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Setting up a multi-member LLC to trade FOREX

  • Post #1
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  • First Post: Jan 9, 2008 5:28pm Jan 9, 2008 5:28pm
I think we may all agree that there are many distinct advantages to setting up and trading FOREX under an Limited Liability Company (LLC). From my understanding, business expenses (internet, home office, gas, etc.) may be deducted from the net capital gains come tax time.
However, I don't understand how exactly a mult-member LLC would be taxed. Supposedly, the IRS treats multi-member LLCs as a partnership for taxes; as the income is divided among the members, passed through the LLC, and reported on the individuals respective personal tax returns, with Schedule E attached.
My question resides in how capital gains taxes are structured in this system. I surmise that the LLC serves as a conduit for the money to travel through; having business expenses, insurance plans, retirement investments stripping down the total taxable amount. The "income" which is capital gains income would then be distributed and reported on Form 6781 (Section 1256 contract election, having opted out of IRC 988), transferred to Schedule D and filed with the LLC's tax return? Then, in accordance with the LLC operating agreement, the net income would then be adjusted to the members. Would the members just report this income on Schedule E? My understanding was that the income would not be taxed if trading under an entity, claiming and gaining trader tax status, and using mark-to-market accounting (no self-employment (SE) taxes).
Just for example question, ACME FOREX, L.L.C. makes $200k claiming all the req'd provisions for minimizing taxes above. What does the income flow chart look like, from income into LLC, business deductions from gains, to business taxes (partnership?), to the individual members and their tax returns?
Here are some links that I derived some of the above from:
http://www.greencompany.com/Educatio...Currency.shtml
"The Tax Guide for Traders" by Robert Green (a good book to start)
http://ragingbull.quote.com/bullseye/node/274
Hello rainingpips,
I really appreciate your effort in trying to bring this topic to light. I am looking for knowledge on this issues as well, as i'm trying to go into partnership with some of my colleagues. I will appreciate if others that have experience in this area can contribute more.

Quoting rainingpips
I think we may all agree that there are many distinct advantages to setting up and trading FOREX under an Limited Liability Company (LLC). From my understanding, business expenses (internet, home office, gas, etc.) may be deducted from the net capital gains come tax time.
However, I don't understand how exactly a mult-member LLC would be taxed. Supposedly, the IRS treats multi-member LLCs as a partnership for taxes; as the income is divided among the members, passed through the LLC, and reported on the individuals respective personal tax returns,...
Quoting ayoneeyee
Hello rainingpips,
I really appreciate your effort in trying to bring this topic to light. I am looking for knowledge on this issues as well, as i'm trying to go into partnership with some of my colleagues. I will appreciate if others that have experience in this area can contribute more.
I am an accountant in Australia so my understanding of LLC companies in the US is limited.
However, I would ask why you would want to go into partnership with some colleagues when this business is so beneficial to an individual trader. I can see immediate problems later when some traders are performing better than the others in the LLC.
If the purpose of the LLC entity is primarily to share the expenses <internet, home office, gas, etc> among the partners, then the advantages of such an arrangement is minor compared to the potential legal costs of unravelling a partnership later.
Without a detailed knowledge of US IRS rules and regulations, the comment that the LLC serves as a conduit for the money to travel through; having business expenses, insurance plans, retirement investments stripping down the total taxable amount. The "income" which is capital gains income would then be distributed and reported on Form 6781 (Section 1256 contract election, having opted out of IRC 988), transferred to Schedule D and filed with the LLC's tax return? Then, in accordance with the LLC operating agreement, the net income would then be adjusted to the members sounds correct. But again, you are going through a 50 mile journey to get to the net income when it is easier to take the one mile trip of trading as individuals and claiming your individual respective expenses.

I would doubt that your understanding was that the income would not be taxed if trading under an entity, claiming and gaining trader tax status, and using mark-to-market accounting (no self-employment (SE) taxes) is correct. Any inccome derived from the LLC company by the each individual would be considered as income liable to taxation, though the income would be minimsed by the process of claiming the expenses in the LLC.

From my experience in advising on partnerships and companies, it is very unusual for a partnership to survive more than three years because of the tensions that arise from different results or business development of the partnership by the individual partners. The substantial costs and loss of good relations between the partners as a result of the dissolving of the partnership is more expensive and traumatic than most people realise. Unless there is overwhelming evidence of enormous benefits of synergy from a partnership, I would recommend a cautious approach.

D

Ps I will send you a bill for my professional advice later
Thanks fxtrader for your selfless and professional advise. I think you hit the nail on the head and that's the part that scared me most, loosing your frienship and trust and getting yourself in a legal battle later, all because of money!. As a novice in that department, my decision to go into patnership is all based on - you have the skill and somebody have the money - its all based on trading large capital, at the end you are still working for somebody.
Your point really make sense to me, I guess i will continue to trade my minimum capital until it grows, register my own company and maybe provide some service to these friends instead of forming a company with them.

Thanks again for giving me the paid service free.

Quoting fxtrader29
I am an accountant in Australia so my understanding of LLC companies in the US is limited.
However, I would ask why you would want to go into partnership with some colleagues when this business is so beneficial to an individual trader. I can see immediate problems later when some traders are performing better than the others in the LLC.
If the purpose of the LLC entity is primarily to share the expenses <internet, home office, gas, etc> among the partners, then the advantages of such an arrangement is minor compared to the potential legal...
Quoting ayoneeyee
Thanks fxtrader for your selfless and professional advise. I think you hit the nail on the head and that's the part that scared me most, loosing your frienship and trust and getting yourself in a legal battle later, all because of money!. As a novice in that department, my decision to go into patnership is all based on - you have the skill and somebody have the money - its all based on trading large capital, at the end you are still working for somebody.
Your point really make sense to me, I guess i will continue to trade my minimum capital until...
The bill is in the mail
Quoting fxtrader29
I am an accountant in Australia so my understanding of LLC companies in the US is limited.
However, I would ask why you would want to go into partnership with some colleagues when this business is so beneficial to an individual trader. I can see immediate problems later when some traders are performing better than the others in the LLC.
If the purpose of the LLC entity is primarily to share the expenses <internet, home office, gas, etc> among the partners, then the advantages of such an arrangement is minor compared to the potential legal...
Hullo fxtrader29,
I saw your comments on another thread. Would you be able to answer some tax related questions about forex and trading for me, and other traders, or are you not allowed to give public advise?
  • Post #7
  • Quote
  • Last Post: Oct 27, 2009 4:44pm Oct 27, 2009 4:44pm
Quoting rainingpips
I think we may all agree that there are many distinct advantages to setting up and trading FOREX under an Limited Liability Company (LLC)....

it makes perfect sense, and you aren't alone. the place where i work right now is restructuring, and we are all gonna be considered "=independant contractors, not employees. we are also all going to set up LLCs for us to trade under so we do get all the exemptions. it's actually a brilliant idea. each trader has his own company, so the actual parent company isnt as liable for anything, plus the traders get all the exemptions and such. pretty good idea.
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