S Corporations for Traders: Why They’re a Bad Idea
When you decide to take your day trading business to the next level, there are a number of legal entities you can choose to form for tax and legal purposes. Establishing a formal business for your day trading enterprise can provide you with some tax advantages at year-end, helps separate and protect personal assets, and can give you access to benefits traditional businesses generally enjoy.
Not all business entities are a good fit for day traders though. In addition to popular choices such as an LLC, LLC partnership, or a C Corporation, you may be considering S Corporation status for your ventures.
There are a few reasons forming an S corporation may be more trouble than it’s worth for your day trading activities.
Strict Requirements for Qualification
There are a lot of ownership restrictions for businesses who file as an S-Corp that can make it difficult to grow your business rapidly.
Types of Shareholders
Only certain individuals, estates, trusts, and tax-exempt organizations qualify for shareholder status in an S Corporation. Each shareholder must be either a U.S citizen or a permanent resident. These constraints do not apply to LLCs or partnerships, in which virtually anyone can be a member.
Types of Shares
In an S Corporation, profit/loss allocation is more rigid than in other entities. Profits and losses must be distributed to shareholders strictly based on ownership percentage.
The paperwork required for S Corporation status is considerably more extensive than for an LLC or partnership. There are fewer hoops to jump through when forming these other entities, and fewer associated costs.
For example, to establish an S-Corp, you must file articles of incorporation with the state. You are not considered an existing S Corporation, legally speaking, until you do.
By law, you must pay yourself a consistent salary over the course of the year. This amount is going to be anywhere between 30%-60% of all profits (depending on the CPA that you use and his discretion). By paying out salaries, you are a known subject to FICA and payroll, and therefore liable for additional taxation.
The additional tax you’ll incur as an S-Corp is 15.3% of anything that you pay out. As a trader, there is no need to pay a salary. Instead, you can trade under an LLC and take a non-taxable distribution.
If you’re ready to elevate your day trading business with legal entity formation, Trader’s Accounting is here to help you through the process!
Not only do we offer assistance with the formation process, we also have business entity packages available which include bookkeeping services, expert consultation, tax preparation, and more.
Give us a call at 800-938-9513 to learn more about the professional services we have available to help you find success with your day trading business!
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