Entity for traders

Discussion in 'Professional Trading' started by yxy, Feb 7, 2007.

  1. mtwokay


    Agree, a home office is right up there in the top 20 IRS flags. It's not worth the potential IRS audit if you're trying save a few pennies.
    #21     Feb 9, 2007
  2. Did you read over the postings on Green's website:


    He has lots of free info on this posted on his web site. Obviously he's trying to sell services, but he's generally regarded as the best in the industry. The only "complaint" about him I've heard is that he likes to do everything by the book -- no questionable deductions. If you're into that you might not like him, but personally I think it's worth skipping questionable deductions as opposed to an audit....and having them wiped out anyway (plus penalties).

    #22     Feb 9, 2007

  3. I think a home office deduction would have been ok but these people were charging their own homebased business rent for using an office in their home.
    #23     Feb 9, 2007
  4. stylark3


    Optioncoach --

    It is also my understanding that if a huge portion of a C-Corp's
    income in paid out in salary then the IRS may only consider
    auditing you if the job title the employee who is
    receiving the salary does not coincide with the industry standard
    for the average salary that is paid out to other employees in
    the industry with the same job title.

    So, if the average salary nationwide of a portfolio manager
    for a C-Corp is, let's say, $400000 a year and the C-Corp
    earns $500000 that year then how is this tax-avoidance?

    The portfolio manager will pay taxes on his $400000 and
    the C-Corp will pay taxes on its remaining $100000 (less other

    On the otherhand, if the C-Corp makes $500000 one year
    and pays out $400000 to its janitor then -- RED FLAG.

    Lesson To be Learned: Make sure the job title of the recipient
    receiving the salary is worthy of the amount be paid.

    Also Thanks Optioncoach, I found the answer to my queston also when I googled the C-Corp double taxation/dividends question. For more info
    see http://www.answers.com/topic/c-corporation
    of which the following is an exerpt:

    Because the corporation is a separate entity, it is also viewed as an individual taxpayer by the Internal Revenue Service. As a result, corporations are subject to double taxation, which means that the profits are taxed once on the corporate level and a second time when they are distributed as dividends to the shareholders. (If a business is eligible, it may elect S corporation status to avoid this negative characteristic of C corporations.)

    DOUBLE TAXATION. After they deduct all business expenses, such as salaries, fringe benefits, and interest payments, C corporations pay a tax on their profits at the corporate level. If any of those profits are then distributed as dividends to the shareholders, those individuals must also pay a tax on the money when they file their personal tax returns. For companies that expect to reinvest much of the profits back into the business, double taxation may not affect them enough to be a serious drawback. In the case of the small business, most if not all of the company's profits are used to pay salaries and fringe benefits, which are deductible, and double taxation may be avoided because no money is left over for distributing dividends
    #24     Feb 9, 2007
  5. Yes but you are talking about having the sole shareholder of the corp also be a contractor and take the bulk of the money stream. That is quite different than one officer also being hired as a contractor :)

    #25     Feb 9, 2007
  6. Yes but you are overlooking the facts here. The situation would be a sole shareholder corp with that sole shareholder being hired as a contractor and taking most of the corp profits as a payment which would be a deduction for the corp and significant reduction of corporate tax paid. That scenario is pretty transparent and will be taken down by the IRS easily.

    I am not talking in generalities here, I am referring to the strucutre of the individual trader trying to avoid double taxation.

    Know how to avoid it? LLC :D

    #26     Feb 9, 2007
  7. chartie


    See Entities for traders

    If you’re married, I think your best choice might be to form a husband-wife “partnership”.

    If you’re not, well the year’07 is still young... :p

    #27     Feb 9, 2007
  8. minmike


    I think having a wife is probably more expensive than any tax known to man!!!:p
    #28     Feb 9, 2007
  9. yxy


    It's so nice to brainstorm with people with experience.

    C-corp idea was presented to me by an accountant specializing for traders. I am supposed to call them up after reading their report on C-corp, and other stuff, but wanted to hear traders' experience and thoughts on this.

    Re double-taxation issue on C-corp, they did not go into details in the report, but mentioned something like funding the initial capital by lending money to the company, so when you take money out, it won't be neither dividends or salaries paid out by the company. I haven't talked to them yet, so I don't know how it works. But it doesn't sound good. I mean it might initially work, but how do you continue getting money out that way? If that's really going to work, how come more people I know are not doing that way (not traders)? So that's why I wasn't too sure about what they have suggested. And yes, if I am going to double-taxed, 15% corporate rate thing won't be appealing.

    One thing I thought though after reviewing everyone's comments is if the IRS is suspicious that I declare my trader status because I want to try to write off all losses from my main personal income to lower my tax rates, then setting up a C-corp might make sense, since I won't be able to do that, I think. They might be more suspicious about my LLC and S-corp than C-corp for that reason.

    I live in CA, so I am trading in the morning before going to work. Even at work I have two monitors and keep watching my positions. I day-trade 5 to 20 trades per day almost everyday. I think I took only one day off as of this year. I put lots of time studying this subject, so I think I'm legitimate.

    I don't want to do anything illegal, but don't simply give in and share what the IRS does not deserve.
    #29     Feb 9, 2007
  10. dhpar


    LLC is good enough if you want to pay minimal taxes - the question is if it is worth the effort for <i>you</i> (going offshore, nominate people to handle all your business, bank accounts etc).
    If you make north of $500k/year it is definitelly worth the effort (and the risk).

    p.s. well and it is not going to be exactly legal in the strictest sense :)
    #30     Feb 9, 2007