How To Day Trade As a Business (Using an LLC)

Summary

In this video, CPA Brian Rivera explores the strategic benefits of transforming day trading into a business through an LLC. He discusses tax efficiency, asset protection, and credibility gains. Rivera outlines the setup process, including selecting a state, naming the LLC, and obtaining an EIN. He also highlights tax advantages like pass-through taxation and the option to be taxed as an S corporation. The video concludes with insights on regulatory compliance and common pitfalls to avoid, offering a comprehensive guide for traders looking to professionalize their operations.

Takeaways

• 💼 **Trading as a Business**: Turning day trading into a business through an LLC can provide tax efficiency and asset protection.
• 📈 **Tax Strategy**: Utilizing an LLC for trading can offer strategic tax advantages and help in protecting hard-earned profits.
• 🏦 **LLC Benefits**: An LLC provides personal asset protection, potential tax benefits, and credibility as a legitimate business.
• 📍 **LLC Setup**: The process of setting up an LLC involves selecting a state, naming the entity, appointing a registered agent, and filing Articles of Incorporation.
• 💼 **Business vs. Personal**: It's crucial to separate business and personal finances and expenses to streamline tax reporting and operations.
• 💼 **Pass-Through Taxation**: LLCs offer pass-through taxation, which means profits are taxed at the individual level, not at the business level, avoiding double taxation.
• 💼 **Tax Elections**: Certain tax elections, like Section 475 or opting out of Section 988 for Forex traders, must be made within 75 days of LLC inception for tax benefits.
• 💼 **Asset Protection**: An LLC can protect personal assets from business losses and legal actions, providing a layer of financial security.
• 💼 **Record Keeping**: Proper record keeping is essential for tax compliance and to track business expenses and income accurately.
• 💼 **Regulatory Compliance**: Understanding and complying with federal and state laws, including filing annual reports, is mandatory for LLCs.

Q & A

What are the potential benefits of trading as a business under an LLC?

Trading as a business under an LLC can offer personal asset protection, potential tax benefits, and increased credibility as a legitimate business.

Why might a trader consider setting up an LLC in their home state?

Setting up an LLC in one's home state can offer simplicity, cost-effectiveness, and straightforward tax compliance requirements, along with easier access to resources and support.

What is a registered agent and why is it necessary for an LLC?

A registered agent is a person designated to receive legal documents on behalf of the LLC. It is necessary for compliance with state regulations and for maintaining a point of contact for the state.

What is an EIN number and why is it important for an LLC?

An EIN number, or Employer Identification Number, is a unique identifier for a business, similar to a Social Security number for individuals. It is important for tax purposes and for opening business accounts.

What is the Section 475 election and why might a trader make this election within 75 days of LLC inception?

The Section 475 election allows traders to mark-to-market their securities, converting capital gains to ordinary income or loss. This can be beneficial for tax planning, especially on the loss side.

How does pass-through taxation work for an LLC?

Pass-through taxation means that the LLC's profits are passed through to its members, who then pay taxes on their personal returns. This avoids double taxation that would occur if the LLC were a corporation.

What are some deductible business expenses a trader might have under an LLC?

Deductible business expenses for a trader might include subscription services, CPA fees, mentorship group fees, margin interest, market data, and home office expenses, provided they are both reasonable and necessary.

Why would a trader want to be taxed as an S corporation instead of an LLC?

A trader might choose S corporation taxation to create earned income, which is necessary for deductions like health insurance and retirement plan contributions, as trading profits alone are not subject to Social Security tax.

How can an LLC help with asset protection for a trader?

An LLC can segregate personal and business assets, protecting personal assets from business losses or legal actions, and vice versa, thus providing a layer of protection.

What are some common pitfalls to avoid when setting up and operating an LLC for trading?

Pitfalls include failure to separate business and personal finances, unexpected expenses related to LLC compliance, changes in broker fees or policies, and underestimating the importance of tax planning and compliance reporting.

