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Creating a Trading Entity

post #1 of 9
Thread Starter 

This thread is to discuss the ideas related to forming an LLC to do the trading instead of trading from a personal account. The considerations involved are:

 

Location for incorporation:

    a) On shore: Nevada, Delaware, Oregon

    b) Off Shore: Cayman Islands, Panama, Bermuda, Etc

 

International Brokerage firms and banks with favorable fees and privacy laws

http://www.lom.com/offshore-bank-account-vs-offshore-brokerage-account

 

Tax consequences if the owner of this LLC is:

    a) A US citizen or Permanent Resident

    b) A non-US citizen

 

Here are some advantages of doing it. I am hoping this would serve as a reference point for all the interested members.

 

 

THE REASONS TO FORM YOUR OWN ENTITY:
As a trader you need to form a separate trading entity for the following reasons:

  • For a situation where the individual might not (or cannot) be treated as "a trader" by the IRS because he or she earns a living from activities in addition to her trading activities, such as:
     
    • receiving income from a full-time W-2 wage job
      • recently we've seen several self-prepared returns where the unwavering pre-audit IRS position is that any W-2 received by either spouse negates their ability to be treated as a securities trader or commodities trader.
    • earning dividend and interest income
    • having (other business) self-employment earnings
    • ... or any SMLLC business activity
    • receiving income or loss from an active pass-thru entity activity
    • receiving income or loss from passive pass-thru entity investments
    • holding substantial investments of any kind
    • being supported in a way other than from active trading
    • having a primary source of income other than active trading
    • earning a living in any other way, besides active trading

    then a 100% pure-play trading entity can be set up and the entity itself will be the trader as 100% of its activities and 100% of its capital are employed in an active business of trading.
     

  • It can be said that a better rule of thumb is to only claim trader status as an individual, reporting income on tax form 1040, whenever the activity is your only "job" and you have no other funds available to support yourself with.  Otherwise, consider forming a separately filing entity that will not use form 1040.
     
  • When your job is in the securities industry (stock brokers, financial investment advisors, registered reps, etc. ), often your purchases and sales need to monitored or reported to and approved by your employer's compliance department.  Investing your funds one time into a separate entity where it is the entity that will be doing the actual trading, in some situations, can eliminate this need to go to your compliance department and disclose details regarding every transaction.
     
  • Virtually every retail broker automatically treats a LLC or other entity as a "professional user" by default.  There must be a reason!  LLC's and other entities command respect, they show that you mean business, are serious about your trading and are a professional.  When seeking the best and largest tax deductions, having an entity in your corner can only help.
     
  • For more sophisticated mark-to-market elections and revocations:
    • To facilitate a so-called "retroactive" mark-to-market election filing.
    • To help facilitate a so-called "retroactive revocation" mark-to-market election.
    • To allow an easy and permanent proactive revocation of a mark-to-market election, simply by stopping the use of the entity.
    • To isolate and protect an individual who has a large capital loss carry-forward from a prior tax year.
    • As "insurance" to temporarily elect mark-to-market for commodities (futures) trading during a potential isolated loss year, so that you will retain the special lower "60/40" tax rate for use in a profitable year.
       
  • Unlike individual taxpayers filing form 1040, all entities (such as those filing tax forms 1065 and 1120S) are clearly exempt from the new 2005 rule (temporarily retracted in January 2006) that each sale be listed directly on an  IRS Schedule D-1 (see 2005 instructions page D-6) rather than attaching a supporting statement to the tax return (Downloaded info, Excel spreadsheet,  Quicken report, Broker provided gain/loss report, etc.)
    • Individual tax form 1040 has the Schedule D-1 to be used with the requirements found in the 2005 instructions
    • Individual tax form 4797, used by M2M traders, requires the use of a free-form statement in the same format as a Schedule D.
    • Entity tax returns using Schedule D require the use of a free-form statement in the same format as a Schedule D.
    • Entity tax returns using form 4797 for M2M traders require the use of a free-form statement in the same format as a Schedule D.
       
