Legality of Trading

Discussion in 'Trading' started by jboydston, Jun 18, 2001.

  1. I have been asked by people to trade for them. Is this legal? What should I be looking out for... Do I need to form an LLC first?
  2. I have wanted to do this for several years, but never got around to looking into the laws.. I hope to see some useful responses in this thread. Anyway, I think you can just get a power of attorney for their trading account. If you are talking about them giving you money to trade, then yes you probably have to form some kind of company so you can prove to the IRS that those aren't your gains/losses. I was thinking: form a corporation and sell the shares to your investors at a certain price, then buy them back later at a higher price, thus passing profits back to them. I'm pretty sure you would have to check "professional" when you open a brokerage account, and pay the professional rate for fees.
  3. Jeffrey


    No problem with legality. Let your broker know what you want to do, and have them send paperwork. The person you want to trade for will fill this paperwork out authorizing you to trade their account. You will have access to their account number on your direct access platform.

    If you acquire many clients, more than five maybe, consider opening a limited partnership with each client owning shares.

  4. I would prefer to consolidate all the cash in one account. I would not be able to trade my account and theirs simultaneously.
  5. mgregor


    I would think that if you were to start trading money for more than several people, especially those not related to you, that you would need to get a license (series 7).

    You would also have to have a very good contract with the person providing you with the money, stating that they understand exactly what type of trading you will be engaging in, as well as the associated risks.

    Basically, if you make them money, they'll love you. If you lose their money they will probably sue you!

    P.S. Just curious, if you're successful at trading, why would you want the hassle of dealing with other people's money and emotions?
  6. To side step the issues associated with manging money for multiple people (like licensing and Fed/state paperwork), you can create an LLC or LLP. Then have each person "invest" their cash/assets in the LLC/LLP and thus have a representative share of the company. You can then trade the LLC/LLP's single account and the profit/loss would distribute proportionately to the investors.

    If you're going to take a management fee, you'll probably want to make the primary vehicle an LLP and create a separate corp (C, S, or LLC) just for yourself. Then make that corp the general partner of the LLP and charge it with management and extract a management fee from the LLP for it. This makes it simple to establish a management contract that gives you a % of the profits realized if that's part of your plan.

    Note however that to keep everything legit, you'll need to manage the LLP (and the second corp) properly (i.e., board meetings, minutes, proper state filings, tax returns, etc.).

    If you're not familiar with what this stuff, start out by going to Borders or Barnes & Noble and reviewing the various books on incorporation that you'll find in the Business section.
  7. BigEd


    It's easy. Just as ArchAngel stated, create a LLC. IMO, there is no benefit to an LLP over a LLC, other than maybe a Family LLP and then just the asset protection and estate planning capability. LLC's are taxed as a partnership unless you have specifically notified the IRS differently.

    Have the LLC 'managed' by a member (you) or preferrably a corporation (whioh you are employed by), which could then draw a salary/fee for trading the single account, as well as pay the trading expenses (computer, data feeds, data lines, office rent, office supplies, news services, training materials, educational expenses, etc.). Any profits over and above the expenses listed above would be taxed based upon some formula based upon percentage of capital, goods, services, or loans contributed, etc. All the 'members' of the LLC/LLP be issued a K-1 on an annual basis for their shares.