What is the FinCEN BOI report and why is it required for LLCs?

The FinCEN BOI report, or Beneficial Ownership Information report, is a requirement for LLCs to disclose beneficial ownership information. It is part of the regulatory compliance to combat money laundering and other financial crimes.

Outlines

00:00

💼 Transforming Day Trading into a Business with an LLC

This paragraph introduces the concept of turning day trading into a business through the use of a Limited Liability Company (LLC). The speaker, Brian Rivera, a CPA, emphasizes the benefits of this strategy, including tax efficiency and asset protection. The video aims to guide viewers on how to structure their trading activities under an LLC for legal and financial advantages. Key points include personal asset protection, potential tax benefits, and credibility as a legitimate business. The speaker also shares his experience in helping entrepreneurs structure their businesses for success and outlines the steps to set up an LLC, such as selecting a state, naming the LLC, appointing a registered agent, and obtaining a federal tax ID number.

05:02

📊 Tax Advantages and Considerations for LLCs in Trading

The second paragraph delves into the tax advantages of operating an LLC for day trading. These include pass-through taxation, which allows profits to pass directly to the owner without double taxation, and the ability to deduct reasonable and necessary business expenses. The speaker also discusses the option to elect an LLC to be taxed as an S corporation, which can help traders create earned income for Social Security tax purposes and deductions for health insurance and retirement contributions. Additionally, the paragraph addresses the potential for digital nomads to leverage the foreign earned income tax credit. The importance of segregating personal and business assets for protection against legal actions and the ability to segregate investment positions from actively traded accounts are also highlighted.

10:03

📋 Recordkeeping and Regulatory Compliance for LLCs

This paragraph focuses on the operational aspects of running an LLC for trading, including the importance of proper recordkeeping and regulatory compliance. It stresses the need to track business expenses, withdrawals, and contributions to the business for tax reporting and financial clarity. The paragraph also touches on the requirement to file annual reports and maintain compliance with federal and state laws. The speaker warns about common pitfalls such as failure to separate business and personal finances, unexpected expenses associated with LLCs, and the potential for increased data fees from brokers. It also advises traders to understand the IRS's distinction between a trader in securities and a business entity and to consider the value of tax planning and compliance reporting.

15:03

🚀 Committing to Professionalism and Growth through LLCs

The final paragraph summarizes the video's message, emphasizing that trading as a business through an LLC is more than a tax strategy; it's a commitment to professionalism, efficiency, and growth. It encourages viewers to consider the long-term benefits of structuring their trading as a business and to seek professional advice for tax planning. The speaker offers a complimentary tax savings estimate call for profitable traders and wishes viewers success on their trading journey, signaling the end of the video.

Keywords

💡Day Trading

Day trading refers to the practice of buying and selling financial instruments within the same trading day. This is a core theme of the video, as it discusses strategies for turning day trading from a hobby into a business. The script mentions the thrill of trading and making a profit, which is a common motivation for day traders.

💡Tax Efficiency

Tax efficiency in the context of the video means structuring one's trading activities in a way that minimizes tax liabilities while remaining compliant with tax laws. The video suggests using an LLC (Limited Liability Company) as a strategic move to achieve tax efficiency, which can help in saving on taxes and protecting assets.

💡LLC (Limited Liability Company)

An LLC is a type of business structure that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. The video emphasizes the benefits of trading under an LLC, such as personal asset protection, potential tax benefits, and credibility as a legitimate business.

💡Asset Protection

Asset protection is a strategy to safeguard an individual's assets from the risks of business liabilities and lawsuits. The video explains how an LLC can provide asset protection by separating personal and business assets, which is crucial for traders who want to protect their wealth as they grow their operations.

💡Pass-Through Taxation

Pass-through taxation is a method of taxation where the income earned by a business flows through to the owners and is taxed on their personal income tax returns. The video discusses how LLCs enjoy pass-through taxation, which means profits are not taxed at the business level but are passed through to the owners, avoiding double taxation.