  • To qualify for and obtain more tax deductions!!
    (if you read elsewhere that sole-proprietor traders are allowed al! the same tax deductions as an entity-based trader, perhaps you need to keep reading and learn the correct facts):
    • health insurance (though, a sole-proprietor trader can arrange to have this deduction by paying the spouse an appropriate W-2 salary and then providing all employees and their families with health insurance).  Of course, the employee-spouse must be a bona fide employee paid for personal services actually rendered to the business.
    • self-insured medical reimbursement plan (see spouse trick above)
    • disability insurance deduction
    • de minimis fringe benefits and occasional supper money Regs. §1.132-7(a)(2)
    • gym and athletic facilities, including tennis courts, swimming pools and exercise equipment  (see spouse trick above)
    • no interest or low interest loans
    • company purchase of home, when a loss makes selling expenses non-deductible (see spouse trick above)
    • tax-free transportation, limos and chauffeurs
    • free parking, vanpools and transit passes (this is also not deductible with 20% or more s-corp shareholders)
    • tax-free lodging (Rowan Companies, Inc. v. United States, 101 S. Ct. 2288 (1981), Ct. D. 2009, 1981-2 C.B. 191)
    • tax-free meals, including meals furnished because all employees must be available during lunch for emergencies (Boyd Gaming, 106 TC No. 19   and   IRC §274(n)(2)(B))
      • note that per McDowell v. Commissioner, T.C. Memo. 1974-72 the meals and lodging must be furnished by the entity.  Reimbursing the employee for receipts submitted will not qualify as tax-free
    • retirement plans (because of the IRS Code that prohibits sole proprietorship traders from contributing)

    the above list is mostly "courtesy" of Sandy Botkin, CPA (see page 175 of his book advertised elsewhere on this web page)
     

  • To lower your risk of being selected for IRS audit.
    • The IRS has obsolete computer systems, including magnetic tapes and 70 different operating systems.  With what little they have to work with, they must concentrate on the individual form 1040, where most non-compliance issues are found.
       
  • To lower your risk so that, if selected for IRS audit, your trader status tax position will be more likely to stand up against IRS attack.
    • Business entities are assigned to the more experienced field auditors who are savvy enough to understand a business-person's perspective.
    • Often, the tax form 1040 is assigned to a less-experienced office audit examiner who starts off assuming the taxpayer is guilty of some level of underpaying his taxes.
    • The overwhelming majority of trader status cases that go to Tax Court are those of Individuals filing as a Sole Proprietorship on a Schedule C.   Few cases come to Tax Court for trader status with an entity that files a separate tax return, and of those cases, many are egregious with multiple infractions besides a questionable claim of trader status.
    • The majority of trader status cases that go to Tax Court for Individuals filing as a Sole Proprietorship on a Schedule C result with a win for the IRS.
       
  • To lower the chances of any issues arising under the IRC §469 Passive Activity and Material Participation Rules as concluded by the U.S. Supreme Court in Groetzinger.
    •  IRS Regs 1.469-1T(e)(6)  (alt link) state that when a properly setup partnership or LLC is a trader, the §469 Passive Activity Rules for the most part do not apply to the owners.  IRS Regs §1.469-1T(e)(6)(iii)
    • It should be noted that generally the §469 Passive Activity Rules continue to not apply to the owners even if trader status is not upheld.  IRS Regs §1.469-1T(e)(6)(i)
    • Amazingly, an identical management/profit sharing arrangement except without a properly organized separate entity (which is common with "managed accounts") results in very different and unfavorable taxes for both the investor and for the trading manager.
      • IRS Chief Counsel, in 2007, has reiterated this position.  CCA200721015 states that under IRS Regs §1.266-1(b)(1)(iv) a flat fee paid to a stockbroker for investment services is an itemized deduction and is not a "carrying charge."
         
  • Corporations generally do not have a form 1099 sent to the IRS reporting their activity.  This lack of a 1099 matching program lowers the exposure of your corporation's tax return to IRS scrutiny.
    • Conversely the lack of a 1099 to tie in to requires that your own internal recording keeping needs to be maintained at a higher level to make sure your numbers are accurate.

