I thought prop traders had to pay SE taxes. I guess you'd know better than I would.
I've just gone through the corporation setup, and I've learned quite a bit. So here goes.
As mentioned previously, having a corporation allows you to put money in a retirement plan. According to my accountant, you can make your salary whatever you consider reasonable. So if I make $100K, I can say that my corporation only made $15K, then put that full amount in a mini 401(k). Or even a Roth mini 401(k). Of course I'm taxed on $85K, but I only pay SE taxes on $15k. Plus let's say I pay $5K in health insurance premiums. I can say my corporation earned $20K instead of $15K, then deduct the $5K from my taxable income.
Here's some other stuff I just learned recently. If you set up a partnership, you can say that your partnership was formed on the first of the year. Not so with a corporation. So for example in 2006, if you have already made money for the year without a corporation, that money doesn't count toward your retirement. If you try to set up a corporation now, it may not even be formed until later this year, and you may not be able to contribute that much for retirement (or deduct that much for your health insurance.) But with a partnership, the earnings are 'defacto', meaning you can draw up your paperwork and say that the partnership started on 1/1/2006. And anything you've made this year can be applied toward retirement and/or health insurance.
The tough part could be getting a partner...I asked my Dad, who was ok with the idea, but his accountant said no dice. Some kind of liability issue. I'm not sure what the big deal was; he would have only been a 1% partner. Incidentally my Dad's accountant told me that if I were to set up an LLC, the same rules would apply as far as being able to go back to the beginning of the year. But then my accountant said that wasn't true. I'm not sure who to believe.
BTW, it could be a lengthy process setting up a corporation. This time of year is a good time if you are using a busy accountant. If you try to do this during their busy seasons (the time just prior to Aug 15 and Oct 15 are their busy seasons too), you may have a hard time getting much attention. What took the most time in my case was having my state approve my application. I had it expedited, and it was still over 2 weeks. Normally it's 6-8 weeks. I would be impressed if you could be set up for trading your corporation in a month from when you get the ball rolling. (Of course if you're setting up a partnership, time isn't necessarily as precious, because I believe you have until the end of the year to get set up for the current year.)
