It should be noted that the bulk of the cost in this post corresponds to the 1/year accounting. If you know acct. basics you should be able to handle it yourself for the single/multi-person LLC, in which case neither of them cost more than about $500 depending on the state fees. The hedge funds are a bit different in that there are several more legal documents that really do need to be done correctly. Still, I have a partner that does the accounting, so it is significantly reducing our start-up costs. It really isn't that difficult. In my experience, especially if you're an options trader, most accountants don't know how to do your taxes anyway. JHMO
Appreciate all the advice Setting up the LLCs isn't the main issue. We've got that covered. What we're struggling with is setting up a SINGLE account made up of multiple LLCs... and passing the K-1 profits from the single account to the LLCs without having to take a 35% business tax bite first. We have no problem with paying capital gains taxes within the LLCs.... just trying to avoid the 'U-Bid' tax on the master trading account, if possible. Maybe we should be looking to set up a non-profit investment club account, deduct management and operating expenses, then pass through the profits/losses that way. I"m not sure... not my expertise.... Anyone with ideas.... or suggestions... apprecitated. Cache, is this similar to what you're dealing with? Thanks, Murray
There are some similar aspects. Let me tell you what I'm getting from your posts and some advice, then you can tell me if I'm on target. --Your investment club members want to combine assets but they don't want to merely designate one member as the account manager. --Each member wants access to the account, with the ability to execute trades. --Each (or several) of the members will be handling taxes under an individual business entity, probably an LLC. --You want taxes to be flow through without the business (master trading account) getting taxed first. Advice Have you considered just forming an LP? You might not be gaining anything by going with an LLC and an LP is easier to form. But if you really like the LLC, then you should be able to form an LLC in which each member is also an LLC. Of course if a certain member chose a different entity that is fine also. In this case the "master" LLC shouldn't get taxed first as the profits should all flow through to the individual LLCs and then to the owners of those entities. Essentially the "master" LLC doesn't make any money and therefore cannot get taxed. I might have misunderstood this point, but I would recommend that only two individuals have the power to execute trades. Allowing everyone to have access is just begging for trouble. I have silent and active partners but I'm still the only one with the ability to execute trades. One of the active partners is "trained" (and authorized) to deal with situations in which I couldn't perform my duties. As far as deducting expenses and other things like that, this is where it gets a little tricky. If certain members are much more active and therefore want to be compensated for their efforts, then you have three avenues. 1)You can charge fees according to an established fee schedule, usually based on a % of AUM. 2)You could charge performance based compensation as a portion of the gains and receive that compensation via fees. 3)Charge performance based compensation as a portion of gains and receive it via allocation. The first is pretty self explanatory as this is the method of most mutual funds. The second is common amongst hedge funds and private investment companies. The third is less known but is somewhat common in the hedge fund industry because of a few tax benefits. In this situation the performance-based compensation is paid via a "re-allocation" of fund assets. IOW, the active managers don't receive fees, they merely adjust fund assets so that their gains were a certain amount higher and the other members gains were an equal amount lower. Like I said before, this might have advantages depending on what kind of income/expenses you have and also what type of instruments you trade. Also, you need to consider whether or not your "master" account will qualify for trader status. If not, things get a bit difficult when it comes time to deduct expenses. In your situation I think that should be one of your main concerns. If you don't qualify as a "trader" then you get screwed at tax time because your trading is not considered a business. In this situation many of the expenses are dismissed and cannot be deducted. Look into this a bit more. IMO, the IRS is going to get increasingly strict on this in the coming years. You don't want to find yourself in a situation five years from now where the IRS audits you and finds that you don't qualify for many of the deductions you've been writing off. Anyway, I don't want to continue to post answers to questions that you aren't asking, so if you have further questions just let me know. Cache
I'm just jumping in without really knowing much about setting up these types of arrangements for trading. But what about an S Corporation? Is there some reason why an S-Corp wouldn't work?
There are certain advantages to an LLC that basically make an S-corp pointless. The fact that most states now recognize the LLC pretty much makes the S-corp the least desirable of all entities for this industry. JMO
Cache, I lke your third option a lot... neve thought of this. I am assuming you probably trade other LLCs as an advisor over their individual account through a POA, rather than all the monies pooled into one account. Here's the grit! We need to form one pool of money under one named account for purposes including 'haircut margin' and maximum cross margin opportunities'. Therefore, the broker is going to see only one monetary account, the IRS is only going to see one account... and the K-1 statement will reflect only one account. What I'm trying to say is.... Only two people will have access to this one monetary master account. It is not an account made up of multiple accounts. The question is... can we still pass through the gains to each indivicual LLC, expecially if they make up different percentages of the master account? The IRS will have only a statement from the broker showing taxes due from this one 'master' account. Does this make sense? M~
Just a warning: Given: Multiple players making trades. Given: Everyone already likes diagonal spreads. Result: Some traders are going sell out someone else's longs or buy in someone else's shorts. Tax Nightmare. Also Position confusion. Suggstion: Form an investment club. Members can contribute different amounts. Meet to discuss trades. Meet as often as necessary. Allow just one or two people to execute the trades. I know this is NOT what you wanted to do, but it is an alternative. Mark
That's exactly how regular investment clubs work. Must you really get more complicated than that? Mark
Hi Has anyone set up LLC for trading with funds from IRAs? At the end of the year if we distrubte profits to all members (that includes IRAs) will that attract Unrelated Taxable Business Income (UTBI) on profits made by IRA a/c. If we have no plans to take salary from LLC for managing the funds, can we setup individual 401K or solo 401K for contribution. Or what is the best retirement plan if one is having FT job, trading in LLC, no plans to take salary from profits? Any suggestions or pointer to links for tax planning are most welcome. Thanks a million in advance Murali