Pros and Cons: LLC vs S-Corp

bone · Feb 18, 2011

No, you want to stay with a single member LLC if you can help it.

With a multi-member LLC, you have to name specific individuals holding LLC ownership and you have to name corporate officer positions in your registration along with their roles. Illinois at least wants you to state their equity holdings in the LLC and hold periodical meetings and record the minutes. If someone's position or status with the LLC changes, you have to file a fresh registration change. My business contracts lawyer and my CPA both talked me out of it when I had employees trading for me.

millridge · Feb 18, 2011

Quote from bone:

No, you want to stay with a single member LLC if you can help it.

With a multi-member LLC, you have to name specific individuals holding LLC ownership and you have to name corporate officer positions in your registration along with their roles. Illinois at least wants you to state their equity holdings in the LLC and hold periodical meetings and record the minutes. If someone's position or status with the LLC changes, you have to file a fresh registration change. My business contracts lawyer and my CPA both talked me out of it when I had employees trading for me.

Oh! I didn't think about that, maybe different state has different rule regarding LLC setup. Need further study this weekend.....

uptickk · Apr 3, 2011

Just thinking out loud hereâ¦

It is possible to setup an LLC to legitimize your trading business and fund it with a minimum amount of capital so that your profits barely offset your trading expenses meanwhile trading the majority of your risk capital in your personal account where you would not be subject to self employment taxes?

Its sounds too good to be trueâ¦

opt789 · Apr 3, 2011

Quote from uptickk:

Just thinking out loud hereâ¦

It is possible to setup an LLC to legitimize your trading business and fund it with a minimum amount of capital so that your profits barely offset your trading expenses meanwhile trading the majority of your risk capital in your personal account where you would not be subject to self employment taxes?

Its sounds too good to be trueâ¦

For the eight thousandth time, capital gains are not subject to self employment taxes. For some traders, like members of an exchange or some who form entities and choose to pay themselves a salary, their capital gains are treated as income and therefore taxable as such including self employment taxes. It does not matter if you form an entity or not, if you have a capital gain it is not treated as self employment income. Your capital gains can only end up being taxed as self employment income if you choose to turn those capital gains into income - just forming an entity or not does not affect this.

Also, forming an entity may help your case to show it was a real business you were engaged in when you get audited, but it does not automatically âlegitimizeâ that you are trading as a business.

dandxg · Apr 3, 2011

There are way too many factors to even attempt advise. Bone says Single LLC I am 2 because it works best in Colorado, or atleast that's what the CPA advised me back then. Last time I heard CA had a franchise tax fee where just having an LLC was $800, I pay $25

uptickk · Apr 3, 2011

Quote from opt789:

For the eight thousandth time, capital gains are not subject to self employment taxes. For some traders, like members of an exchange or some who form entities and choose to pay themselves a salary, their capital gains are treated as income and therefore taxable as such including self employment taxes. It does not matter if you form an entity or not, if you have a capital gain it is not treated as self employment income. Your capital gains can only end up being taxed as self employment income if you choose to turn those capital gains into income - just forming an entity or not does not affect this.

Also, forming an entity may help your case to show it was a real business you were engaged in when you get audited, but it does not automatically âlegitimizeâ that you are trading as a business.

Thanks for replying. My end goal is to be able to write off expenses and possibility be able to contribute to some sort of retirement plan. I currently trade without an entity and as you stated do not pay self employment taxes on my capital gains (1256 contracts). I am on the fringe of what would probably be considered trader status in the eyeâs of the IRS and thus looking to setup an entity if it means I could deduct expenses and not pay self employment taxes.

Correct me if I am wrong but according to what you are saying, I could setup an LLC and all of my capital gains would still get the favorable 60/40 tax treatment without incurring self employment taxes. If this is possible how does one withdraw their profits from the LLC without turning those gains into income and thus being subject to self employment taxes?

I will eventually get legal and tax advice from a pro but I am trying to nail down an understanding first.

Thanks

opt789 · Apr 3, 2011

Quote from uptickk:

Thanks for replying. My end goal is to be able to write off expenses and possibility be able to contribute to some sort of retirement plan. I currently trade without an entity and as you stated do not pay self employment taxes on my capital gains (1256 contracts). I am on the fringe of what would probably be considered trader status in the eyeâs of the IRS and thus looking to setup an entity if it means I could deduct expenses and not pay self employment taxes.

Correct me if I am wrong but according to what you are saying, I could setup an LLC and all of my capital gains would still get the favorable 60/40 tax treatment without incurring self employment taxes. If this is possible how does one withdraw their profits from the LLC without turning those gains into income and thus being subject to self employment taxes?

I will eventually get legal and tax advice from a pro but I am trying to nail down an understanding first.

