Prop Structure for Taxes

I will start prop trading in January and have a tax related question. I have a corporation and an LLC so am I better off getting paid into my personal account, Corp or LLC?

 

If you are talking about being paid out in your profits then yourself might be best since the Prop will issue you a K-1 anyway. Passing it to the LLC who then has to pass it to you is just another layer of costs to your accountant. Putting it in a C-corp means you will pay extra taxes when you want to dividend to yourself.

If you are talking about a salary then yourself for the same reasons above.

 

But with a Corp I can deduct operating expenses, rent, software etc. can I do that if I do it through personal?

 

I think that involves other issues whether you qualify as a professional trader status to deduct those things so check with your accountant. An LLC or C-corp can both deduct those things if they are valid. Much harder as individual since it raises red flags (again check with your accountant). i can only give you the legal side of the equation

 

With either one you can deduct operating expenses.

Both are subject to double taxation, but in different ways.

The difference is that a owner of a Corporation is subject to taxation twice by the time it gets to the owners (in the form of salary), once as corporate income tax, and another as personal income tax.

An LLC is considered a "pass-through" entity of which you pay a kind of self-employment tax.

Case in point:
Mary owns a print shop. In keeping with the industry standard, Mary decides that a reasonable salary for a print shop manager is $35,000 and pays herself accordingly. Mary’s total earnings for the year are $60,000: $35,000 paid in salary and the remaining $25,000 paid as a distribution from the S corp. Mary’s total employment tax is $5,355 (15.3% of $35,000).

If Mary were the owner of an LLC, she would have to pay employment tax on the entire $60,000, equaling $9,180. But as an S corporation, she realizes savings of $3,825 in employment tax.


Excerpted from:
http://www.powerhomebiz.com/vol136/structure.htm
Note: S-corps are in California, but did you know that some states have no state income tax? Like Nevada.

 

My traders don't bother with entities since, as individuals we are all exempt from FICA (Self Employment taxes), and their K-1's are given at "triple net".

(Not intended as tax advice, just personal opinion from me, not Bright Trading).

FWIW,

Don

 

What prop firm are you at?

 

Jasper Capital (LLC under Assent).

Still not sure which way to go, I guess personal is simpler, not sure about all the duductions I now claim through my S-Sorp though...

 

They should allow you to submit your business related expenses to them to reduce the amount of taxable income. Each December our traders submit everything, keeps everything simple, one $$ number on their K-1...simple taxes.

Don

 

What Don said sounds great. Getting income directly is a lot simpler, but wouldn't you rather save money? True, it may cost a bit to hire a CPA and save your receipts but I think it is worth it in the long run. Especially so if you plan to trade professionally for a long time. Why not get a laptop for "free"? :eek: