so imagine turning your day trading hobby into a highly profitable tax efficient business yes it's not just a dream but it's a strategic move that's going to help you save on taxes but also it's going to help you protect your assets as you grow your wealth so in today's video we're going to dive a little bit deeper on how to trade as a business using an LLC let's go hey what's up everybody Brian Rivera here CPA and I'm want to welcome you back to the channel so on this channel I talk about a lot of different things but really I'm just a tax strategist that loves to help business owners save money on taxes so if you are new don't forget to hit that subscribe button so if you're like most Traders the thrill of trading and making a profit is usually matched by the fear of losses and also complications as it comes to taxes so you're not just day trading stocks but you're navigating a financial landscape with the goal is to find any advantage you can take to keep your profit we've been there and we understand how crucial it is to find solutions that not only help you protect your hard-earned gains but also give you peace of mind and that's why today we're going to talk a little bit more about how trading as a business or under an LLC can be a Game Trader for you and your operation my goal is at the end of this video is that you understand the ins and outs of the LLC uh how it can protect your assets how it can help you strategize from a tax perspective providing more tax efficiency and how you can overall streamline your operations so this is your blueprint of transforming your day trading into a legitimate business that will be protected so with years of experience in both tax planning in business structuring I've helped countless entrepreneurs like you both Traders and non-traders help structure their activities and to streamline their operations for long-term success so by leveraging both the legal and tax benefits of an LLC our clients have been able to scale their operation beyond what they thought possible while also saving money on taxes along the way now it's your turn to put some of this stuff into practice to take your trading to the next level introductions to LLC for day Traders so an LLC or limit liability company is not just for traditional businesses but day Traders can use these as well by trading under an LLC you gain crucial benefits such as personal asset protection meaning your business and personal assets are now separated potential tax benefits that you can leverage under the LLC structure and then number three is you gain credibility as running a legit business I think this structure is particularly attractive for the Trader out there who wants to take that next step in professionalize their trading Journey setting up your LLC so setting up your LLC first starts off with selecting where you want to incorporate so a lot of people like the states such as Wyoming Delaware and Nevada is because they have low Feast to get set up and they also offer privacy protections setting up in your home state offers simp Simplicity cost Effectiveness and straightforward tax compliance requirements so in my experience it's generally best to set up in your home state because you usually have access to more resources and support to help you along that journey of managing that LLC uh and the other thing is sometimes you don't want to have to maintain multiple uh designations for that LLC a lot of times if you live in let's say California and you set up an LLC in Nevada well when you go to file your taxes California will see that you're operating a Nevada based business in California and they will require you to file what's called a foreign entity and so you now you'll have to maintain two different registration once you've landed on your home state the next step is you're going to want to name that LLC and make sure that it complies with your state regulations so after you've named your entity the next step is you want to identify a registered agent typically there's going to be somebody that the state can identify or contact in the event that they can't reach you and then from there it's typically you're just going to file your Articles of Incorporation that's typically filed with your state you're also going to get your federal tax ID number and this is you can think of this as almost like a social security number for your business this EIN number is then going to be tag to your business while it's in existence so while you're still in the setup process you'll also want to make sure that during this step you make any required elections because typically these are time based so they need to be done within 7 5 days of inception for example if you're someone that trades stocks or options and you want to make the section 475 F election what this does is it basically converts your capital gains to ordinary income ordinary loss uh it helps you on the loss side and it also gets for the was shells well the section 475 election must be made within 75 days of inception so if you created an LLC on January 1st You Can Count from that day 75 days forward to make that election and once you make that election it'll go in your books and Records another example maybe you're a Forex Trader well Forex Traders are tax as what's called section 988 and you might want to opt out of that and you might want to be a 1256 Trader well what a 1256 Trader is is somebody that gets a favorable tax rate and if you want to make that election you want to do it within those first 75 days so that you can document that those things happen and then the last election that you might want to make is maybe you don't want to be taxed as an LLC maybe you want to be taxed as an S corporation well this is also The Sweet Spot of where you might want to make that S corporation election as you're filing that new LLC this foundational step is crucial for legal operation and financial organization all right so now let's talk about some of the tax advantages of llc's llc's enjoy something what's called past through taxation and so what that means is that the profit that an LLC generates is pass through to its shareholders so if you own that LLC 100% out right whatever that LLC does is there's no taxes being paid at the LLC level instead those profits are passed through to you on the personal side and on that side that is where you will pay tax so you're not double tax like you would if you were inside of a corporation so the other thing that you can do now is you have the ability to deduct business expenses for a business expense to be deductible it must be both reasonable and necessary so as you are conducting your day trading business you want to think about what are those things that are allowing me to generate profit so you might want to look around and say okay yeah I pay for subscription Services yes I pay my CPA yes I'm a part of mentorship groups yes I pay for margin interest because I trade on margin yes I have scanners I pay for Market data I run my operation out of a home office like there's a ton of stuff that you should be tracking and that you can deduct against your LLC and they must be reasonable and necessary now the other tax advantage of an LLC is that you can elect to be taxed as an ES Corporation a lot of times people wonder like why would a Trader ever want to be taxed as an escorp and the reason for that is because an escorp provides the trader an opportunity to create earned income and the reason why a Trader needs earned income is because their profit from Trading is not subject to Social Security tax one of the requirements to deduct your health insurance or contributions to retirement plans such as the solo 401k or a SEP IRA or even a traditional IRA is earned income so by having that escort designation you pay yourself reasonable compensation when you pay yourself reasonable compensation you can now deduct officer health insurance you can now deduct uh solo 41k contributions which is a tax right off against your profit now the other cool thing that you can do is sometimes we come across traders who are digital Nomads meaning that they live overseas so they stay out of the country uh for long periods of time um but they still remain us residents uh so one of