and form a partnership. Each partner contributes amount based on which his/her partnership % is decided. So for starting trading activity with 1cr, a 1 lakh contribution gets you 1% partnership of the firm. The managing partner who will actually trade, will get a salary / compensation and the rest of the profit is divided equally among all partners (in % ratio) after all statutory fees, taxes etc.
Another way would be to form a Pvt Ltd Company which trades in F&O on Company account. Profits are shared with shareholders via dividends after all statutory fees, expenses, taxes. The company / partnership firm will not take a loan from anyone or have any clients per se. Only partners / shareholders.
Thanks for pointing me towards the case order against HBJ Capital. Will read in detail to understand more.
I want to open a company and trade, and keep investments in my personal account.
I understand both taxation wise this is good and also helps avoid audit for my personal accounts.
I will strictly use my own funds. and only have 1 or 2 family members as partners
(if 2 ppl legally mandated, else I will be the only director/proprietor)
In your experience, what’s the best way to do it?
Open LLP/LLC or partnership or Pvt Ltd company?
If more than 50% of your income comes from trading/financial assets, you will need to make this pvt ltd into a NBFC. Don’t think pvt ltd company makes sense. But yeah, as long as it is small and just 10 to 12, no one will notice. But what you need to know is that, even if one of these complaint to SEBI tomorrow (if you were to lose some money), this can come back to haunt.
Adding to that, when you trade on behalf of a coporate body (a LLC is treated as a person in eyes of law), you need to have an investment advisor and NISM certified dealer terminal atleast to make it legal.
The PVT company thing works legally only for one person company where you are the sole proprieter. Anything else is potentially a violation including the NBFC norm I think. If you traded on demat of others based on advise given by LLC, then its advisory income which is outside the NBFC norm. But for that you need to have IA and NISM certification.
Btw, managing 100 different portfolios and executing them separately while getting confirmations is almost an impossible task.