Bob Greene is great for retail traders and some professionals who have "other things going." There are very few circumstances that you need another "entity" when trading with an established LLC (like ours). In any event, be sure to get second opinions before getting too involved with multiple entities. Don
We have multiple entities in Bright (Securities), including hedge funds, etc. But we designed Bright Trading with certain provisions that make it much more beneficial, tax wise and regulatory wise, to be an individual member. A Series-7 trader can really save money by being an individual member. No "self-employment tax" and taxes paid on "triple net." Don
There are a number of reasons why trading through entities may be a better way to go for some traders. I note the following: 1. Maximize your tax deductions. Assuming one could otherwise qualify as a trader in one's individual name [see comment # 2 below], there are still deductions available to a corporation, for example, that are not available to an individual. One example is a Medical Reimbursement Plan. Another is corporate fringe benefits. 2. Get certainty in the tax law. The law that establishes trader status is case law; there is no definition in the Code or the regs. Case law rules are, by their nature, general in their tenor. For example, a trader must trade on a "frequent and regular basis" [whatever that means] and must trade "continuously" [whatever that means] throughout the year, to catch "short term" market swings. There are no objective, "safe harbor" rules to define the status. The difficult cases are those in the gray areas, such as where somebody is trading fairly heavily but has a day time job from which they get the majority of their income. 3. Reduce your audit exposure. The highest audit rate is for a sole proprietor, filing a Schedule C--which is exactly what a trader files. The IRS statistics indicate that the audit rate for a comparable activity carried on through an entity is approx. 1/6th of the audit rate for the same level of activity carried on as a sole proprietor. 4. Get asset protection. If you own the brokerage account in your individual name, as a sole proprietor/trader does, then that brokerage account could be jeopardized if the trader gets hit with a frivolous lawsuit. 5. I agree with the comments by a previous poster who noted that trading through a legal entity provides a means to get earned income, which can then be used to fund a 401(k) and to support other deductions that require earned income. Finally, I do not contend that a legal entity is necessary appropriate for everybody. It is a "facts and circumstances" test that varies from person to person. Nevertheless, the factors I mention above indicate that many traders are well served by setting up either a LLC, a C Corp, or a combination of the two. Those are the high points!