  • To allow Income Shifting or Income Splitting.
    • If you had significant trading gains this can allow you to shift a portion of that income from your highest income tax brackets, for example, to the lower tax brackets of your children.
    • If you want to trade the funds for other family members or friends - the tax deductions they receive for your compensation generally can be structured to be fully deductible for federal & state purposes, rather than being limited as with typical "full discretion managed accounts."
    • Many other beneficial, "special allocations having substantial economic effect under the §704(b) regulations." (Allocations of partnership items are permitted only if these allocations are agreed upon in the partnership agreement)
      • §1.704-1(b)(2) has three requirements based on the principles contained in paragraph §1.704-1(b)(2)(ii)(a) and except as otherwise provided in §1.704-1, an allocation of income, gain, loss, or deduction (or item thereof) to a partner will have economic effect if, and only if, throughout the full term of the partnership, the partnership agreement provides--
        • 1.704-1(b)(2)(ii)(b)(1)  For the determination and maintenance of the partners' capital accounts in accordance with the rules of paragraph (b)(2)(iv) of this section,
        • 1.704-1(b)(2)(ii)(b)(2)  Upon liquidation of the partnership (or any partner's interest in the partnership), liquidating distributions are required in all cases to be made in accordance with the positive capital account balances of the partners,z as determined after taking into account all capital account adjustments for the partnership taxable year during which such liquidation occurs (other than those made pursuant to this requirement (2) and requirement (3) of this paragraph (b)(2)(ii)(b)), by the end of such taxable year (or, if later, within 90 days after the date of such liquidation), and
        • 1.704-1(b)(2)(ii)(b)(3) If such partner has a deficit balance in his capital account following the liquidation of his interest in the partnership, as determined after taking into account all capital account adjustments for the partnership taxable year during which such liquidation occurs (other than those made pursuant to this requirement (3)), he is unconditionally obligated to restore the amount of such deficit balance to the partnership by the end of such taxable year (or, if later, within 90 days after the date of such liquidation), which amount shall, upon liquidation of the partnership, be paid to creditors of the partnership or distributed to other partners in accordance with their positive capital account balances (in accordance with requirement (2) of this paragraph (b)(2)(ii)(b)).
           
  • Good way to allow you the ability to create "earned income" and thereby make tax deductible retirement plan contributions of $44,000+ each for yourself and for family members, including young children.
    • Keep in mind that "earned income" is subject to Social Security taxes of 15.3% on the first $100,000 (or so) per year, per person and 2.9% on amounts over that.
       
  • The "earned income" also allows the possibility of deducting 100% of your family's health insurance.
     
  • The "earned income" also allows the possibility of deducting your family's medical & health expenses, if a c-corporation is formed.
    • Note though, the "earned income" method can also be used to hire your spouse to legitimately perform viable services to a non-c-corporation business, including a self-employed business - a sole proprietorship securities trader.
       
  • To allow you to deduct a  higher meals expense allowance, if a c-corporation is formed.
     
  • To provide some level of asset protection against "charging orders" should you have a judgment rendered against you for some non-trader reason, if a multi-member LLC is formed.
     
  • To lower or eliminate, to a limited extent, the IRS and State taxes for any income allocated to an out-of-State c-corporation (using a multi-entity set-up).
    • The c-corporation tax rate is 15% on the first $50,000 of taxable income per year, limited to an accumulation over several years of up to $250,000 (or even $150,000).  Further subject to any limitations applicable to personal holding companies (PHC).
       
  • Be aware that an entity often has higher fees charged by the brokerage and to obtain real-time quote services. (at many brokerages, with a little foresight, it often is easy enough to avoid these higher fees)
    • On the other hand some brokerages charge less for entity accounts, IB for example.
       
  • Obtaining credit, opening a bank account, opening a brokerage account, trading options and futures and obtaining margin may entail more red-tape when working through an entity.  (again, with a little foresight, it often is easy enough to work around these problems)
     
  • Of course, when business assets become large, I am a big believer in not putting all of your eggs in one basket.  Consider using multiple entities at the same and in staggered levels of ownership to help reduce your tax burdens, as well as the inevitable liability and lawsuit exposure that success brings. These can include an assortment of C and S corps, as well as LLCs, LLLPs and trusts.
     
