Working for a "Prop Firm" LLC that distributes a K-1 to me. An accountant I've just met with suggests that I create a single member LLC, let's call it XYZ Capital, which will be a sub LLC of the Prop Firm LLC. Since the K-1 is not earned income, the accountant also suggests creating a single member "Management" LLC...let's call it XYZ Management. He then said that the Capital LLC would "pay" the management LLC a "fee" which would convert the K-1 into Earned Income. Does anyone have a set-up similar to this or has heard anything along these lines? I believe the Robert Green Trader Tax book suggests a similar set-up. I'm wondering how successful, or what obstacles people have had with these circumstances. Thanks.
Sounds good, but isn't that the law that the gov is trying to change b/c hedge and PE firms have been doing that for years?
You could be right about the legislation... Also reading about Partnership benefits if you are say a Husband/Wife. I'm just wondering what people out there who work for Prop firms and set up Sub LLC's within the Firm's LLC...and I know there are many of them out there....how do you structure it and have you been able to unlock the benefits of turning K-1 into earned income without IRS obstacles/inquiries?
Why in the world would you want to convert to earned income. You'll be paying an additional 15% tax off the TOP for Self employment Tax on the first $100k or so you earn.
No, your accountant is wrong (at least as it applies to Bright Traders).... If someone were to join as an "entity" they would lose two things of high value. First off, they would no longer be a "limited liability" member, and would have to sign personal guarantees for any money lost in excess of the net account balance. And two, they would lose the exemption from FICA (self employment tax). Having started out my life in Public Accounting, I find that some accountants, who may not understand our industry, will try to "sell" additional entities, when none are really called for. FWIW, Don
As for why I would want to turn K-1 into earned income...basically there is a large portion in the Green Trader Tax book that speaks of this. It says with solely K-1 income, you can't set up a retirement plan like a mini 401k, deduct health insurance premiums, deduct home office expenses, etc, etc. My accountant agrees with the findings of the book. Am I saying this is the way to go? Not at all..that's why I'm posting the question here, to see if anyone actually has chosen one path or the other and with what level of success.
USATrader I'm all ears....you collect K-1 in your name as an individual...no LLC, etc... and have all of the benefits that the Green book speaks of? Thanks in advance
No. Under LLC. However, you can take deductions under that umbrella. No need for "earned income" to take deductions.
USATrader...so if i'm understanding correctly, you trade under one LLC and receive the K-1. You don't "pay" yourself a management fee or anything like that to another LLC. The Green Trader Tax book also mentions filing two Schedule C's under one LLC as a possible scenario...is that what you currently do? Thanks