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I'm considering an LLC with C-corp style of tax election. The business will be primarily futures trading and some IT related activities.
I'm here to do some homework before I talk to my CPA. I think there is no real need for liability protection so LLC with solo-proprietorship or partnership style taxation will be of no use. S-corp doesn't apply to me as I'm not a permanent resident (yet).
I did some research on google and here are my findings about C-corp taxation
* Can pay corporate-tax and retain the money with company which will be much lower than my regular tax-bracket.
* Can enjoy corporate write-off and show many expenses with pre-tax money
* Grrr - double taxation: Only applicable if I'm making more than what I can show as expenses (nice to have problem)
Any help/guidance?
Can you help answer these questions from other members on NexusFi?
The preference of S Corp vs. C Corp is the flexibility with respect to distribution of profits and double taxation.
The true tax rate for C Corporations dividends and capital gains is already 45% and could rise to nearly 50% next year (if Obama and the spendocrats get their way). That's because it gets taxed at the corporate rate, then all dividends capital gains get taxed AGAIN at the cap gains rate.
"A dumb man never learns. A smart man learns from his own failure and success. But a wise man learns from the failure and success of others."
Thanks RM. But one can work for $1 salary and enjoy humongous benefits (no dividends at all). I guess this is what most of wise folks (including Warren Buffet) do (heard in rich day poor dad audiobook). Trading will be part-time/passion and liquidation/distribution can be easily deferred for over a decade. I don't want to cap my potential growth at my current tax bracket (33%).
I'm making an assumption that I'll be profitable (most of us are not).
That's not completely accurate. Although it's legal to use "tax avoidance" it doesn't always pan out. If you run a small business out of your home and setup an LLC taxed as an S-Corp, you still have to pay the employees (even if it's just you) what the IRS deems as a "reasonable" and comparable salary. In essence, you can't claim $1. They'll come knocking.
Just like any tax avoidance strategy, the IRS may or may not come knocking. I worked with a guy who claimed his animals at his "farm" were a business and as such, he was able to write off a lot, including property taxes. But the IRS says that if you don't claim a profit after a certain number of years, it's no longer considered a business and is a "hobby."
It's no different than the guy that wins the lottery and tries to avoid estate taxes by buying his parents a home, putting it under an LLC and then hiring his parents as "caretakers." If you don't get audited, that's great. But if the IRS comes knocking, not only with they slap your hand and make you pay back taxes, they'll charge you interest on what you owe. My co-worker (above) actually had interest charges racking up while the IRS took their sweet time to determine a ruling (it took them 5 months and when they ruled, he owed several hundred dollars in interest just for those 5 months).
"A dumb man never learns. A smart man learns from his own failure and success. But a wise man learns from the failure and success of others."
That is why I'm talking LLC with C-corp style taxation ; S-corp can not retain money so at the end of year I'll have to disperse everything. I think C-corp can just pay corp-tax (15% for first 50K) and remaining gets added into company capital.
I thought we could use a thread devoted to Taxes. This is all things taxes regarding trading.
One example, Advantages/disadvantages for different situations (equities, futures, forex, etc) as well as benefits of filing sole-proprietor vs LLC or as a …
I don't see how choosing C corp taxation instead of an S corp would do anything but create extra taxes and paperwork for your trading business . You can deduct the same expenses as an S corp that you could as a C corp, so there's no advantage gained there. The double taxation is really a killer, unless you have the tax planning & accounting resources necessary set up your affairs so that profits are accrued in low-tax countries like Google and other big companies do. Not that you have to be as big as Google for this sort of tax planning, but it's probably not practical for a single trader. The main reason people form C corps instead of S corps and endure the extra taxation is if they plan on attracting investors or going public some day, which doesn't seem like it applies to you (does it?)