  • Here's a nice 167 page booklet (PDF file) entitled "Incorporate The Road To Riches" that reinforces many of the above reasons, and adds several more in an easy to read format.
     
  • This web page link explain more reasons to for a separate entity: "Protect Your Business Losses by Incorporating"
post #2 of 9

Does this entity specialize in trading UVXY?

post #3 of 9
Thread Starter 

The other option is to do your banking in a country that offers completely tax-free banking, regardless if you are a local resident or not.  Such countries on this list would include Panama and the Dominican Republic.  In the case of the Dominican Republic especially, investors have the opportunity to earn up to 8% or more with US Dollar Bank Certificates of Deposit or 90 day commercial paper.

 

Since the only reason why any financial institution would report bank account information is for the assessment of taxes, and there is no local taxation on bank account interest in these two countries, there is no local reporting that takes place.  With that said, there certainly is no reporting to foreign governments as well.

 

Setting Up An Anonymous Brokerage Account

 

Almost all non US or "Offshore" Banks maintain a relationship with a US Bank or US Stock Broker for the purpose of providing access to the US markets for their clients.  There are two ways that this is done.  One of these ways is known as a "fully disclosed" basis, where in effect all accounts carried with the US Bank or Broker are directly in the name of client. 

In essence, the foreign or offshore bank is really acting as a sort of branch office in this regard.  With this type of relationship, the client would receive a statement directly from the US Bank or Brokerage Firm, since of course "they know who you are".  Not necessarily the best route to take, if confidentiality and privacy are your goals.

 

The other and more common type of relationship, is through what is known as an "Omnibus Account" or "Custodial Account".  With this type of relationship, the client is not disclosed to the US Bank or Brokerage Firm at all.  Instead, the foreign or offshore bank has one master account, titled in the name of the bank, which is being used to execute and carry all investment activities of the bank's clients.   Your brokerage account is then directly carried with the offshore bank, and any statements would come from them.

In reality, your offshore bank is really performing what is called "sub-accounting", which means that they are "breaking down" the master-account and are issuing a monthly statement to you with your holdings and activities.  The US Bank or Broker does not know who the underlying clients are, or what investments each client owns. 

 

They simply know that they have a "custodial account" or "omnibus acThis really is the best route to take, because what you in essence have is an anonymous US brokerage account (just remember what we said earlier about capital gains vs. interest or dividends). With the same SPIC or insurance protection of any other direct client that maintains an account with them. 

The only down side to some offshore banks or offshore brokers are the fees involved.  In the past, anyone that has dealt with some of banks in the Bahamas or Europe can tell you that full service brokerage fees look like a good deal after getting a rate schedule from some of the offshore banks offering similar brokerage services.  The good news is, that is starting to change, and there are some very good banks in both Panama and The Dominican Republic offering very very competitive fee schedules.

 

Source: http://www.escapeartist.com/efam10/offshore_investing.html

post #4 of 9

yeah .. there is alot more than just a LLC title involved if you want to create one.

It doesnt have to be in Nevada or anywhere else, .. only reason is for tax benefits.. but really its not worth the hassle if your stock related.. its more for manufacturing.

 

And of course its a benefit.. but really people should consult with their CPA about the benefits.. When i inquired it was no big deal to file in CA or NV etc..

its best to get series licensed also if you open a LLC corporation..

 

In regards to offshore, i wouldnt know, as i dont have 20 million dollars yet lol. But i would just pay my fair share of taxes..

post #5 of 9
Thread Starter 

Of course, I pay my fair share of taxes but when you pay taxes on stock profits immediately but not allowed to deduct stock losses in a fair manner, you must find legal ways to minimize tax incidence to survive the game. For example, if I traded a stock ticker more than once in a month and lost money on it, I wont be allowed to deduct that loss but if money is made, I must pay the tax.

