Advantages to starting an LLC to trade in?

Discussion in 'Professional Trading' started by flier6, Jun 14, 2005.

  1. flier6


    I met a career trader once who set up an LLC to do his trading in. Under this arrangement, would you be able to name yourself as an employee of the corp and divert some of the trading profits into a 401K thereby reducing the taxable profit? Could you also name your spouse as an employee and divert more of the trading profit into her 401k?

    Thanks in advance.
    SCOTTYDOESNTKNOW likes this.
  2. How about taking the to time read this detailed information to educate yourself about the best possible trading entity
    and 401K Plan structuring to reach your question-goals:

    Trader Entities:

    Trader Retirement Plans:

    From the same site, you may want to first read this as a topic overview:

    Entities for traders
    A trader entity allows you to establish a retirement plan and/or other tax-deductible and tax-deferred fringe benefit plans. These are not available for sole proprietor traders (who otherwise receive all trader tax status and MTM accounting benefits). A trader entity can also deliver business tax breaks to your spouse or investors. If you miss the April 15th MTM election as an individual, you can form an entity to elect MTM for the balance of the tax year – since you make an internal election as a “new taxpayer.”

    An excellent solution for many traders, with some hidden gems for late MTM elections, is husband/wife general partnerships. They are free to form, the paperwork is easy to assemble and there are rarely any state taxes to pay. Plus you can achieve all the best strategies, whether your spouse is active in the business or not.

    If you are not married, a single-member LLC is a great entity for many traders. A separate tax return is not required for this entity and you save accounting fees every year by reporting this activity on your individual tax return.

    Part-time traders who are not married may benefit from an S-Corp, as a separate tax return may deflect some IRS questions about part-time trader tax status.

    Whatever you do, stay clear of C-Corps to avoid double taxation and trapped losses that don’t provide any tax benefits. C-Corp/LLC schemes sound good on the drawing board, but they are highly expensive and don’t provide most of the benefits promised.

    Every state has different tax rules and rates for various types of entities, so make sure to customize your entity for your home state. Traders face trouble when they use entities in tax-free states, outside their home state, because they live and work in their home state. When it comes to entities, watch out for snake oil salesmen and consult with a CPA or attorney you can trust and who are experts in trader taxation.

    Retirement plans for traders – which ones are best for you?
    Profitable traders should save for their retirement, just like all other businesses and individuals. Uncle Sam makes it worth your while with tremendous tax incentives, including generous deductions and tax credits. Consider these excellent initial returns on your money. Plus consider the power of compounded tax-free annual returns – wow can your money grow fast!

    A Mini 401(k) plan is the plan of choice for traders. You get both an elective deferral from a traditional 401k plan plus a maximum defined contribution plan, all in one. Big earners can sock away even more with defined benefit plans including 412(i) plans. Roth IRAs are also very attractive for traders.

    If you want to use your retirement plan accounts as part of your trading business, watch out, you could be in for some nasty surprises from the IRS and ERISA! Learn the rules and some limited ways to navigate around the rules.

    Retirement plan assets can grow to become your most important and biggest nest egg, so use this guide to customize the best type of retirement plan for traders and learn how to stay out of trouble when trading those assets. It’s just too great an asset to risk losing.

    Fringe Benefit Plans
    By employing your spouse and classifying yourself as a “spouse of a non-owner/employee,” you can unlock valuable fringe benefit plan tax savings in a pass-through entity; the preferred choice for traders. Fringe benefit plan amounts are the same for C-Corps and pass through entities, when utilizing this strategy.

    C-Corps are a poor choice of entity for business traders. Double taxation is costly, especially if you are highly successful. If you have trading losses, you can not pass-through those losses to your individual tax return for immediate tax relief. With a “pass-through” entity, a business trader avoids double taxation and gets immediate tax refunds on trading losses. All items of income or loss are passing through to the individual tax level and taxes are not paid on the entity level. There are no remaining advantages to a C-Corp. Business traders can use a pass-through entity coupled with the “spouse of a non-owner employee” strategy to unlock every conceivable tax benefit.

    Fringe benefits are known as “perks,” including health, life and disability insurance; education, dependent care and adoption assistance; meals, lodging and parking; and many other types of plans.

    Learn how to convert your fixed family expenses into tax deductions which can put another $10,000 of so per year in your pocket. If you have some time and inclination, you can enjoy the same types of perks that corporate America enjoys.
    SCOTTYDOESNTKNOW likes this.
  3. flier6


    Exactly what I was looking for...thanks a lot.