What type of entity does a trader chose? I have been day-trading actively and have a full-time job. I was told that a C-corp might be a choice for me, but am wondering the accountant might have suggested C-corp, maybe because they can charge me more??? In reality, can an LLC do just as good job for me as C-corp? Sharing any opinions or experience in this field will be greatly appreciated !
Assuming you're a U.S.-based trader, it's very difficult to get trader status if you have a full-time job, and the resultant income, outside of trading. You can likely setup an entity, but you'll need a tax lawyer to tell you whether the IRS might consider it a tax avoidance scheme. Also, whether you're trading stocks or futures should primarily affect your decision. Of course, all the accountants, services, etc. want to 'help' you setup an entity. They want your money. For most people, it's just not needed (or valid).
Thanks. Yeah, I did review the IRS site and know that it's very difficult to get the status for traders with a full-time job... That's why I am considering setting up an entity to make it more official. I wanted to set up an LLC, because it seems to be less hassle paperwork, but an accountant I inquired recommended a C-corp....
C-corp means that when you go to withdraw trading profits you are facing double taxation. A c-corp makes no sense for trading purposes when an LLC meets the same criteria and allows pass-through taxation. In all honesty an entity might not do much anyway since a trader does not need protection from liability, however if someone trades for a living and wants to put a professionalaaa look to their operations and use different types of deductions and such then the LLC works fine. Also works fine if you are combining your capital with other traders to join the money and lay out rights and responsibilities.
I see. Sounds like many traders WON'T consider setting up an entity. That's good to know, because I thought you would almost have to do so in order to use tax benefits of deducting business expenses, all that. I am inclining to do an LLC. C-corp idea was presented to me for 15% tax rate for the initial $50,000 profit. And if you fund a company in a correct way, you won't be double-taxed. To set up correctly, I will probably have to go to professionals and spend lots of money doing it. I'm not sure if it's worth it. I read another article that S Corp might be better than an LLC, but don't know why S-corp is better. They both pass-through entities, right? Anyway, if you use a pass-through entity, you just file a personal income return, nothing else, using 1040, plus schedule C, etc.? If the tax returns I am going to submit are the same either by name or by my entity, then I wonder if the IRS is really going to consider my trading business more official just because I file LLC articles with the state....As far as I'm concerned, I think I meet qualifications as "traders in securities," but have no clue what they would think.
I think that should be you're main concern. My first and best guess would be the IRS would consider your entity a tax avoidance scheme. But PLEASE talk to a tax attorney first, preferably one with securities/trading expertise.
What is the PRIMARY source of your income? If it is your job, then forming any kind of "entity" is not going to fool the IRS into giving you trader status. And forming an LLC gives you no other benefits, because the income flows directly to your return. And of course you have a clue as to what they would think. Its right in their regs. Now, if you worked a job during the day and traded an instrument of some type for many hours afterwards, had been doing so regularly and for some time, and generated a substantial amount of income...then you may possibly have a case. But IF you have fulltime employment, the bar is set very high at the IRS to give you trader status, and you need to be prepared to be challenged in an audit.
Double taxation cannot really be avoided in a C-corp. Assume you make $100,000 in trading income in 2006. The Corp will pay tax on that. Then assume you withdraw the $100,000 as a dividend to yourself. You will then pay income tax on that as double taxation. That is why many favor the LLC for pass-through purposes. However if you are a single individual it might not matter. If you are pooling your money with others, then the LLC is a good idea to formalize the pooling of assets and agreements between the parties. As for S-corps, most tax people do not understand how LLCs work if they are old school so they push C-corp and S-corp out of habit. However, each has their place. For trading as an individual, not sure if an entity is really required. For pooling of assets then an entity is a good idea.
Can anybody answer this one? If I get paid via 1099 as an independent contractor do I have to pay Self employment tax and income tax? I`m going to see an accountant next week but I figured I would throw it out here. Thanks!
Got the answer. Yes 1099 has to pay both. Ouch. That will make my tax rate 35% this year...I may throw up.