Trading through an LLC - implications

[kubamaria 2]

Hello, 

Are there people who set up an LLC for their trading? I am trying to understand what are the implications ? For now, I figured: 

- POSITIVE : 

-separation from your private money 

- means you need to pay income tax (and not capital gains tax) and therefore it is seen as if you were working for pension purposes (important for those who have trading as main occupation)

NEGATIVE

- platform subscription is more expensive (double for DAS TRADER) 

- accounting more complicated

But I am sure there are more implications.  If somebody already went through it, I will be very grateful for your experience/ressources. 

Maria 

[Guerillatrader1 0]

Following...

[louisrburns 3]

I asked an attorney about this last year. 

Since an LLC is a pass-through entity, your money is not separate for tax purposes and unlikely to be for legal purposes either. If you get sued and they come after your assets, they may get your LLC too. 

He said there's no benefit to having an LLC for a trading account. The people who recommend it are usually the ones selling the service for it. 

[ReneVaughan 2]

They have a webinar in the education center called Green Trader Tax Webinar where a CPA that specializes in taxes for traders explains the pros/cons of an LLC. You might find that helpful. I'm also curious what other people are doing though. Following this discussion.

[Jeff 0]

Following

[Daniel Thomas 23]

You should never ask THAT attorney for financial advice again... 

If structured correctly, an LLC can be completely separate from your personal finances, and even taxed as a separate entity; and it can - in fact -- preserve the oft referred to "corporate veil." 

 

The problem most people run into when forming an LLC -- especially for trading purposes -- is they do so under a "single-member" variety.  This, indeed, is treated as a "pass-through-entity" for tax purposes..., but not always.  

If, for example, you elect (through the IRS) to be taxed as an S/C-corp, you can avoid this "pass-through" issue.  Without getting into too much detail, it also helps (almost necessary) to have at least one additional "owner" (such as a spouse/child/etc).  

 

That said, and again -- without getting too much into detail -- the tax ramifications at the "upper level" are treated commensurate with the type of security you're trading.  Equities, for example, are taxed differently than futures.  In other words, your business will be taxed according to taxation guidelines for "traders in securities" (and will have to meet the standards for such), and your personal taxation will be at the distribution/income level (which is often considered "double-taxation"). 

 

Once the business is taxed at this "upper level," then you (an owner/stakeholder) can take payment SEPARATE from the taxation parameters forced upon your business (in other words, you can turn your portion of "income" into "ordinary income," "dividends," etc...).  

 

Unless you're using the LLC to preserve a "corporate veil," there aren't many reasons to even bother.  The most rationale reason would be to 're-start' your trading journey (as a "day trader") with the benefit of electing "mark-to-market" (section 475) from inception (there are election timelines many traders don't understand/know about until well after they've already begun trading). 

 

Anyways...  Yes..  You can run a trading business through an LLC....AND benefit from the various "reasons" for doing so...., but for most traders -- it's unnecessary.

 

ps...  I've been trading under an LLC for over eight years.  Hope that helps. 

Edited January 16, 2023 by Daniel Thomas