One of the most dangerous myths in trading is that you can manage other people’s money without any formal legal structure. Some traders assume that as long as they’re trustworthy or experienced, there’s no need for regulation, documentation, or licensing. But this belief is not only false — it’s potentially illegal. Managing money without a proper legal framework can expose you to regulatory violations, lawsuits, reputational damage, and even criminal charges.

This article explains why a legal structure is essential for managing capital — whether you’re running a fund, trading client accounts, or offering investment services.

Why some traders think legal structure isn’t needed

1. “It’s just friends and family” mindset:
Many traders start by managing small accounts for people they know and assume informality protects them. But regulators often treat any management of client capital as a regulated activity.

2. Misunderstanding of the law:
Some believe that only hedge funds or investment firms need licences. In reality, even managing one client’s account may legally require registration, depending on jurisdiction.

3. Influence from social media or prop trading culture:
Prop traders operate under different frameworks, using firm capital. This creates the false impression that legal formality is optional when dealing with outside funds.

4. Fear of complexity and cost:
Traders delay setting up legal structures because they believe it’s expensive or too complicated — until problems arise and it’s too late.

What legal structure actually does

1. Provides regulatory protection

• Different countries have different thresholds, but most require registration or licensing to manage other people’s money.
• This includes designations such as FCA-authorised (UK), SEC-registered (US), or ASIC-licensed (Australia).
• Operating without it can result in heavy fines or legal action.

2. Clarifies legal liability

• A legal entity (e.g., LLP, Ltd, LLC) separates personal and business liability.
• If a client sues, your personal assets are at risk if you’re trading without an entity.

3. Enables contractual clarity

• A legal structure allows you to issue clear contracts, outlining fees, risk limits, withdrawals, disclaimers, and responsibilities.
• This protects both you and your client in case of disputes.

4. Builds trust and professionalism

• Investors take you more seriously when you have a registered entity, formal reporting, and compliance policies.
• This improves your ability to raise capital and scale operations.

5. Enables tax planning and optimisation

• Trading through a registered entity offers tax efficiencies, structured compensation, and deductibility of expenses.

When legal structure is required

Activity	Legal Structure Required?
Managing money for friends/family	Yes, in most jurisdictions
Offering signals/copy trading	Often yes (depends on scope)
Trading pooled funds (e.g. hedge fund)	Always yes
Receiving profit share from clients	Yes
Social trading via platforms	Platform may be licensed, but you may still need oversight

Always consult legal professionals or a compliance advisor before handling external funds — even on a small scale.

Types of legal structures used

• LLC or Ltd company: Ideal for separating liability and setting up contracts.
• Registered Investment Adviser (RIA): Required in the US when giving advice or managing funds.
• Fund vehicle (e.g. SICAV, LP, trust): Used for pooled capital in regulated jurisdictions.
• Power of Attorney structure: Sometimes used for account management under strict agreements. Still requires disclosure.

Conclusion

You absolutely do need a legal structure to manage other people’s money. Whether it’s one client or one hundred, fund management is a regulated activity in most parts of the world. Operating without structure is not only unprofessional — it’s potentially unlawful. If you’re serious about managing capital, you must treat it like a business, not a hobby.

To learn how to set up a compliant, professional fund or client management structure — with risk controls, contracts, and credibility — enrol in our Trading Courses at Traders MBA, where we show you how to build a real trading business from the ground up.