Benefits of Incorporating Your Trading Enterprise
While trading in a legal entity does not automatically guarantee that the IRS or tax court will consider your trading activity to be in the active trading business, it does offer some other benefits. Generally, a legal entity files a separate income tax return from the individual. Filing a separate income tax return allows you to provide the IRS with a clearer picture of your trading business because the business activity is not co-mingled with individual activity on one return. The more clearly your information is presented to the IRS upfront, the fewer problems you will have in the future.
Common Trading Legal Entities
LLCs taxed as partnerships are becoming the most popular choice for active traders due to their ease and flexibility. To be taxed as a partnership, your entity must have at least two members, and it is then considered to be a pass-through entity. This means that while the LLC files its own return, the income or loss from trading flows to the members and is reported on the members’ individual income tax returns. Members are allowed to take distributions of capital from the LLC, which provides a method of taking out money without having to pay payroll taxes. In addition, the trading income from an LLC is not subject to self-employment tax.
Don’t be confused by Single Member LLCs (SMLLC). When you trade through an SMLLC, the IRS considers your SMLLC a disregarded entity for tax purposes. This causes you to file a Schedule C on your individual income tax return, thus you are effectively trading as a sole proprietor.
Unlock powerful tax savings with expert S-Corp guidance tailored to traders and small business owners. This type of entity may help high net-worth individuals. We help you determine whether electing S-Corporation status is the right move, file IRS Form 2553 correctly, and structure your payroll and distributions for maximum tax efficiency. From compliance to ongoing strategy, we ensure your S-Corp is set up and maintained to keep more of your hard-earned income in your pocket.
The C Corporation is less frequently used by traders. However, for clients that insist on using a C Corp, it can have the ability to offer benefits, such as Medical Reimbursement Plans, which do not work well in pass-through entities like LLCs. The C-Corp is a standalone entity, meaning the income from trading is taxable to the C Corporation and does not flow through to the individual owners. The reason it is not typically used is because often times double taxation can play as a factor. Profits are generally removed from this type of entity through salary or dividends, again, which will cause double taxation.
Trader’s Accounting can help you turn your trading activities into a legal trading business entity to better build and preserve your wealth.
As people pursue a trading business to augment their income, they are looking for work-from-home jobs that offer flexibility and financial independence. Men and women who have children at home or full-time jobs can trade—it is just a matter of obtaining the right opportunity. The idea of trading for a living at home is appealing to many people who have considered trading as a business. If you want to become a full-time trader from home, it’s important that you take the time to plan and research your trading business.
Setting up a trading entity at home correctly is an important step if you plan to work as a full-time trader. Business entity packages from Trader’s Accounting will allow you to take advantage of many benefits that the typical trader does not have access to. From our packages, you will receive some of the following benefits:
- Home office deduction
- Trading entity operating documents
- Trading entity consultation services
- Bookkeeping services
- Bookkeeping coaching for traders
- Free first year federal and state tax returns
- Mark-to-market coaching
- Obtain a federal tax ID (EIN)
After deciding to take their operation to the next level by incorporating, many home-based active traders will need expert advice to begin and complete the process. Save yourself the frustration with your taxes by consulting directly with the recognized leading CPAs and other trading specialists at Trader’s Accounting.
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