Benefits/Drawbacks to trading through an LLC?

D

DragonDog

I plan on starting a trading account with about $20,000. Probably going to trade bond futures primarily (ZF, ZN, ZB) until I learn the bond market like the back of my hand.

Here is my question:

Am i better off just trading the account as an individual or should I incorporate an LLC, declare myself and a few family members as members of the LLC, and trade the funds by opening a brokerage account in the name of the LLC?

For the purposes of taxes, which would be the better route? I have been told that as an individual trader I may not deduct expenses incurred as part of my trading business such as purchase of a new computer, commissions paid, and etc... unless I apply for trader status with the IRS. But even if I apply for trader status, I have been told that there is no guarantee that I will be approved for such status by the IRS even if I trade full time for a living.

On the other hand, I have heard from other people that if I trade from the LLC account, the trading I do will be subject to self employment tax as well as income tax.

I don't plan on pulling money out from the LLC brokerage account when profitable; the goal is to build the account to a nice comfortable level ($500,000 or so) and then maybe start to have the LLC disburse funds to its members (in this case, I would be the only member receiving 100% of the disbursement).

So here's another question: if I keep making money year after year without disbursing funds, how would I be taxed? Do I still have to pay taxes on the funds even though they have not yet been disbursed (well, i know i have to pay taxes on them but would i have to pay taxes on funds in an undisbursed state right away or would i have to pay the taxes on the funds only when the disbursement is made?)? If so, what kind of tax treatment would such a situation warrant (i.e. do i pay capital gains taxes or just treat it like income...also, on top of that tax do i still have to pay self employment tax as I have been told by a friend?)

I'm trying to get into the trading business in a smart way in order to minimize the tax liability of my account. I also would like, if possible, to one day turn the LLC into a hedge fund if I am profitable enough (this is my dream, actually) and so I want an easy transition from trading just my own money to someday trading money for multiple investors. I believe the LLC is good for that sort of thing as I can simply make future investors members of my LLC and simply deposit their money into the LLC account and trade with not much headache.

Does anybody have an idea about the best way to start trading as a business? I would very much like to go the LLC route but I really need to hear from people with more knowledge than me on all of this. Thanks!!
 
Quote from DragonDog:

I plan on starting a trading account with about $20,000. Probably going to trade bond futures primarily (ZF, ZN, ZB) until I learn the bond market like the back of my hand.

Here is my question:

Am i better off just trading the account as an individual or should I incorporate an LLC, declare myself and a few family members as members of the LLC, and trade the funds by opening a brokerage account in the name of the LLC?

For the purposes of taxes, which would be the better route? I have been told that as an individual trader I may not deduct expenses incurred as part of my trading business such as purchase of a new computer, commissions paid, and etc... unless I apply for trader status with the IRS. But even if I apply for trader status, I have been told that there is no guarantee that I will be approved for such status by the IRS even if I trade full time for a living.

On the other hand, I have heard from other people that if I trade from the LLC account, the trading I do will be subject to self employment tax as well as income tax.

I don't plan on pulling money out from the LLC brokerage account when profitable; the goal is to build the account to a nice comfortable level ($500,000 or so) and then maybe start to have the LLC disburse funds to its members (in this case, I would be the only member receiving 100% of the disbursement).

So here's another question: if I keep making money year after year without disbursing funds, how would I be taxed? Do I still have to pay taxes on the funds even though they have not yet been disbursed (well, i know i have to pay taxes on them but would i have to pay taxes on funds in an undisbursed state right away or would i have to pay the taxes on the funds only when the disbursement is made?)? If so, what kind of tax treatment would such a situation warrant (i.e. do i pay capital gains taxes or just treat it like income...also, on top of that tax do i still have to pay self employment tax as I have been told by a friend?)

I'm trying to get into the trading business in a smart way in order to minimize the tax liability of my account. I also would like, if possible, to one day turn the LLC into a hedge fund if I am profitable enough (this is my dream, actually) and so I want an easy transition from trading just my own money to someday trading money for multiple investors. I believe the LLC is good for that sort of thing as I can simply make future investors members of my LLC and simply deposit their money into the LLC account and trade with not much headache.

Does anybody have an idea about the best way to start trading as a business? I would very much like to go the LLC route but I really need to hear from people with more knowledge than me on all of this. Thanks!!
More...


For tax purposes I don't think it makes much difference at all
 
-----For the purposes of taxes, which would be the better route? I have been told that as an individual trader I may not deduct expenses incurred as part of my trading business such as purchase of a new computer, commissions paid, and etc... unless I apply for trader status with the IRS. But even if I apply for trader status, I have been told that there is no guarantee that I will be approved for such status by the IRS even if I trade full time for a living.