 

Look what big guys are doing:

 

http://www.nytimes.com/2012/04/29/business/apples-tax-strategy-aims-at-low-tax-states-and-nations.html?pagewanted=all

http://www.huffingtonpost.com/2012/09/20/microsoft-taxes-profits-offshore_n_1901398.html

http://www.bloomberg.com/news/2010-10-21/google-2-4-rate-shows-how-60-billion-u-s-revenue-lost-to-tax-loopholes.html

 

As always, morals are meant for the middle class while the rich  and corporations are free to do what is best for them legally.

post #6 of 9
Thread Starter 

The Nevada Tax Haven

By any standard, no other place in the world compares or has the reputation for gambling as Navada does. It's the main reason its most famous city earned the nickname "Sin City." Nevada is a near perfect Tax Haven state because it's pro-business in nearly every legal and financial aspect you can think of. You barely have to revisit legal business documents or worry about filing annual reports because those requirements don't exist. The only fee required up front is an annual fee of $125 per year and an annual business license of $200/year. Once the foundations of registering your LLC or Corporation are laid down, you might never have to visit the state for anything other than business networking or enjoying a round of poker and craps at the casino tables. Better known as "The Silver State" Nevada also has no business franchise fees. The following are additional benefits to registering your business in Nevada .

  • Business income tax does not exist.
  • Capital gains tax does not exist.
  • State corporation tax and inheritance tax don't exist.


Isn't that nice? Yes indeed. The architects of the laws governing business in Nevada have a single reason for this unbelievable generousity. The make way more money from combined state gambling revenue that pales any hyperthetical losses for lack of business fees. If your business follows the S Corporation model with shareholders, they remain anonymous under Nevada business laws and can easily elude law suits for this reason.


Additional benefits of a Nevada tax haven:

You and all elected members of your company don't have to reside in Nevada to do business there.You don't have to conduct official business meetings there either, it can be anywhere. You can where all hats in the company as CEO, CFO, COO, Vice President, Treasurer, etc. Nevada is one of several states that allow you to be a one man company owning all managerial titles.Your business privacy is almost rock solid too. The state does not require excessive personal or business disclosures giving you peace of mind about privacy concerns. Elected officers, employees, and outside investors can buy stake in a Nevada company using anything of value. Last but not least, Nevada is not legally bound to share your business information with the IRS, this reason alone attract good and bad intentioned business owners alike. Let's hope your business intentions steer clear tax evasion if you are already liable to the IRS.


Read more: http://www.entrepreneurrookie.com/business-planning/why-you-should-register-your-startup-business-in-a-tax-haven-state/#ixzz2AF9TRAuq

post #7 of 9
Thread Starter 
post #8 of 9

Do you live in NV? otherwise goodluck.

The concept of a LLC is to claim expenses to off set your tax liability and if you dont live in NV or Delaware then you cant create a company.

You need to reside in the state you are filing it in. Please go talk to a CPA.

post #9 of 9
Thread Starter 

Additional benefits of a Nevada tax haven:

You and all elected members of your company don't have to reside in Nevada to do business there.You don't have to conduct official business meetings there either, it can be anywhere. You can where all hats in the company as CEO, CFO, COO, Vice President, Treasurer, etc. Nevada is one of several states that allow you to be a one man company owning all managerial titles.Your business privacy is almost rock solid too. The state does not require excessive personal or business disclosures giving you peace of mind about privacy concerns. Elected officers, employees, and outside investors can buy stake in a Nevada company using anything of value. Last but not least, Nevada is not legally bound to share your business information with the IRS, this reason alone attract good and bad intentioned business owners alike. Let's hope your business intentions steer clear tax evasion if you are already liable to the IRS.

 

Quote:
Originally Posted by mjoke View Post

Do you live in NV? otherwise goodluck.

The concept of a LLC is to claim expenses to off set your tax liability and if you dont live in NV or Delaware then you cant create a company.

You need to reside in the state you are filing it in. Please go talk to a CPA.

That is coming from a CPA. One of the common feature of most tax havens is that you dont have to reside in that state or country. You just need to have a physical office in that state, which was legally met by using the CPA's office. For example, a building in Delaware houses 50,000 businesses, another building in Cayman Islands houses say 30,000 businesses.

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