We started trading last year, and are electing MTM accounting this year. But we are really confused about which entity to go with. Partnership, LLC, C-corp. Has anyone had any success or disappointments with any of these. We are not high on the trading circuit - 300 to 500 trades per year; and would like to have our medical costs paid; and ideally we would like to pay for continued education (B.S. degree or M.S. degree). I have read reviews for each of these entities, all professing to be the best. Before I hire someone, has anyone any recommendations? Not sure if it matters, we live in CA.
Bren, CA charges $800 or more in tax (on top of other fees) for LLC and corporations, whereas a general partnership saves these costs. Since you are just starting out you might want a general parnership but if you want medial costs (on top of health insurance) you need a c-corp in addition to the trading entity. Unless you have a lot of medical espense, it probably isn't worth the trouble. Generally, education unrelated to your current occupation or not appropriate and helpful to your job is not deductible. A little planning now, before you start is the smart way to go. Good luck to you!
my wife and I are a husband and wife trading team and we use a limited partnership as the trading vehicle in which we are both limited partners and then we own a C corp as the general partner that has a management agreement witht he partnership. we use the c corp for ease of health insurance, profit sharing etc. the only donw side to the c corp is you should pay yourself a wage and then you get into employment taxes like fica and of course more record keeping. i don't think you should trade in a c corp but in a pass through entity.
its not that there are so many advantages to using a pass through entity but that it is so un wise to trade in a c corp. if you have profits in a c corp you would have to distribute those profits in the form of expenses or wages because any net profits would be subject to personal holding tax which is alot higher rate than most peoples tax rate. and c corps can't do anything about losses except have future years profits carry back. a c corp can't even deduct the $3,000 a year. and there are becoming even less advantages to a c corp because now self employed individuals can deduct their health insurance premiums and even set up a savings account.. in a pass through entity (s corp, llc, partnership) the entity is not concerned with the profit/loss but goes right to the individual owners tax return. imo there are two reasons for an entity. reduce the risk of audit and some asset protection and if you want to pay yourself a wage, ability to pay into a retirement account.
Thanks for the reply. So an s corp is considered a pass trough "becaused the profit/loss passes through to the individual? Is this type better than a limited partnership? Ken
Limited Partnerships are used for a different type of asset protection and more for estate planning than s-corporations. One type of entity isn't "better." Each entity has its own uses and benefits. The choice should be based on the individual needs and goals of the owner and his tolerance for red tape and the associated monetary costs that are sometimes more or less with the various options out there.
If you're serious traders (licensed of course, or else you're simply customers of brokerage firms), then you want to keep your individual status. Do not waste money on LLC's, C corp's, or anything else. You can be totally exempted from FICA (Self employment taxex) which is like giving you 15% right off the top. Of course, the money you save will be donated to the State of California...you might want to re-think that part of the equation. If you make only $250,000 per year, you will be wasting over $2,000 per month just to live there...(I grew up in CA, love CA, worked many years in CA, but after I started making (and holding onto) real money, just could not justify paying all that extra money...heck I could buy another home and just visit when I wanted to...a 3 hour drive from NV. I spent many years in Public Accounting, and hate to see people waste money on accountants and lawyers. Feel free to call me to discuss...702.739.1393., Don
the irs is starting to look at sub s corps and making you pay most of your profits in wages to yourself. in a limited partnership all the profits would just flow through as capital gains and not incure any employment taxes. which is better? it just depends what you want to achieve in the long run. if you want a ira or profitsharing/401k then you have to have a entity that pays you a wage and not just a capital gain. imo because of the favorable tax treatment for futures traders having all your income capital gains income is far better than paying yourself a wage just so you can set up a retirement account. but you have to ask your tax consultant. someone you trust.