On the other hand, I have heard from other people that if I trade from the LLC account, the trading I do will be subject to self employment tax as well as income tax. ----

all not true


---So here's another question: if I keep making money year after year without disbursing funds, how would I be taxed?---


yes

depends on your distributions % applied to each member.
if your LLC made 10K and you split it with your spouse,but not distribute-you still have to pay your taxes. think about it..it's realized profits. C corp is a different story..but also taxed differently. you can find all the info in internet.


here is good place to start-

http://www.traderstatus.com/
 
Just to echo a few things already posted:
No such thing as “applying for trader status” and never has been.
Self employment tax never applies to capital gains, no matter what entity you trade through. You have to go out of your way and turn those capitals gains to ordinary gains or income by doing something like being a member of an exchange or paying yourself a salary.
An LLC is a pass through entity so taxes will be due just like on an ordinary return, e.g. if you close out your trade taxes are due. There is no tax advantage to trading through an entity as far as what is due.

DragonDog, no offense but this looks like another fake post, in a long line of fake posts that appear on this site. You are not going to turn 20k into 500k no matter how you trade so don’t worry about it. If you trade enough, multiple trades everyday, and don’t have another job you can just put your gains on Schedule D and your expenses on Schedule C exactly like the IRS has instructed, and there is no need for an entity. If you trade for a few years and are profitable, then come back and look at whether an entity makes sense.
 
Quote from opt789:

Just to echo a few things already posted:
No such thing as “applying for trader status” and never has been.
Self employment tax never applies to capital gains, no matter what entity you trade through. You have to go out of your way and turn those capitals gains to ordinary gains or income by doing something like being a member of an exchange or paying yourself a salary.
An LLC is a pass through entity so taxes will be due just like on an ordinary return, e.g. if you close out your trade taxes are due. There is no tax advantage to trading through an entity as far as what is due.

DragonDog, no offense but this looks like another fake post, in a long line of fake posts that appear on this site. You are not going to turn 20k into 500k no matter how you trade so don’t worry about it. If you trade enough, multiple trades everyday, and don’t have another job you can just put your gains on Schedule D and your expenses on Schedule C exactly like the IRS has instructed, and there is no need for an entity. If you trade for a few years and are profitable, then come back and look at whether an entity makes sense.
More...

What if i`m offered to trade OPM,will an entity be the option?
 
Quote from krittika:

What if i`m offered to trade OPM,will an entity be the option?
More...
If you trade OPM then an entity is the only way to go, but you need to pay in the neighborhood of 30k for an attorney to put together your entities, disclosure documents, and subscription agreements.

Most here will tell you it is not worth it to trade OPM if you are a decent trader. It is simply not worth the hassle and endless liability, that is why you see so many successful managers eventually quit the business and just set up family offices to trade family money. I have done both, and the only thing I can say is they are right, but it depends on your strategy and a million other factors as to whether trading OPM is right for you.
 
I have a question on the subject of LLC

Lets say I want to protect from black swan event or broker error .

I just read a story the other day on ET about a very screw options deal that happened where the guy was on the hook for way more than his 800 dollar account because of a broker error. I want to protect from this type of thing from ever screwing me over in some way shape or form.

Lets say I trade through LLC and only keep say 50k in the account at any time. If a big error occurs where a loss is greater than the amount in account then they can't come after my personal funds correct?

Any one else have any tips on protecting from black swan events and entities that should be utilized? Only trading my own funds.
 
Quote from opt789:

Just to echo a few things already posted:
No such thing as “applying for trader status” and never has been.
More...


http://www.traderstatus.com/trader.htm


There is no tax advantage to trading through an entity as far as what is due.
More...
http://www.traderstatus.com/entities.htm#benefits

you can have some tax savings,if you spread your distributions to your relatives ,who are in lower tax brackets than you are and are members of your LLC. but it's a pain in a**. money ,taxes and relatives,who making less than you are..
 
Quote from opt789:

If you trade OPM then an entity is the only way to go, but you need to pay in the neighborhood of 30k for an attorney to put together your entities, disclosure documents, and subscription agreements.

Most here will tell you it is not worth it to trade OPM if you are a decent trader. It is simply not worth the hassle and endless liability, that is why you see so many successful managers eventually quit the business and just set up family offices to trade family money. I have done both, and the only thing I can say is they are right, but it depends on your strategy and a million other factors as to whether trading OPM is right for you.
More...

Thanks.
 
Bob111,
I am not sure why you are posting that link, there is no such thing as applying for trader status. If you claim trading expenses via you personal or entity tax return you are obviously claiming trader status, but there is no “applying” for it. You simple claim it by deducting your expenses then when/if you get audited you will find out if the IRS agrees with you.

As far as giving your gains to people with a lower tax rate, I won’t even begin to comment since that can be construed, depending on the circumstances, as tax fraud. But I will agree that there are advantages to having an entity, and that is why I trade through one, but for a new trader I would say find out if you are consistently profitable first before worrying about an entity.
 
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