Incorporation has many advantages for traders who want to grow their wealth by reinvesting profits and deducting trading expenses with a firm conviction that there is tax law standing behind a corporation that is not available to someone trying to trade as a “trader in securities”.
Incorporation has many advantages for traders who want to grow their wealth by reinvesting profits and deducting trading expenses with a firm conviction that there is tax law standing behind a corporation that is not available to someone trying to trade as a “trader in securities”. For some traders, this is the perfect tax-efficient way to use a combination of a corporation and an LLC or Limited Partnership to both receive money to live on while maximizing the amount of deductions including “perks” that the closely held corporation can maintain.
The C corporation in this combined entity structure operates as the management company, its business purpose is to manage the trading business; paying the bills, entering into agreements for itself and the LLC, and making all of the trades through the LLC, which acts as the trading company and owner of the securities traded by the corporation. You and your family members hold the C Corporation’s stock; the LLC is a partnership that includes you, your family members and the C Corporation. Generally the corporation will act as the LLC manager, or the Limited Partnership General Partner.
In this arrangement, most of the expenses are paid through the C Corporation, while the LLC is used strictly for holding the brokerage account. Because the C corporation manages the LLC’s trading activity, the only expenses incurred by the LLC are commissions, margin and management expenses.
You and your family, as LLC members, may take distributions from the LLC instead of salary, and thus avoid payroll taxes. Because an LLC is a flow-through entity, you’ll only pay income taxes on the profit generated by the LLC.
Here’s another savings: because the C corporation manages your trading and deducts all trading expenses, including the medical expenses for the corporate officers from its management income, before taxes are calculated for the corporation these deductions are netted out. At that point, the corporation’s profit will be taxed at the lower corporate rate, currently 15 % for the first $50,000 in income.
If you elect to leave retained earnings in the corporation there is a dilemma. How to get the money out. You have two choices, payroll on which income tax and payroll tax would be owed. The other would be through issuing a dividend.
The dividend recipients would be taxed on the dividend amount that they received. Dividends have a cap of 15% federal income tax with no payroll tax on them at this time, and therefore can be an inexpensive way for many traders to get their money our of the corporation.
Of course, you’ll still enjoy the full benefits of a C corporation, including personal asset protection, fully deductible fringe benefits, and clear corporate tax laws.
Is a combined C corporation/LLC entity right for you? It may be if you want to use a legal entity for trading, take money out of your business without paying payroll taxes, and make fewer than 200 trades per year. Consult our experienced Traders Accounting tax professionals to see which entity structures are best for your business.
Jim Is Coming To Fort Lauderdale In November!
Mark your calendar; Jim Crimmins will be giving a full day seminar at the Courtyard Marriott on Cypress Creek Road from 9:30 – 4PM on Sunday November 21st. There is a Buffet Lunch included. The cost is only $79 if you pre-register before November 19th.
We will be discussing a lot of those wonderful tax issues, but for those of you who have heard Jim speak before you know how entertaining and even funny he can present the lessons to you. Some of the items being covered are:
The Fred Chen Court Case—what does this mean to your trader’s taxation?
The New Tax Rules – What do they mean to you, should you be doing anything before the end of the year to get ready?
The Business of Trading—Is this something you are ready for? Find out the various ways of creating a tax efficient atmosphere for your trading.