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Anonymous

Question

LLC for Trading?

Forum|Forum|4 years ago
October 15, 2021
3 replies
24 views

I am thinking about forming a LLC for tradings as I want to get some "earned income" for Future SS and Medicare benefits and current benefits such as Health Insurance and 401K contributions and Mark to Market benefits (section 475) /wash rule benefits.

My understanding is with "just LLC" all of these thing can't be achieved. One need "S corp" for benefits parts such as pay roll, 401k, Health insurance.

It is recommended for Traders to form LLC in your home state. WHY? Reason I got was it law suit protection. Not sure how?

Most C corp are formed in Delaware so why not your trading LLC (solo member) be formed in Delaware etc?

When you apply for LLC, do you apply for just for LLC or you apply for either LLC or S corp?

S corps are LLCs but where does "S" part comes at the time of filing/registering your LLC or it is part tax election. Like first form an LLC and then send IRS your LLC for 475 and tax identification number and elect S part there?

I have read both ways, People say it is S corp vs it is just LLC but it has S corp status for tax purposes. I have seen my state's secretary of state website and it has only one thing LLC?

Q. Thing I am trying to understand is are these 3 vs 2 things. I am bit confused with S part how and from where it comes.

3 Entities: LLC, or LLC with S corp status for Taxes or S corp

2 Entities: LLC or S corp

Mike9241

Level 15

consult a tax/law pro. my understanding is that only individuals can make the 475(f) election.

and making the 475(f) election for an individual means trading income is not self-employment income

some of the questions you ask are legal issues that we can't answer.

How LLCs Are Taxed

By default, your LLC is taxed in one of two ways, depending on how many owners (called "members") are in the LLC:

A single-member LLC is considered a disregarded entity and is taxed as a sole proprietorship, filing Schedule C to for the individual's personal tax return.
A multiple-member LLC is taxed as a partnership. The partnership files an information return on Form 1065, with Schedule K-1's for each member/partner.
Many states have annual fees for all LLC's and some impose an income tax on the net income

For Federal and state purposes LLC member taxes are based on their share of the income of the business for the year. No matter how much or how little LLC members take out of the business for personal use, they are taxed on the full amount of the annual net income of that business. neither single-member or multimember LLC's pay salaries to their members.

C-corporation

LLC Taxed as a Corporation

Many LLCs choose to be taxed as corporations to save on taxes. In this tax situation, the LLC members become shareholders and they are not self-employed.

For higher-income individuals or those with profitable LLCs, the fact that corporate shareholders don't have to pay tax on their share income of the corporation is a tax advantage. The corporate rate (a flat 21%, beginning with the 2018 tax year) may be lower than the higher tax rates for personal income taxes.

You also avoid having to pay self-employment tax, unless you work in the corporation as an employee (and pay FICA tax). most likely a significant portion of the net income would need to be paid out as salary because it is your personal work and expertise that is generating the profits.

C-Corp classification for tax purposes is done by filr ing form 8832. my personal opinion is that it makes no sense to form an LLC just to have it taxed as a C corporation. as a C-Corporation distributions ( dividends) are taxed to the individual so in effect there's double taxation. the remaining profit is taxed a 21% and then if the distributed tax at the taxpayer level.

S-Corp

LLC Taxed as an S Corporation

An S corporation is a special kind of corporation that has some tax advantages. Owners can split their income from the S corporation between a distribution (in the same way as a partner in a partnership) and status as an employee. An S corporation owner who works in the business must be paid a reasonable salary as an employee and must pay tax and FICA tax on this salary. Again due to the nature of the work done a substantial portion of the profits would need to be paid out as salary

Because the S corporation profits are distributed to owners, this tax status avoids the double taxation situation.

To qualify to be taxed as an S corporation, the business must meet specific requirements:

the business can have no more than 100 shareholders
no shareholder can be a nonresident alien (noncitizen who doesn't live in the U.S.
there can be only one class of stock
all shareholders must be individuals (not other businesses)5

Another advantage of S corporation status is that an S corp owner can take a 20% tax deduction from his or her share of business income, in addition to usual deductions for business expenses. This Qualified Business Income (QBI) deduction is calculated on the owner's income as an employee. This deduction is not available for personal service businesses like accounting, law, consulting, or financial services. Also, the QBI deduction is limited or not available for higher-income business owners.