the things that they can Leverage is called the foreign Earned Income Tax Credit meaning for this current tax year um you can actually deduct 120,000 against your profit um and not pay federal income tax on those dollars now the requirement is you got to have for an earned income all right so now we're going to move on to Asset Protection One of the llc's key benefits is segregating your personal asset ass from business assets if your trading account suffers a significant loss or legal action your personal assets will be protected against that on the contrary maybe you have other businesses or exposure let's say you have rental properties and something happens with your rental property and you get sued well you don't want them to have access to your trading capital and so by having that in another LLC you're providing another layer of protection against business U debt or uh legal action one of the other things that I like that the LLC does is it allows you to basically segregate your investment positions from your actively traded accounts now one of the disadvantages of being a 475 or a marketto market Trader is that you no longer get long-term capital gains but you don't care is because you're a short-term day trader but you might also find opportunities in the market where you want to invest longterm and by investing longterm you get long-term capital gains well one of an easy way to separate those position is you invest longterm in your personal name and then on the LLC side what you'll do is you'll conduct your your active day trading accounts under that LLC account operating as an LLC allows you to open up a business bank account which then you can separate both your business and personal finances which will help simplify your tax reporting now some of the things that you want to track is you want to be able to track your business expenses so anything that's reasonable and necessary in that LLC uh you want to track your expenses but you also want to track your withdrawal so meaning you taking any distributions out of the company and you also want to track your contribution so anytime you're adding Capital into the business now if you do this your CPA will love you um and it'll make his life easier uh or her uh life easier come tax time now the other thing you want to do is you want to make sure that you open up your training accounts under your EIN number I can't tell you how many times I've seen people do the leg work they do all the stuff that they need to do to get the business open they go throughout the year and at the end of the year their 1099 B is under their name they did not open the business accounts or they didn't open the trading accounts under the business you open the business up just take that last step and make sure that that documentation uh is clear and concise now that you have an LLC you want to make sure that you understand the Regulatory Compliance and then your recordkeeping responsibilities compliance with both federal and state laws unfortunately is non-negotiable this includes filing all annual reports and all Financial transactions both the expense side and on the trade side that occurred in that business now you might ask what are some of the annual reports that I need to file well depending on your state usually you'll have an annual report to file um so you'll want to make sure you check what state that you Incorporated in um now the other piece is obviously depending on how your LLC is taxed whether that's a sole proprietorship that's going to get filed with your personal taxes if you're an LLC tax as a partnership well you'll have a partnership tax return that gets completed and then the k1s would then flow through your personal taxes and then if you're an LLC tax as an S corporation you're also going to have a pass through entity which is an S corporation return that produces a K1 that then goes through your personal tax now one of the new requirements for llc's going forward is they have to do a finson Boi report which is beneficial ownership and so that report doesn't take that long but it is something that you need to file anytime a new entity uh is being registered at the end of the day proper record keeping is going to help you when it comes tax time but also when you're evaluating your overall trading business you want to know your numbers from top to bottom so one of my favorite tools that I like to streamline tax preparation for that also lets me know if I qualify as a Trader um if my what my capital gains short-term long-term gains are and any reports that I need to do when it comes tax time is Trader files and I love Trader files is because it helps Traders automate tax reporting uh so that that way they can move on and focus on what they need to which is trading all right so now I know I shared a lot of positives now I do want to make sure that we cover any of the common pitfalls especially things that I've seen over the years um and this is going to help you on your decision-making Journey whether or not the LLC today trade is going to work for you number one is going to be failure to separate business and personal expenses and income I mentioned it earlier you want to make sure your trading accounts and your business bank accounts are under your LLC and you want to make sure that you're properly tracking your expenses under that business the other thing llc's sometimes come with unexpected expenses for example an LLC tax return is a little bit more complex than a personal tax return so you can expect your compliance fees to go up sometimes the broker is going to tag you as a professional and so your data fees might go up as well so before you're setting up an LLC you might want to check with your preferred broker just to see are they going to mark up your data fees just because you're opening up an LLC account account so it's extremely important that you factor this in to make sure that your LLC will still be profitable while it's in operation not all Brokers firms treat LLC and personal accounts the same now I've come across some Brokers firms that don't even support LLC Accounts at all um but the other thing you want to look at is to look to see if their margin policies are consistent or the same and if they're not make sure that the margin policies under the LLC accounts won't impact your day trading you want to make sure that you understand the IR s's designation for Trader insecurities versus a business entity while forming an LLC might sound like a straightforward way to enjoy tax benefits it's crucial that you understand what a day trader in Securities is versus just operating a business entity and in some cases achieving that Trader in security status um does allow a lot of the same benefits that an LLC does so you want to make sure which situation works best for you now Trader status requires Mee and certain criteria but if you can meet that you might be able to get some of the same benefits that you can inside of the LLC without going through the the headache or the compliance of actually setting up uh an LLC for trading another Pitfall that I've ran into is underestimating the value of tax planning and overlooking your tax compliance reporting requirements uh I can't tell you how many times I've seen Traders cross the end of the year get into the next year have a great year but they didn't do anything from a strategy perspective to try and chip away at their tax bill so if you fail the plan you can prepare to fail so making sure that you're at least looking at your tax situation on a quarterly basis can save you thousands of dollars a year if you are a profitable Trader so to sum it all up trading as a business is more than just a strategic move it's a commitment to both professionalism efficiency and growth to help you scale your trading operation so if you found value in today's video don't forget to hit that like And subscribe button and if you're someone that's a profitable Trader and you're looking at different ways to save on tax I'm going to drop a link below where you can book a complimentary tax savings estimate call with someone from our team I sincerely wish you guys the best of luck on your trading journey and we'll catch you at the next video have a good one