💡Business Expenses

Business expenses are costs incurred by a business for the purpose of generating income. The video highlights the importance of tracking and deducting business expenses, such as subscription services, CPA fees, and home office expenses, to reduce taxable income and increase tax efficiency.

💡S Corporation Election

An S corporation election is a choice made by a business to be taxed under Subchapter S of the Internal Revenue Code. The video mentions this election as a strategy for traders to create earned income, which is necessary for certain tax deductions and to qualify for Social Security tax benefits.

💡Earned Income

Earned income is income received for working, such as wages, salaries, and tips. The video explains that traders need earned income to deduct health insurance premiums and contributions to retirement plans. An S corporation election can help traders generate earned income by paying themselves a reasonable salary.

💡Regulatory Compliance

Regulatory compliance refers to a business's adherence to laws, regulations, and rules governing its operations. The video stresses the importance of compliance with federal and state laws for LLCs, including filing annual reports and maintaining accurate financial records, which is essential for legal operation and financial organization.

💡Recordkeeping

Recordkeeping in the context of the video involves maintaining accurate and organized financial records for a business. Proper recordkeeping is emphasized as a best practice for tax preparation and for evaluating the financial health of a trading business, ensuring that all transactions, expenses, and contributions are documented.

💡Trader Status

Trader status, as discussed in the video, refers to the IRS's classification of a trader in securities. Achieving this status can provide tax benefits similar to those of an LLC, such as the ability to deduct business expenses. The video suggests that traders should understand the criteria for trader status and consider whether it might be more suitable for their situation than forming an LLC.

Highlights

Turning day trading into a business can be a strategic move for tax efficiency and asset protection.

Trading as a business under an LLC can offer legal and tax benefits, including personal asset protection.

LLCs provide potential tax benefits and can help with tax strategizing from a business perspective.

LLCs allow for pass-through taxation, which means profits are taxed at the individual level, not at the business level.

Business expenses related to day trading can be deducted when trading under an LLC, which can increase tax efficiency.

Electing to be taxed as an S corporation can provide opportunities for earned income and tax deductions.

Digital nomads can leverage the foreign earned income tax credit to reduce their tax liability.

Asset protection is a key benefit of LLCs, as it separates personal and business assets.

LLCs allow for the segregation of investment positions from actively traded accounts.

Operating as an LLC requires understanding regulatory compliance and recordkeeping responsibilities.

Proper record keeping is essential for tax time and evaluating the overall trading business.

Failure to separate business and personal expenses can be a common pitfall when operating an LLC.

Unexpected expenses, such as increased compliance fees, can come with operating an LLC.

Not all broker firms support LLC accounts, which is important to check before setting up an LLC.

Understanding the IRS's designation for traders in securities versus a business entity is crucial.

Underestimating the value of tax planning can lead to missed opportunities for tax savings.

Trading as a business is a commitment to professionalism, efficiency, and growth in the trading operation.

