CTA Startup

Stok · Mar 17, 2010

Quote from heech:

I don't understand the need for a C-corp either. Seems to me you could've been a LLC in your LP.

But as far as double taxation goes, I'm assuming you're sub-chapter S, so at least you're avoiding that... but I do believe you still have to pay the same withholding/social security you would've otherwise had to pay, every time your corporation sends you a paycheck.

You may be right on using an LLC for my LP...I will ask him later this week why we did a C-corp. But, again, the C-corp gets paid nothing, they just sit there owning 1% of the LP. I get paid from my LP.

I will add, I do pay a small amount, under $100 in payroll taxes I think from my C-corp, need to go look at my books. And, I do get a K1 and 1099 from the LP I manage.

Regardless, I do have concerns if running as CTA/CPO, one is subject to SET.

heech · Mar 17, 2010

Quote from Stok:

You may be right on using an LLC for my LP...I will ask him later this week why we did a C-corp. But, again, the C-corp gets paid nothing, they just sit there owning 1% of the LP. I get paid from my LP.

If I understand you correctly, the LP isn't the actual fund structure. You formed a LP... just because.

My question would actually be, why bother with the LP? What does it buy you? Shouldn't the LP itself be a LLC?

And, more importantly, are sure you don't need to pay SET for whatever your LP is "paying" you? (Or even if the LP is just passing it on as partnership income.) This isn't a CPO/CTA issue... but basically, the federal government wants its cut, and I don't think the IRS has left any loopholes out there.

http://www.irs.gov/businesses/small/article/0,,id=98846,00.html

You are self-employed if any of the following apply to you.
You carry on a trade or business as a sole proprietor or an independent contractor.
You are a member of a partnership that carries on a trade or business.
You are otherwise in business for yourself.

SuperVolatility · Mar 17, 2010

Quote from Aaron:

What was the point of the C-corp as the GP of your LP?? I have yet to see a good reason for a trader or CTA to set up a C-corp. Heck, even Goldman Sachs was a partnership until it wanted to go public. You are paying double taxes -- first at the corporate level and then your personal income tax when you get a salary.

And the self employment tax is the same as the withholding your C-corp is going to have to make out of your salary. And filing Schedule E with your taxes is simpler, if you ask me, than filing and paying withholding tax at the corporate level. You aren't saving any money anywhere, are you?

I think you made things overly complicated for no benefit that I can see. Now you have to do a corporate tax return _and_ a 1065 for your LP. Ugh. Or rather I should say, you have to pay your CPA (who set up this structure) to do both a corporate tax return and a 1065. Sounds like your CPA is ensuring his income stream for years to come.

Maybe I'm not understanding something, but I would suggest you get a second opinion from another CPA.

So Aaron - do you pay self employment taxes, do you pay SS, etc taxes? I know you operate as selfpropriertor.

Aaron · Mar 17, 2010

Quote from SuperVolatility:

So Aaron - do you pay self employment taxes, do you pay SS, etc taxes? I know you operate as selfpropriertor.

Yes on management fees, no on trading profits.

Stok · Mar 17, 2010

It seems to me, then, that independent traders would have to pay SET, and they don't. They are in business for themselves, and the carry on a trade (trading).

heech · Mar 17, 2010

Quote from Stok:

It seems to me, then, that independent traders would have to pay SET, and they don't. They are in business for themselves, and the carry on a trade (trading).

"Because capital gains and losses are specifically excluded from the definition of "net earnings from self-employment," net earnings from a trading activity are not subject to the SE tax (IRC Section 1402(a)(3)(A))."

Any fees you earn are a different story. I assumed that's what we were talking about here.

Stok · Mar 17, 2010

Quote from heech:

"Because capital gains and losses are specifically excluded from the definition of "net earnings from self-employment," net earnings from a trading activity are not subject to the SE tax (IRC Section 1402(a)(3)(A))."

Any fees you earn are a different story. I assumed that's what we were talking about here.

You are correct, just saying, in general, independent traders are self-employed...it's a screwy system ;-)

I just emailed a friend of mine who runs a hedge fund (equity only), if he is subject to SET as the manager, will let you know what he says.

Stok · Mar 17, 2010

Quote from Stok:

You are correct, just saying, in general, independent traders are self-employed...it's a screwy system ;-)

I just emailed a friend of mine who runs a hedge fund (equity only), if he is subject to SET as the manager, will let you know what he says.

He said yep, and get your expenses sky high ;-)

SuperVolatility · Mar 17, 2010

Quote from Aaron:

Yes on management fees, no on trading profits.

just to be clear management fee is 1% maineteance and 20% incentive?

Or just the 1% (or whatever it is)...any inceptive fees are subjet to SET??

Stok · Mar 18, 2010

Quote from SuperVolatility:

just to be clear management fee is 1% maineteance and 20% incentive?

Or just the 1% (or whatever it is)...any inceptive fees are subjet to SET??

SET should apply to all management and performance fees from what I now understand. The manager gets paid to the management company (LLC), and all earnings are subject to SET. I did find this article comparing using an S-Corp over an LLC in order to save some $ on SET. The S-Corp pays the manager a reasonable salary, which is subject to SET, but then retains the rest of earnings that is not subject to SET: (found this article from another thread on ET):

http://www.powerhomebiz.com/vol136/structure.htm

I don't know if an S-Corp could be setup as the manager of an CTA/CPO ?? I'm still doing research.....