Many LLC's choose the S corporation for its tax status because:

It avoids the double taxation situation of corporations
S corporation owners can take the QBI deduction on business income (not employment income)
Owners pay Social Security/Medicare tax only on employment income.

How to Make the Election

If you decide to make this election, here is some more information you need to know:

fOR THE LLC To be taxed as a Corporation, use IRS Form 8832 — Entity Classification Election. The election to be taxed as the new entity will be in effect on the date entered on line 8 of Form 8832. The election cannot take effect more than 75 days before the date the election is filed, nor can it take effect later than 12 months after the date the election is filed. This election is not needed if the entity was originally formed as a Corporation.

The form includes a consent statement which may be signed by all members, or by one member on behalf of all members. If one member signs, there should be some record in company membership meetings that all members approved this election.

You must provide the name(s) and identifying the number(s) of owners (Social Security Number for a single-member LLC, and Employer ID Number for multiple member LLC).

This election is not needed if the entity was originally formed as a Corporation.

To be taxed as an S Corporation, use IRS Form 2553 - Election by a Small Business Corporation. To begin the new tax classification for a year, you must file by March 15, effective for the entire year. You will need to include information about each shareholder: name and address, shares owned, Social Security number, the date the owner's tax year ends, and a consent statement

Mike9241

TheRonald1

Level 2

Form an LLC in your own state, owned solely by you (or with spouse) and it will be reported on Sched C of your 1040.

You will need a FEIN (no cost).

Any profit from that Sched C is subject to Self-Employment income.

Remember the bank & investment accounts must be held in the name of the LLC for the 1099's to be included as LLC income !

Be sure to treat it as a business. Don't move money between you & the LLC unless it is paid in capital, a Loan Agreement, or salary (can be via a 1099-NEC).

Your health insurance, travel and office expenses may be deductible ... depending on your situation.

Any other variations add risk or complications (e.g. company tax filing, tax filings in multiple states), and you can lose the asset protection.

I have done that for 29 years & it has been very helpful.

Our Corp. has another 20 LLC's with $ millions in assets ... so even though I am NEITHER a CPA nor a tax lawyer (and never played one on TV or in movies), I'm well versed on this stuff.

Anonymous

Ronald:

Thanks for your reply.

Lets say your business made $150000 in 2021

LLC does not makes sense for me as it moved all income and expenses to schedule C. So all income until FICA cap (which I think is like $142800 for 2021) and medicare has no limit. I will get screwed there.

S corp, income is only via payroll so I decide how much you want to pay yourself (reasonably). Lets say I pay myself $50k and rest will be come as distribution (1099). with S corp, Sch C has only expenses but no income.

With S corp I can deduct Health insurance and 401K as well.

Q. What are entity level (either LLC or S corp) tax filings? Is it only to IRS (federal) or state as well? I am assuming when S corp is generating W2 and 1099 its copy go to IRS as well. Are there additional filing by S corp in terms of taxes?

Opus 17

Level 15

@529325

Failing to pay yourself a fair market salary as an S Corp. is a guaranteed audit with severe penalties. You’d better be 100% certain that the salary you pay yourself is reasonable both in terms of the time and effort that you put into the job and in comparison to similar work performed by employees in the same area of business.

Opus 17

Level 15

You can be a "trader" and report your activity as earned income on schedule C, without being either an LLC or an S-corp.

https://www.irs.gov/taxtopics/tc429

You really need strong qualified professional advice.

Anonymous

I don't need to get into arguments. Sch C has ONLY expenses, NO revenues.

In order to deduct expenses on Sch C you need TTS.

In order to get wages you need 475 (MTM, ordinary income) and if your link IRS suggest having 2 accounts, one for Portfolio for Capital gains and one for trading as they don't mix in ONE account.

I am not sure for wages/w2, if you only need 475 or 475 along with an entity such as LLC or S crop. I am still working to figure it out.

So far What I have found out it, 401K and Health insurance deduction can only be achieved by having S corp.