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First off let me give you a disclaimer: This is in no way a solicitation
for business, nor is it offerings of tax advise. Each individual and entity
has unique circumstances, needs and goals which must be taken into
consideration when deciding upon the type of entity from which to operate
and specific information for tax planning or the filing of tax returns. The
following is simply a generalized discussion of tax entities.
You folks all have some correct information and some slanted info.
Let's look at the entities:
1. Individual - Simple that's each of us and our individual tax returns.
Has some tax advantages and some disadvantages. At least some of your
income will go here, there is no avoiding it. There is no protection from
any liability.
The advantages to filing or doing business as an individual are simplicity,
inexpensive, fairly flexible and suitable for most taxpayers.
The disadvantages - Some problems with expense deductibility, no shelter
from liability and not suitable for more than one person in the trading
business.
2. Corporate - A corporation is a living entity. It can sue and be sued,
it shelters from liability its shareholders in most instances, and it files
its own tax return. It may conduct any legal business authorized by its
board of directors.
One corporation is just like another for most uses and circumstances.
Whether it is a "C" corporation of "Sub-Chapter S" corporation is strictly a
tax issue and a matter of filing an election. All corporations start out as
"C" corps and may be changed to a "S" Corp by election with the IRS. This
in no way changes the legal pros and cons of the corporation.
Advantages of a Corp in general:
Permits a good deal of insulation from liability for the shareholders
Permits the deduction of almost all ordinary and necessary business
expenses.
For C Corp:
Much less likely to be audited.
More flexibility for insurance and pension plans.
Advantages of a "S" Corp:
Is simply a pass through entity, all income and expenses maintain their
original character, i.e., you still have capital gains treatment.
Maintain liability protection
Pension plan flexibility
Disadvantages of Corps in general:
Costly to set up, maintain and dissolve.
Record keeping is necessary in order to maintain "Corporate Veil".
More expensive to maintain
Disadvantages of a "C" Corp:
Loses the advantage of Capital Gains treatment, all income is ordinary
Will probably be treated as a "Personal Service Corporation" under audit,
all income will be taxed at the highest corporate rate.
Is often difficult to drain all of the income out. For instance if you buy
equipment or other assets, that cash outlay may not all be deductible in the
year spent, so some double taxation is likely.
The IRS may step in and decide salaries are too high for services performed
and require the corporation to reclassify some salaries as dividends,
thereby creating double- taxation.
Disadvantages of a "S" Corp:
No more flexibility for insurance than as an individual.
Record Keeping still required
Will be audited along with shareholders
Partnerships:
General Partnership: rarely used anymore because of liability issues. All
partners are equally liable for the actions of each partner. This is a
pass-through entity as well. Requires a partnership agreement to open a
trading account.
Limited Partnership: Made up of a general partner and some number of
limited partners. Usually the limited partners are limited in liability to
only their capital accounts. These are usually the publicly traded
partnerships. Also pass-through, the general partner is in charge of all
decisions. Partnership agreement required to open a brokerage account.
Some states charge an annual fee to do business.
Limited Liability Companies:
Currently the entity of choice in most states and situations. An LLC has
members rather than partners or shareholders. It is governed by a
management committee and the record keeping requirements are much less
onerous. The limited liability of a corporation is its greatest attraction.
It may be taxed as a "C" corporation or a Partnership in most states and
for the federal requirements. Thus it offers a great deal of flexibility.
Again since it is a pass-though entity the income and expenses retain their
original character. Many states charge some type of fee for doing business
as an LLC.
This is just a short and dirty explanation of each of the entities which
were discussed on the digest today. They are by no means all-inclusive, nor
are any of the particular reasons for their use examined in detail. All of
these entities have a place in given situations, and are in use on a daily
basis. You need to consult a tax professional and an attorney to decide if
any of these choices will benefit you and to have them set up if so. There
are very few individuals that would benefit from having a basketful of these
entities from which to conduct a business of trading.
I hope I helped at least some.
Thanks,
Perry
Futures on Stocks Central
H. Perry Dahm, CPA, CTA
mailto:hpdahm@xxxxxxxxxxxxx
300 Esplanade Drive, 9th Floor
Oxnard, CA 93030
805-981-3929
800-350-8744
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