Thanks

Income from an LLC or partnership you set up will simply flow through to your personal taxes. My trading entity files a tax return, but does not actually pay the taxes, all the gains (or losses) and expenses are passed through via a K1 to your personal tax return. Your legitimate trading expenses are deducted on the entity return and the gains are passed through to your schedule D via form 6781 for futures traders and Schedule E for expenses. Some other of your expenses may have to be taken on schedule E page 2, but that is a complicated process and depends on each personâs unique situation. That is the big difference between what is considered a pass through entity (general partnership, or LLC) and ones that arenât like an actual corporation. Also be aware that many states have additional taxes on LLCs but not on sole props or general partnerships.

Frankly it is simpler, as others have pointed out on this website, to just not bother with an entity. Your gains go on your taxes like anyone else, then you take your expenses on schedule C. This does tend to get more audit scrutiny though, so it is best to make sure you will fall under the IRSâs rather archaic, oversimplified and as yet still not completely understood definition of trading as a business. Whether you set up an entity or not you are still allowed to claim all the same deductions for expenses.

Depending on their situation, most people without a retirement plan at their work can still put 5000 in a roth ira. If you want to put a substantial amount into a self employed retirement program (which can in the long run be rather beneficial for some people) then you will have to set up an entity where you pay yourself a salary. The salary is earned income which is what you need to put it in a deductible retirement account, unfortunately you will have to pay self employment taxes on that salary. This is why so many here state that you need professional assistance, every traderâs situation is different. I would, however, caution people to find not only professional help, but professional help that knows the trading business â not many do.

Bob111 · Apr 3, 2011

Quote from uptickk:

Thanks for replying. My end goal is to be able to write off expenses and possibility be able to contribute to some sort of retirement plan. I currently trade without an entity and as you stated do not pay self employment taxes on my capital gains (1256 contracts). I am on the fringe of what would probably be considered trader status in the eyeâs of the IRS and thus looking to setup an entity if it means I could deduct expenses and not pay self employment taxes.

Correct me if I am wrong but according to what you are saying, I could setup an LLC and all of my capital gains would still get the favorable 60/40 tax treatment without incurring self employment taxes. If this is possible how does one withdraw their profits from the LLC without turning those gains into income and thus being subject to self employment taxes?

I will eventually get legal and tax advice from a pro but I am trying to nail down an understanding first.

Thanks

how big are your TRADING expences anyway?

uptickk · Apr 3, 2011

Quote from opt789:

Income from an LLC or partnership you set up will simply flow through to your personal taxes. My trading entity files a tax return, but does not actually pay the taxes, all the gains (or losses) and expenses are passed through via a K1 to your personal tax return. Your legitimate trading expenses are deducted on the entity return and the gains are passed through to your schedule D via form 6781 for futures traders and Schedule E for expenses. Some other of your expenses may have to be taken on schedule E page 2, but that is a complicated process and depends on each personâs unique situation. That is the big difference between what is considered a pass through entity (general partnership, or LLC) and ones that arenât like an actual corporation. Also be aware that many states have additional taxes on LLCs but not on sole props or general partnerships.

Frankly it is simpler, as others have pointed out on this website, to just not bother with an entity. Your gains go on your taxes like anyone else, then you take your expenses on schedule C. This does tend to get more audit scrutiny though, so it is best to make sure you will fall under the IRSâs rather archaic, oversimplified and as yet still not completely understood definition of trading as a business. Whether you set up an entity or not you are still allowed to claim all the same deductions for expenses.

Depending on their situation, most people without a retirement plan at their work can still put 5000 in a roth ira. If you want to put a substantial amount into a self employed retirement program (which can in the long run be rather beneficial for some people) then you will have to set up an entity where you pay yourself a salary. The salary is earned income which is what you need to put it in a deductible retirement account, unfortunately you will have to pay self employment taxes on that salary. This is why so many here state that you need professional assistance, every traderâs situation is different. I would, however, caution people to find not only professional help, but professional help that knows the trading business â not many do.

Opt789,

Thanks for all the information I truly appreciate it. I was not aware of the additional taxation some states have on LLCs and will have to do a little more research around this.

I was aware of needing earned income in order to contribute to a retirement account and that was part of what I was trying to figure out a solution too since I am not eligible to contribute to an iRA. My initial thought was to take a salary from the LLC to get earned income which would result in self employment taxes on the salary. However, my research shows that I would only be able to contribute 25% of my salary to a retirement account while still paying taxes on the full salary amount which isnât a great trade off. I know you can also take cash distributions from the LLC which I donât believe are subject to the self employment taxes but you are still left paying yourself a âreasonableâ salary that I am not sure justifies the tax costs just to get a retirement plan.

Right now I am thinking that once I quite my full time job I will just go the route of trader status and build the best case possible in the event of an IRA audit.

uptickk · Apr 3, 2011

Quote from Bob111:

how big are your TRADING expences anyway?

Outside of commissions which reduce your tax base anyway not much (internet, computers, etc.). I was more hoping for the retirement benefits and any health insurance costs once I quit my full time gig.

EDIT: I should also mention I was also looking for a way to prove income as I plan on buying a home in the next year or two and have read posts about people getting denied for loans as a result of being "unemployed".