Murray, As Cache indicated, the primary LLC entity elects to be taxed as a partnership, such that the profit/loss is passed on to the respective members. Is there a reason that you want to have multiple LLC entities as opposed to a single LLC entity where you are all members as individuals? -segv
An LLC entity can either be member-managed, or can hire or elect a manager, or even specify certain members as managers for a specific purpose. One option would be to create a single LLC where you are all individually members, where each of you have a separate economic interest in the trading account, and where two members are designated to manage the trading account. Such a structure would seem to meet your objectives, but you should really seek competent legal advice in your respective jurisdictions. This is not the kind of entity or activity you want to partner in without a solid Operating Agreement. For example, the legality of the above arrangement varies by jurisdition. Finally, all of the foregoing assumes that you are splitting profits and losses in the trading account according to the sum of the respective investments, and that no member is recieving any form of compensation for managing the trading account. My advice: Get an attorney. -segv
Yeah a lot of people like this when it is first mentioned. You really need to figure out if it is beneficial to your organization. I know others are probably wondering what I'm talking about, so here are a few details so I don't get too many questions later. The basics are that there are two main types of tax. Income and capital gains. If you manage a "fund" and collect fees , they are considered income and you are taxed accordingly. If you receive them via the allocation method, they are considered capital gains. This could be good or bad. A couple examples: GOOD You only trade options on broad-based indices (1256 contracts) and thus get preferential (60/40) treatment at tax time. Those paying you don't pay tax on the gains and you get the 15% long term rate on 60% of those re-allocated profits rather than taxing the entirety at your personal income tax rate. BAD You only trade equity options and therefore don't get preferential treatment. You also have some past losses/expenses that you'd like to write off this year, but these deductions aren't categorized under capital losses and thus can only be written off against income, not capital gains. ANOTHER BAD One of the silent partners has another form of income coming into his individual LLC. If you are compensated by re-allocation then those "expenses" cannot be deducted from his other income. Anyway, I think you get the picture. The issues are all about income vs. cap gains. As far as my situation is concerned, it is a little more complicated than I would recommend to most people. My partners and I don't only deal in trading securities. Our entity had to be conducive to a P/E firm, as well as an IA/MM firm. I don't want to get into all the gritty details. Let's just say that my business philosophy is different than most, and I prefer to take on additional partners rather than let business consume my life. That's better than I'd thought. I was thinking you were suggesting a nightmare scenario of each person having the power to manage a single pooled account. I should've known you were smarter than that, but better to err on the side of caution. Anyway, what will essentially happen in your case is that if you form a single master account under an LLC, the gains will flow through to individual members as described in your articles of organization. If each member is another LLC then the profits allocated to each entity will then flow through to the owners of the respective entities. At this level each owner will finally pay tax on the gains according to his/her personal tax situation. If I were you I would consider a slightly different situation. Set it up similar to the way many hedge funds are setup. Form an LP with yourself (and the other managing partner) as the GP. Form an LLC for you and the other managing partner that will shield you from business risk. Otherwise, as the GP you carry all the business risk. You now have a situation in which each of the silent members are simply limited partners and can operate under whatever entity they would like. That is not a concern of yours. They should handle their own business, although in my entity my partner in charge of accounting takes care of them for free because I'm nice. You as the GP operate under the LLC so that you are protected from any supposed injustice that one of the silent partners would accuse you of. Your LLC is also free to charge whatever fees you'd like, under whatever method you'd like. You are taxed according to your personal income status. And just as a side note. The IRS doesn't get a record of your options trades anyway. They only get what you give them so it will be up to you to make sure that the necessary statements are provided to the individual partners. Cache
:eek: An LLC passes through the taxable income portion to its members. The members can be individuals, LLCs, partnerships or whatever entity and the pass through continues. an LLC hedge fund has members which are any entity and the LLC issues K-1s to each member. it is then up to each Member to do its own taxes...
Segv make good points, and I always advocate hiring "competent" legal counsel, but I also recommend two other things. 1) First get all the information you can. You are going to get charged by the minute for your time. Every minute saved is money earned for your business. Also, many things, such as the "allocation" fees example above, will not be brought up by your lawyer. If there is anything unique about your situation, it is up to you to do some background research and present it to your lawyer. S/he will only do the research to the extent that you require and pay for it. 2) In this industry "competent" legal counsel is hard to find and very expensive. Most people who visit an attorney to setup a business entity aren't starting a trading business. A vast majority of lawyers/accountants aren't familiar with the industry. This takes me back to #1. You should really do most of the research and then present the ideas to the lawyer. This is why I don't like basic statements like "get an attorney". It is very likely that the local attorney won't know much more about your business than you do. I always wished that someone would simply make some suggestions so that I would have a place to start. Anyway, good luck Murray. Cache
Actually the questions presented are not legal ones, they are tax ones so a lawyer is not even needed. Talk to a CPA with experience with investment entities and you will save a lot of money and time. The lawyer is only needed to set up the LLC and you do not even need one for that really.... Coming from a lawyer... Forget the lawyer, find a good accountant..
What all needs to be one to set up LLC is file one page document (LLC-1) with state. That doc includes details like LLC name, our address, registrar name and addres, LLC busines description, managed by one member/more than one member/ all members etc. It's as simple as that. I believe this can be done by us without any difficulty. As suggested by coach, we may have some questions on tax planning, deductions, retirement plans etc. So good accountant is more useful than lawyer at this stage. Last week I met one useless account who charged $75 but could not answer even some basic questions. His tax understading is worse than mine. I heard we can contribute upto $44000 per year for our retiement even though we have FT job and 401K with our employer. He did not even know that.
This is true. That's why most of my "advice" was dealing with tax considerations and came from the (tax) professionals that I work with. Again Murray, you really need to consider whether your entity will qualify for trader status. Many traders assume that they qualify. It's been suggested to me by several professionals that the guidelines are more strict than many traders think. IOW, if you are only trading diagonals in which you hold positions for about a month (consequently making trades only a few times a month) you will likely not qualify in the eyes of the IRS. This changes your tax status dramatically and will likely change the way you setup and run your business.
murray, as i mentioned before there are certain tests that need to be met which will swing the entity into a certain direction. A CPA proficient on the subject should give you all the info you need after you sit down with them and explain exactly what activitities you and the others members will be conducting under the structure. They will point you in the right direction as fas as taxes and protection goes. There are some trade offs as in everything else in life but based on your specific day to day activities(the entity's income), you will know which way to go.
All good points, Cache. I guess I should have qualified and said "Get an attorney experienced in proprietary trading, hedge funds, and securities law". An experienced attorney will usually know an experience accountant in this business, and vice versa. -segv