Quote from Sailing:
Cache,
I lke your third option a lot... neve thought of this.
I am assuming you probably trade other LLCs as an advisor over their individual account through a POA, rather than all the monies pooled into one account.
Yeah a lot of people like this when it is first mentioned. You really need to figure out if it is beneficial to your organization. I know others are probably wondering what I'm talking about, so here are a few details so I don't get too many questions later.
The basics are that there are two main types of tax. Income and capital gains. If you manage a "fund" and collect fees , they are considered income and you are taxed accordingly. If you receive them via the allocation method, they are considered capital gains. This could be good or bad. A couple examples:
GOOD You only trade options on broad-based indices (1256 contracts) and thus get preferential (60/40) treatment at tax time. Those paying you don't pay tax on the gains and you get the 15% long term rate on 60% of those re-allocated profits rather than taxing the entirety at your personal income tax rate.
BAD You only trade equity options and therefore don't get preferential treatment. You also have some past losses/expenses that you'd like to write off this year, but these deductions aren't categorized under capital losses and thus can only be written off against income, not capital gains.
ANOTHER BAD
One of the silent partners has another form of income coming into his individual LLC. If you are compensated by re-allocation then those "expenses" cannot be deducted from his other income.
Anyway, I think you get the picture. The issues are all about income vs. cap gains.
As far as my situation is concerned, it is a little more complicated than I would recommend to most people. My partners and I don't only deal in trading securities. Our entity had to be conducive to a P/E firm, as well as an IA/MM firm. I don't want to get into all the gritty details. Let's just say that my business philosophy is different than most, and I prefer to take on additional partners rather than let business consume my life.
Here's the grit!
We need to form one pool of money under one named account for purposes including 'haircut margin' and maximum cross margin opportunities'. Therefore, the broker is going to see only one monetary account, the IRS is only going to see one account... and the K-1 statement will reflect only one account. What I'm trying to say is.... Only two people will have access to this one monetary master account. It is not an account made up of multiple accounts.
The question is... can we still pass through the gains to each indivicual LLC, expecially if they make up different percentages of the master account?
The IRS will have only a statement from the broker showing taxes due from this one 'master' account.
Does this make sense?
M~
That's better than I'd thought. I was thinking you were suggesting a nightmare scenario of each person having the power to manage a single pooled account. I should've known you were smarter than that, but better to err on the side of caution.
Anyway, what will essentially happen in your case is that if you form a single master account under an LLC, the gains will flow through to individual members as described in your articles of organization. If each member is another LLC then the profits allocated to each entity will then flow through to the owners of the respective entities. At this level each owner will finally pay tax on the gains according to his/her personal tax situation.
If I were you I would consider a slightly different situation. Set it up similar to the way many hedge funds are setup. Form an LP with yourself (and the other managing partner) as the GP. Form an LLC for you and the other managing partner that will shield you from business risk. Otherwise, as the GP you carry all the business risk.
You now have a situation in which each of the silent members are simply limited partners and can operate under whatever entity they would like. That is not a concern of yours. They should handle their own business, although in my entity my partner in charge of accounting takes care of them for free because I'm nice.
You as the GP operate under the LLC so that you are protected from any supposed injustice that one of the silent partners would accuse you of. Your LLC is also free to charge whatever fees you'd like, under whatever method you'd like. You are taxed according to your personal income status.
And just as a side note. The IRS doesn't get a record of your options trades anyway. They only get what you give them so it will be up to you to make sure that the necessary statements are provided to the individual partners.
Cache