Transcripts

so imagine turning your day trading

hobby into a highly profitable tax

efficient business yes it's not just a

dream but it's a strategic move that's

going to help you save on taxes but also

it's going to help you protect your

assets as you grow your wealth so in

today's video we're going to dive a

little bit deeper on how to trade as a

business using an LLC let's

go hey what's up everybody Brian Rivera

here CPA and I want to welcome you back

to the channel so on this channel I talk

about a lot of different things but

really I'm just a tax strategist that

loves to help business owners save money

on taxes so if you are new don't forget

to hit that subscribe button so if

you're like most Traders the thrill of

trading and making a profit is usually

matched by the fear of losses and also

complications as it comes to taxes so

you're not just day trading stocks but

you're navigating a financial landscape

with the goal is to find any advantage

you can take to keep your profit we've

been there there and we understand how

crucial it is to find solutions that not

only help you protect your hard-earned

gains but also give you peace of mind

and that's why today we're going to talk

a little bit more about how trading as a

business or under an LLC can be a Game

Trader for you and your operation my

goals at the end of this video is that

you understand the ins and outs of the

LLC uh how it can protect your assets

how it can help you strategize from a

tax perspective providing more tax

efficiency and how you can overall

streamline your operations so this is

your blueprint of transforming your day

trading into a legitimate business that

will be protected so with years of

experience in both tax planning in

business structuring I've helped

countless entrepreneurs like you both

Traders and non-traders help structure

their activities and to streamline their

operations for long-term success so by

leveraging both the legal and tax

benefits of an LLC our clients have been

able to scale their operation beyond

what they thought possible while also

saving money on taxes along the way way

now it's your turn to put some of this

stuff into practice to take your trading

to the next level introductions to LLC

for day Traders so an LLC or limit

liability company is not just for

traditional businesses but day Traders

can use these as well by trading under

an LLC you gain crucial benefits such as

personal asset protection meaning your

business and personal assets are now

separated potential tax benefits that

you can leverage under the LLC structure

and then number three is you gain

credibility as run rning a legit

business I think this structure is

particularly attractive for the Trader

out there who wants to take that next

step in professionalize their trading

Journey setting up your LLC so setting

up your LLC first starts off with

selecting where you want to incorporate

so a lot of people like the states such

as Wyoming Delaware and Nevada is

because they have low Feast to get set

up and they also offer privacy

protections setting up in your home

state offers some Simplicity cost

Effectiveness and straightforward tax

compliance requirements so in my

experience it's generally best to set up

in your home state because you usually

have access to more resources and

support to help you along that journey

of managing that LLC uh and the other

thing is sometimes you don't want to

have to maintain multiple uh

designations for that LLC a lot of times

if you live in let's say California and

you set up an LLC in Nevada well when

you go to file your taxes California

will see that you're operating a Nevada

based business in California and they

will require you to file what's called a

foreign entity and so you now you'll

have to maintain two different

registration once you've landed on your

home state the next step is you're going

to want to name that LLC and make sure

that it complies with your state

regulations so after you've named your

entity the next step is you want to

identify a registered agent typically

there going to be somebody that the

state can identify or contact in the

event that they can't reach you and then

from there it's typically you're just

going to file your Articles of

Incorporation that's typically filed

with your state you're also going to get

your federal tax ID number and this is

you can think of this as almost like a

social security number for your business

this EIN number is then going to be

taged to your business while it's in

existence so while you're still in the

setup process you'll also want to make

sure that during this step you make any

required elections because typically

these are time based so they need to be

done within 7 5 days of inception for

example if you're someone that trades

stocks or options and you want to make

the section 475 F election what this

does is it basically converts your

capital gains to ordinary income

ordinary loss uh it helps you on the

loss side and it also gets for the was

shells well the section 475 election

must be made within 75 days of inception

so if you created an LLC on January 1st

You Can Count from that day 75 days

forward to make that election and once

you make that election it'll go in your

books and Records another example maybe

you're a Forex Trader well Forex Traders

are taxed as what's called section 988

and you might want to opt out of that

and you might want to be a 1256 Trader

well what a 1256 Trader is is somebody

that gets a favorable tax rate and if

you want to make that election you want

