How To Start An LLC For Day Trading Business?

If you have a stock trading business that earns solid capital gains, it may be time to consider forming limited liability companies. These don’t just offer benefits for tax purposes but also help with personal asset protection.

But what does an LLC for a stock trading business look like? How do you start an LLC? And what else do you need to know about this business structure before choosing to use it over being a sole proprietor?

We created this guide to answer those questions and more. Keep reading to learn everything you need to know about forming a stock trading or day trading LLC business venture as a qualified trader.

Read More: Best Registered Agent Services 2024

What Is an LLC For Day Trading?

LLCs are limited liability companies. It’s a kind of business structure that you can use when running a legal trading business, as opposed to a sole proprietorship or S Corp. Qualified traders form LLCs to protect personal assets, enjoy tax advantages and appear more legitimate to outside investors and other day traders.

Why Is Setting Up An LLC For Day Trading Important?

Setting up an LLC for trading stocks may be important for a few different reasons. For example, it can help you protect your personal assets from seizure in the event that your company fails while trading stocks.

It may also make it easier to keep track of ordinary income and business expenses. There could even be some helpful tax deductions for capital gains taxes and passive income. But this depends on the amount of taxable income you have and the state you trade stocks in.

Setting up an official business entity may also help you look more professional as a day trader. This could help you get more outside clients and generate more trading profits so that you can increase your net income and build your trader status.

LLC Benefits Of A Day Trading

If you start an LLC or S corporation, it tends to make outside parties view you as a more successful trader. That means there may be an immediate business activity benefit if you get an LLC involved in your trading activities.

Another benefit of forming an LLC as an independent trader is that your capital losses will have limited legal exposure. When you accept retirement plan contributions or manage brokerage account for a mark-to-market client, anything can happen. LLCs offer personal asset protection while trading stocks so you don’t have to worry as much about your personal assets.

There may also be several other tax benefits related to capital gains, business expenses, and self-employment tax. But these tax benefits will vary based on where you do your day trading and plan on turning a sole proprietorship into an LLC.

Tax Implications of Trading Stocks Through an LLC

There are some tax implications to keep in mind if you decide to conduct stock trading through an LLC business venture. One is that you need to be a qualified trader in order to qualify for deductions of normal business expenses in this separate legal entity.

The IRS defines a qualified trader as someone who meets the following criteria:

• Your company needs to have a standard holding period for stocks it buys and sells
• The trading consistency of stocks should be standard
• The LLC spends a sufficient amount of time trading securities
• Among other factors

That being said, it’s important to note that the money you make and lose will be considered passive income for tax purposes, which may have been the same thing you experienced while day trading as a sole proprietor. You won’t be able to contribute to individual retirement accounts or pension funds.

However, whether you can become a qualified trader and deduct business expenses from things like self-employment taxes is a complicated issue. It’s best to ask a financial expert for advice in this area.

5 Basic Steps to Start An LLC For Day Trading

Are you one of the many day traders who is ready to begin trading through an LLC trading account for superior tax treatment? If so, here are five basic steps to follow whether forming a single-member LLC or selling stocks and managing an individual retirement account with multiple people.

Visit the secretary of state’s website for your state

The first thing day traders should do is figure out what paperwork they need to fill out in their state in order to start trading stocks through an LLC. This typically means filling out an operating agreement and potential articles of organization too, but it can vary by state.

Fill out the required forms and pay the filing fee

Once you’ve found the right forms, you can fill them out with your business information. You may need to note previous business income, pension fund information and the owners individual tax returns in order to become a qualified trader.

Both qualified traders and non-qualified traders need to submit a filing fee as well. The amount depends on your state but is often similar to the cost of creating an S Corp.

Set up a tax ID number

If you’re a new day trader that’s just starting this business activity, even if just for educational and entertainment purposes, you should also set up an employer identification number (EIN). You will need one of these to hire mark-to-market and brokerage account employees to benefit from pass-through income taxation. You can do this online at the website for the Internal Revenue Service.

Provide follow-up documentation to the internal revenue service and the Secretary of State as needed

After a few weeks, your Secretary of State and the Internal Revenue Service should get back to you. They’ll let you know if you can begin stock trading and earning capital gains as an LLC or if you need to submit further information to enjoy the asset protection benefits.

For example, you might have to submit previous self-employment taxes or more information about your ordinary income through stock trading for tax purposes. It just depends on your state and what they want to see from you before providing limited liability protection so day traders avoid taxes.

Begin trading as an LLC

Now all that’s left to do is to take advantage of your newfound trader status and begin trading activities at market prices. If your trading activities lead to net capital losses, you may be able to defer taxes and mortgage interest, depending on your limited liability companies structure and whether you deduct retirement plan contributions. 

Top 2 LLC Services

If you decide to form an LLC based on your trader status and limited liability protection goals, then you may want some professional support. Here are two of our favorite providers of LLC formation assistance.

ZenBusiness

ZenBusiness can help you turn ordinary income from a stock trading business into an LLC by guiding you through each step of the process. They also offer ongoing assistance with tax treatment, accounting services, and business growth goals – all with the inclusion of after-hours customer support. 

Northwest Registered Agent

Northwest Registered Agent can also help with LLC formation and tax treatment. They’re slightly more affordable than Zen Business in many scenarios but don’t quite offer as many services and resources, which is why they take the second spot on our ranking.

Final Thoughts

Starting an LLC for your day trading business could be a smart decision if you want to limit your personal liability and potentially enjoy some tax benefits. You can go through that process on your own by following this guide or hire an independent service provider to guide you through the LLC formation process with more personalized advice. Either way, we wish you all the best moving forward.

Frequently Asked Questions (FAQs)