Best practices for setting up an auction business: Yes, your business structure matters

Auctioneers are often reminded as they come up in the ranks that “you’re a business.” Maintaining this mindset can be helpful in making good decisions and reaching goals, but it’s also helpful in maintaining a business structure that protects assets.

Mike Brandly , CAI, AARE, CAS, founded his auctioneering business in 1979 and continues to operate it today. He’s also invested in taking the knowledge he’s built up since then to others in the industry, teaching classes throughout the country for state associations, the NAA, CAI and Designation Academy. He’s an excellent candidate for discussing business structure and the best practices auctioneers should consider as they navigate what can be the complex process of running an auction company.

Brandly said that when most auctioneers graduate from auction school and enter the industry, they have a car, a home, they start a family and everything, including their auction business, is mixed together. Given the fact that we’re living in a rather litigious world, bundling everything together can be risky. “If this is your box,” Brandly said, referring to all assets being lumped together under one entity, “then all of this would be of interest to the attorneys on the other side. The point of painting this picture is that you want to avoid this.”

Choosing a business structure

There are four basic business entities recognized in the United States: Sole proprietorship, partnership, limited liability company (LLC) and corporation. Brandly said the definition of each can vary somewhat from state to state, but when it comes to recommending a structure, LLC and corporation offer the most protection. “Protect assets including your home, retirement, stocks, bonds, college funds and the like,” Brandly said. “You might have personal property as well as real property. How do you protect those assets?”

When operating as a sole proprietor, Brandly said there are no provisions for operating as a business, which means for an auctioneer, “their business is them.” He said every asset they have “could be subject to a lawsuit.” He refers to LLCs as a “touch less complicated than a corporation,” and they are fairly new to the scene—some states didn’t adopt LLC laws until the late 1990s. Brandly’s company, Brandly & Associates, was a partnership until he was advised to re-establish as an LLC because, “it’s a better situation.”

“A partnership is a glorified sole proprietorship,” he says, adding that there is a lack of protection of assets and a lack of tax benefits, which is why he steers auctioneers away from choosing sole proprietorship or a partnership structure. Choosing the corporation structure could be the best option if the company is growing at such a rate that there are more liabilities that could become a target for lawsuits. While more complex to establish, a corporation offers the most protection. For example, in a corporation, the auctioneer can own the auction house and the corporation leases it from the auctioneer. All high-value items are only leased by the corporation, which means there is essentially nothing for the lawyers on the other side to go after in a lawsuit. “The corporation is poor on purpose,” Brandly said.

Developing an “A” Team

The best business structures are backed by three important people, Brandly said, all of which should, if possible, be friends. These include an attorney, an accountant and an insurance agent. While trial attorneys are preferable when being sued, establishing a relationship with a transaction attorney is the priority for auctioneers. “Transaction attorneys are advisors,” Brandly said. “They give advice on contracts and terms. They are also evaluators.”

There aren’t many attorneys specializing in auction law because it’s such a niche market given the number of lawsuits auctioneers face, but Brandly recommends hiring a real estate attorney with a background in real estate licensing and law. “A lot of the principles are similar to auction law,” Brandly said. Bringing an accountant into the mix, specifically a CPA, is also desirable. Brandly said they are just as important as an attorney, as they offer advice on business structure and taxes. They know about depreciation schedules, expenses, etc.

Finally, an insurance agent can also be a valuable advisor to auctioneers. Brandly said it’s fairly easy to find insurance coverage online, but the “problem is you don’t have a person you can talk to who can help” when it’s needed the most. Again, having a good relationship with this person is also a benefit, as they are more likely to look out for your best interests.

This article was excerpted from a 2021 NAA Benefit Auction Summit session. This content is free on-demand for NAA members at?pathlms.com/naa.

Read more articles from?the auctioneer magazine?with an NAA membership.