to do it within those first 75 days so

that you can document that those things

happen and then the last election that

you might want to make is maybe you

don't want to be taxed as an LLC maybe

you want to be taxed as an S corporation

well this is also The Sweet Spot of

where you might want to make that S

corporation election as you're filing

that new LLC this foundational step is

crucial for legal operation and

financial organization all right so now

let's talk about some of the tax

advantages of llc's llc's enjoy

something what's called pass through

taxation and so what that means is that

the profit that an LLC generates is

passed through to its shareholders so if

you own that LLC 100% out right whatever

that LLC does is there's no taxes being

paid at the LLC level instead those

profits are passed through to you on the

personal side and on that side that is

where you will pay tax so you're not

double tax like you would if you were

inside of a corporation so the other

thing that you can do now is you have

the ability to deduct business expenses

for a business expense to be deductible

it must be both reasonable and necessary

so as you are conducting your day

trading business you want to think about

what are those things that are allowing

me to generate profit so you might want

to look around and say okay yeah I pay

for subscription Services yes I pay my

CPA yes I'm a part of mentorship groups

yes I pay for margin interest because I

trade on margin yes I have scanners I

pay for Market data I run my operation

out of a home office like there's a ton

of stuff that you should be tracking and

that you you can deduct against your LLC

and they must be reasonable and

necessary now the other tax advantage of

an LLC is that you can elect to be taxed

as an ES Corporation a lot of times

people wonder like why would a Trader

ever want to be taxed as an escorp and

the reason for that is because an escorp

provides the trader an opportunity to

create earned income and the reason why

a Trader needs earned income is because

their profit from Trading is not subject

to Social Security tax one of the

requirements to deduct your health

insurance

or contributions to retirement plans

such as the solo 401k or a SEP IRA or

even a traditional IRA is earned income

so by having that escort designation you

pay yourself reasonable compensation

when you pay yourself reasonable

compensation you can now deduct officer

health insurance you can now deduct uh

solo 41k contributions which is a tax

right off against your profit now the

other cool thing that you can do is

sometimes we come across traders who are

digital Nomads meaning that they live

overseas so they stay out of the country

uh for long periods of time um but they

still remain us residents uh so one of

the things that they can Leverage is

called the foreign Earned Income Tax

Credit meaning for this current tax year

um you can actually deduct 120,000

against your profit um and not pay

federal income tax on those dollars now

the requirement is you got to have for

an earned income all right so now we're

going to move on to Asset Protection One

of the llc's key benefits is segregating

your personal ass assets from business

assets if your trading account suffers a

significant loss or legal action your

personal assets will be protected

against that on the contrary maybe you

have other businesses or exposure let's

say you have rental properties and

something happens with your rental

property and you get sued well you don't

want them to have access to your trading

capital and so by having that in another

LLC you're providing another layer of

protection against business U debt or uh

legal action one of the other things

that I like that the LLC does is it

allows you to basically segregate your

investment positions from your actively

traded accounts now one of the

disadvantages of being a 475 or a

marketto market Trader is that you no

longer get long-term capital gains but

you don't care is because you're a

short-term day trader but you might also

find opportunities in the market where

you want to invest longterm and by

investing longterm you get long-term

capital gains well one of an easy way to

separate those position is you invest

longterm in your personal name and then

on the LLC side what you'll do is you'll

conduct your your active day trading

accounts under that LLC account

operating as an LLC allows you to open

up a business bank account which then

you can separate both your business and

personal finances which will help

simplify your tax reporting now some of

the things that you want to track is you

want to be able to track your business

expenses so anything that's reasonable

and necessary in that LLC uh you want to

track your expenses but you also want to

track your withdrawal so meaning you

taking any distributions out of the

company and you also want to track your

contribution so anytime you're adding

Capital into the business now if you do

this your CPA will love you um and it'll

make his life easier uh or her uh life

easier come tax time now the other thing

you want to do is you want to make sure

that you open up your training accounts

under your EIN number I can't tell you

how many times I've seen people do the

leg work they do all the stuff that they

need to do to get the business open they

go throughout the year and at the end of

the year their 1099 B is under their

name they did not open the business

accounts or they didn't open the trading

accounts under the business you open the

