|Forming Your Own Entity
(or have TraderStatus.com help guide you)
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||Copyright© 2001 to 2012 Colin M. Cody, CPA and TraderStatus.com, LLC, All Rights Reserved.|
WHY form an entity to trade through?: Why Form Your Own Entity?
Do it yourself: Entity Formation Services, for all 50 States
Do it yourself, using TraderStatus.com's assistance: LLC and S-Corp or C-Corp Entity Formation Services, for all 50 States
Before you start, please read the legal disclaimer below
Telephone or email us to talk about your concerns.
But remember it is not all that easy. Article on the Challenge of Entity Selection or click here.
The table below is believed roughly accurate to show approximate current Minimum State Fees that will be incurred by forming your entity. There are additional costs for a "corporate kit & minute book" (usually under $100), Document Preparation & Filing fees paid to an attorney if you use one (usually under $1,000), or Document Preparation & Filing fees paid to a do-it-yourself web site such as the link above (usually under $200), and/or for TraderStatus.com to provide personal consultation and to walk you through the above web site and for additional subsequent forms and registrations: Form SS-4 for your IRS ID#, Form 2553 to immediately elect S-Corp status for your corporation, immediately preparing your Mark-to-Market election, and so on (for an additional amount, usually $400).
Once your entity is formed, you may open a bank account, credit card account and brokerage account and start trading! There are other ongoing fees, from income taxes (yes, even for S-corps in some States), minimum tax, business privilege tax, franchise tax, accumulated capital tax, annual report of officers fee and other fees unique to each State. In addition many States charge additional or increased fees for "foreign" or out-of-State entities doing business within their State. Many of these States are marked with (*) in the table below.
Why use TraderStatus.com to do your leg work? Trader Status entities need to be handled correctly right from the beginning, otherwise you have wasted your time and money.
EXAMPLE: TraderStatus.com was recently contacted by a big entity formation web site that "forms hundreds of entities for traders" telling us that they promote the "secrecy" of their client's identity by setting up their trader entities with a manager and registered agent. Apparently they were totally unaware of the landmark court cases which disallow trader status and the mark-to-market election when this is done improperly.
Apparently they are not alone. It seems that is has become SOP (Standard Operating Procedure) in the legal community and therefore with the LLC formation companies to form all LLC in a legally expedient fashion that offers the owners the best legal advantages and protections. Unfortunately this flies in the face of trader status taxation! Not being experts in the field of IRS trader status, they fail to understand the whole purpose of forming a trader status entity to begin with! Unfortunately, from what we've seen, the hard facts are that when it comes to Trader Status, the overwhelming majority of advisors have no clue what trader status is truly all about.
Nearly 50% of our new incoming clients who already have an entity structure in place have been advised to either eliminate it entirely, or replace it with a properly formed one. This is because the costs to correct a defective entity including its "skeletons in the closet" make it far more cost efficient to simply form a new entity with an emphasis on proper Trader Status planning and not a boiler plate emphasis on privacy and so-called "asset protection."
There is no magic here, but it must be understood that a thorough understanding of the trader status rules is required to pass muster with your trader status tax filings. Unfortunately, mass production incorporators make their living selling you entities and "advice." Other tax preparers might make their living selling tax services and even "trader status advice" which advice changes year-to-year as they learn from their mistakes. When selecting your own tax advisor, remember that TraderStatus.com is the site that was created by Colin M. Cody, CPA, who understands the law, how it was developed and its application in the real world and who participated in (authored) the actual writing of the IRS Code section that applies to traders.
Once it is determined that you could use a separate entity to your tax benefit, steps need to be taken to custom fit your entity to your tax situation. This normally requires a discussion about and review of your prior form 1040 and your year-to-date trading activity. For $400 traders get all their ducks in a row so they start off on the right foot.
Forming an entity can be a straight forward affair. But if you have complexities such as: if you, are seeking asset protection and legal isolation, then a qualified attorney, probably one from your home State of residence, is necessary. We work with your attorney to make sure that trader status requirements are properly considered - when you are a full service client.
Do I need to know about securities laws to set up an LLC as a sort of hedge fund?
If you'll be the sole owner of your LLC and you don't plan to take investments from outsiders, your ownership interest in the LLC will not be considered a "security" and you don't have to concern yourself with these laws. For co-owned LLCs, however, the answer to this question is not so clear.
First, let's consider the definition of a "security." A security is an investment in a profit-making enterprise that is not run by the investor. Here's another way to think about it: If a person invests in a business with the expectation of making money from the efforts of others, that person's investment is generally considered a "security" under federal and state law. Conversely, when a person will rely on his or her own efforts to make a profit (that is, he or she will be an active owner of an LLC), that person's ownership interest in the company will not usually be treated as a security.
How does this apply to you? Generally, if all of the owners will actively manage the LLC -- the situation for most small start-up LLCs -- the LLC ownership interests will not be considered securities. But if one or more of your co-owners will not work for the company or play an active role in managing the company -- as may be true for LLCs that accept investments from friends and family or that are run by a special management group -- your LLC's ownership interests may be treated as securities by your state and by the federal Securities and Exchange Commission (SEC).
If your ownership interests are considered securities, you must get an exemption from the state and federal securities laws before the initial owners of your LLC invest their money. If you don't qualify for an exemption to the securities laws, you must register the sale of your LLC's ownership interests with the SEC and your state.
Fortunately, smaller LLCs, even those that plan to sell memberships to passive investors, usually qualify for securities law exemptions. For example, SEC rules exempt the private sale of securities if all owners reside in one state and all sales are made within the state; this is called the "intrastate offering" exemption. Another federal exemption covers "private offerings." A private offering is an unadvertised sale that is limited to a small number of people (35 or fewer) or to those who, because of their net worth or income earning capacity, can reasonably be expected to be able to take care of themselves in the investment process. Most states have enacted their own versions of these popular federal exemptions.
For more information about SEC
exemptions, visit the SEC website at
http://www.sec.gov/smbus/qasbsec.htm#eod6 A quick way to
research your state's exemption rules is to go to the home page of your
state's securities agency, which typically posts the state's exemptions
rules and procedures. To find your state securities agency, go to your
Secretary of State's website. The Wyoming Secretary of State's office
provides a list of state websites at
Each entity pays an incorporator fee of approximately $115 and an articles of organization or a minute book fee of approximately $85. As an example: the total expected cost for creating an S-Corp in Colorado might be as follows:
The following table is only a
rough guide to initial costs. State set-up fees vary widely
for expedited service, confirmation paperwork costs, correspondence
charges including those States that require your personal signature vs.
those who accept a hired incorporator's signature and for newspaper
announcement publishing fees. Most States
also hit you up for annual fees after formation, NV and CA often look
for these fees before the ink is dry on your initial paperwork, while
most others are due as much as a year later.
People promoting Nevada
Incorporations are notorious for misleading honest taxpayers with
promises of elimination of taxes by simply paying for some "tax advice" and incorporating in the State of Nevada.
There is a look-alike web name
(putting a single hyphen in the URL) allegedly run by SleepyShopper
Dot Com Network, Inc. at
This web site does not get our nod of approval.
Last updated: January 20, 2014January 2014
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Copyright© 2001 to 2012 Colin M. Cody, CPA and TraderStatus.com, LLC, All Rights Reserved