Trading As A Business - A Day Trader's Single Most Powerful Profit-Generating Strategy

Online, April 29, 2010 (Newswire.com) - Trading as a business reinforces the two most important elements of trading - psychological discipline and cash flow management.

Maintaining control of psychological emotions such as fear and anxiety ensures consistent trading success. When faced with a trading gain or loss, don't allow it to feed these emotions. Decisions we make with personal activities and hobbies are products of the human psyche; it is what makes each of us unique. By trading as a business, you are able to remove the personal emotion and start thinking of the activity as a normal day-to-day business. By maintaining books and records required to be a legitimate business, you gain better control of losing trades, fully incorporating psychological discipline into your trading plan.

We all know that it is much easier to trade with more money than less. Effective cash flow management is simply generating more income than expense. Properly structuring your trading business will reduce your largest expense, your tax bill. Regardless of meeting the stringent IRS requirements of "trader status" or "trader in securities," trading as a business could slash your taxes. That's right, even an investor is able to take most deductions! The stipulation is that your investment activity must not be a hobby and expenses must be "ordinary and necessary" (See Treasury Regulation section 1.212-1).

With the many methods available for trading as a business, choosing the right one could be a daunting task. Structuring your business requires careful consideration to avoid potential tax traps, audit risk, and legal liability. Everyone's circumstance is different so be extremely vigilant if you receive a recommendation because it is the simplest or most beneficial. What works for some does not work for all and most one-size-fits-all approaches we found are dangerously deceptive.

Your available options for trading as a business are:

Sole Proprietorship - This structure requires no formation work to establish and does not differentiate you from the business. With simplicity, you also receive a higher risk for audit, no asset protection, and higher risk of your activity being considered a hobby. All income is reported on the appropriate schedule based on the underlying trading activity and expenses are deducted on Schedule C. (Note: This option is only available to those who meet the IRS classification of "trader status" or "trader in securities".)

Corporation - Trading as a corporation requires drafting and filing Articles of Incorporation, creating by-laws and maintaining written meeting minutes for board of directors and shareholders meetings. To meet the minimum legal requirements, you must also maintain a separate set of books and financial records and establish all bank and brokerage accounts under the name and tax ID number of the corporation. This allows the corporation to be treated separately from its shareholders and managers for legal purposes.

A separate tax return is required for all US corporations. Depending on specific tax elections made, the entity will be treated as a separate taxpayer and pay its own income tax or pass profit/loss to its shareholders who then report it on Schedule K-1.

Limited Liability Company - Trading under an LLC requires the drafting and filing Articles of Organization, creating an internal operating agreement and maintaining written meeting minutes for annual manager/member meetings. You must also maintain separate books and records and open all bank and brokerage accounts under the name and tax ID number of the LLC.

When establishing an LLC for trading, you may make an "entity classification election" or most commonly referred to as "check the box" tax election. This enables the LLC to be treated as the following for federal income tax purposes:

• Sole Proprietorship (disregarded entity)
• Partnership
• C Corporation
• Subchapter S Corporation

Tax-Exempt or Non-Profit Entities and Trusts - Some day traders and investors may use a tax-exempt or non-profit entity for trading but only in a few circumstances. With two major issues to take under advisement, careful planning and consideration is necessary. Use of such an entity may result in a situation such as not being able to deduct expenses related to your activity or penalties for income distribution. Only in the event that the entity or trust is subject to U.B.I.T. (Unrelated Business Income Tax), may it take business deductions against income.