business up just take that last step and

make sure that that documentation uh is

clear and concise now that you have an

LLC you want to make sure that you

understand the Regulatory Compliance and

then your recordkeeping responsibilities

compliance with both federal and state

laws unfortunately is non-negotiable

this includes filing all annual reports

and all Financial transactions both the

expense side and on the trade side that

occurred in that business now you might

ask what are some of the annual reports

that I need to file well depending on

your state usually you'll have an annual

report to file um so you'll want to make

sure you check what state that you

Incorporated in um now the other piece

is obviously depending on how your LLC

is taxed whether that's a sole

proprietorship that's going to get filed

with your personal taxes if you're an

LLC tax as a partnership well you'll

have a partner ship tax return that gets

completed and then the k1s would then

flow through your personal taxes and

then if you're an LLC tax as an S

corporation you're also going to have a

pass through entity which is an S

corporation return that produces a K1

that then goes through your personal tax

now one of the new requirements for

llc's going forward is they have to do a

finson Boi report which is beneficial

ownership and so that report doesn't

take that long but it is something that

you need to file anytime a new entity uh

is being registered at the end of the

the day proper record keeping is going

to help you when it comes tax time but

also when you're evaluating your overall

trading business you want to know your

numbers from top to bottom so one of my

favorite tools that I like to streamline

tax preparation for that also lets me

know if I qualify as a Trader um if my

what my capital gains short-term

long-term gains are and any reports that

I need to do when it comes tax time is

Trader files and I love Trader files is

because it helps Traders automate tax

reporting so that way they can move on

and focus on what they need to which is

trading all right so now I know I shared

a lot of positives now I do want to make

sure that we cover any of the common

pitfalls especially things that I've

seen over the years um and this is going

to help you on your decision-making

Journey whether or not the LLC today

trade is going to work for you number

one is going to be failure to separate

business and personal expenses and

income I mentioned it earlier you want

to make sure your trading accounts and

your business bank accounts are under

your LLC and you want to make make sure

that you're properly tracking your

expenses under that business the other

thing llc's sometimes come with

unexpected expenses for example an LLC

tax return is a little bit more complex

than a personal tax return so you can

expect your compliance fees to go up

sometimes the broker is going to tag you

as a professional and so your data fees

might go up as well so before you're

setting up an LLC you might want to

check with your preferred broker just to

see are they going to mark up your data

fees just because you're opening up an

LLC account so it's extremely important

that you factor this in to make sure

that your LLC will still be profitable

while it's in operation not all Brokers

firms treat LLC and personal accounts

the same now I've come across some

broker firms that don't even support LLC

Accounts at all um but the other thing

you want to look at is to look to see if

their margin policies are consistent or

the same and if they're not make sure

that the margin policies under the LLC

accounts won't impact your day trading

you want to make sure that you

understand the irs's designation for

Trader insecurities versus a business

entity while forming an LLC might sound

like a straightforward way to enjoy tax

benefits it's crucial that you

understand what a day trader in

Securities is versus just operating a

business entity and in some cases

achieving that Trader insecurity status

um does allow a lot of the same benefits

that an LLC does so you want to make

sure which situation works best for you

now Trader status requires meeting

certain criteria but if you can meet

that you might be able to get some of

the same benefits that you can inside of

the LLC without going through the the

headache or the compliance of actually

setting up uh an LLC for trading another

Pitfall that I've ran into is

underestimating the value of tax

planning and overlooking your tax

compliance reporting requirements uh I

can't tell you how many times I've seen

Traders cross the end of the year get

into the next year have a great year but

they didn't do anything from from a

strategy perspective to try and chip

away at their tax bill so if you fail

the plan you can prepare to fail so

making sure that you're at least looking

at your tax situation on a quarterly

basis can save you thousands of dollars

a year if you are a profitable Trader so

to sum it all up trading as a business

is more than just a strategic move it's

a commitment to both professionalism

efficiency and growth to help you scale

your trading operation so if you found

value in today's video don't forget to

hit that like and subscribe button and

if you're someone that's a profitable

Trader and you're looking at different

ways to save on tax I'm going to drop a

link below where you can book a

compliment tax savings estimate call

with someone from our team I sincerely

wish you guys the best of luck on your

trading journey and we'll catch you at

the next video have a good one