When you decide to become a full-time active day trader, you have a number of choices when it comes to structuring your business from a tax and legal standpoint. Establishing a legal entity for your day trading activities can give some tax advantages, provide access to certain benefits, and help keep your personal assets separate and protected from your business.
Many traders choose to form a Limited Liability Corporation or a C Corporation, depending on the needs of their business and personal preference. Another option is creating an S Corporation, but that is not always a good idea. Often, creating an S-Corp is not worth it for day traders and can often times increase your tax liability, instead of lowering it. Here’s some more information:
What is an S Corporation?
An S Corporation is a pass-through entity similar to an LLC. The S-Corp will pass income, deductions, and/or losses through to the shareholders personal return. The tax is then assessed at their individual income tax rates.
The Downsides to Making this Choice
When it comes to the reasons a day trader shouldn’t form an S-Corp, there are quite a variety of them.
When you form an S-Corp, you’re going to pay significantly more upfront than the other business structuring options due to the paperwork. In fact, the formation of an S-Corp in general requires more effort and costs more than forming another type of entity. One such task is filing an article of incorporation with the state you’re doing business in, which is a legal necessity.
No one wants to pay more in taxes than they must, but that’s what you’re signing up for when you form an S-Corporation. You legally must pay yourself a consistent salary throughout the year. The amount will be determined by the discretion of your CPA, but it will be a significant percentage of all profits, usually somewhere between 30%-60%. By paying a salary, you’re now liable for additional taxation. The additional tax you’ll incur will be 15.3% of what you make. When you trade under an LLC on the other hand, you can take a non-taxable distribution instead of paying a salary.
In short, structuring your business as a S-Corp will cost you more money and hassle up front, will limit your ability to grow quickly, and will cost you more money in taxes. If you’re looking to take your trading business to next level by creating a legal entity and want to avoid these issues, Traders Accounting can help. We can help you through the formation process and also offer you business entity packages, which include bookkeeping services, expert consultation, tax preparation, and more. Give us a call at 800-938-9513 today to learn more about what we can do for your trading business!