I thought prop traders had to pay SE taxes. I guess you'd know better than I would. I've just gone through the corporation setup, and I've learned quite a bit. So here goes. As mentioned previously, having a corporation allows you to put money in a retirement plan. According to my accountant, you can make your salary whatever you consider reasonable. So if I make $100K, I can say that my corporation only made $15K, then put that full amount in a mini 401(k). Or even a Roth mini 401(k). Of course I'm taxed on $85K, but I only pay SE taxes on $15k. Plus let's say I pay $5K in health insurance premiums. I can say my corporation earned $20K instead of $15K, then deduct the $5K from my taxable income. Here's some other stuff I just learned recently. If you set up a partnership, you can say that your partnership was formed on the first of the year. Not so with a corporation. So for example in 2006, if you have already made money for the year without a corporation, that money doesn't count toward your retirement. If you try to set up a corporation now, it may not even be formed until later this year, and you may not be able to contribute that much for retirement (or deduct that much for your health insurance.) But with a partnership, the earnings are 'defacto', meaning you can draw up your paperwork and say that the partnership started on 1/1/2006. And anything you've made this year can be applied toward retirement and/or health insurance. The tough part could be getting a partner...I asked my Dad, who was ok with the idea, but his accountant said no dice. Some kind of liability issue. I'm not sure what the big deal was; he would have only been a 1% partner. Incidentally my Dad's accountant told me that if I were to set up an LLC, the same rules would apply as far as being able to go back to the beginning of the year. But then my accountant said that wasn't true. I'm not sure who to believe. BTW, it could be a lengthy process setting up a corporation. This time of year is a good time if you are using a busy accountant. If you try to do this during their busy seasons (the time just prior to Aug 15 and Oct 15 are their busy seasons too), you may have a hard time getting much attention. What took the most time in my case was having my state approve my application. I had it expedited, and it was still over 2 weeks. Normally it's 6-8 weeks. I would be impressed if you could be set up for trading your corporation in a month from when you get the ball rolling. (Of course if you're setting up a partnership, time isn't necessarily as precious, because I believe you have until the end of the year to get set up for the current year.)
One other caveat...here's my understanding of the difference between a SEP IRA and a mini 401(K). With the SEP, you take a percentage of your earnings (I think 20%) and that's what you can contribute toward retirement. So if your corporation makes $75K, you can put $15K toward your retirement. And you have to pay SE taxes (15.3%) on that $75K. But with a mini 401(K), you can contribute the first $15K. So in this case, you can contribute the same amount with $15K vs the $75K for the SEP. And you only pay SE taxes on $15K. So it would seem the better choice would be the mini over the SEP. But there's a problem. What if your intent is to trade your retirement account? I have yet to find a single direct access broker who allows trading of a 401(K). And most of them allow trading an IRA, whether it's Roth, SEP or regular. So now you have funds in a 401(K) but you can't trade it. If you do want to trade it, you have to convert it from a 401(K) to a IRA. Then you have to move it to your brokerage. I'm not yet at this point...I'm hoping it's not as difficult as it sounds. I have a feeling there may be some regulations, or problems with the firm I set up my 401(K) with, that might make it a challenge.
I keep thinking of more things to add. My accountant advised against an LLC. Apparently he has a trader who is having a problem with the IRS because of the LLC, and he's steering clients away from this type of entity until the case is resolved. (He expects to win, incidentally.) Actually it is a single member LLC that is causing the problem. For some reason a multi member LLC may not be a problem. I really don't know why all of this is the case; I didn't press him on the issue. My understanding is that a C corp is not a good idea either, but I honestly don't know why. I talked with a firm that recommended one of these, but I'm suspicious of them. I have an S Corp, by the way. And I am using Green and Company.
Now, if the IRS only would change the Wash Sale Rule...I'd be a happy camper... But that discussion might require a separate thread...
Nobody mentioned flow-through profits. I'm General Partner of an older style custom LP... Which files a return and pays no taxes... The profits just flow through to each Limited Partner. How a Limited Partner handles taxation of his profits is none of my business. This works well if set up properly... That is... An experienced law firm draws up a good LP agreement... Which often run 20-30-40 pages... And can have almost any clause imaginable.
There is no such thing as a "lengthy process" in setting up a corporation unless you consider 15minutes to 1 hour a "lengthy process". You obviously are not going to a corporate lawyer if you are bringing up "tax season" as a stumbling block. Corporate lawyers don't have tax season.
So from the time you met with your lawyer until you were trading your corporation, how long did it take? Did you not have to wait for your state to approve the documents?