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Running Your Own Business as a Trader

Sound familiar? You have spent years surfing the 'Net, and studying books and charts in search of currency trading strategies or forex trading strategies. All you really want is the 'Holy Grail' of entry techniques. You usually end up adding one indicator on top of another, switching from one guru to the next, until you are so confused and unsure of your entry system that you are unable to make entry decisions and stay organized. You get so distracted and frustrated that you quit watching the markets all together!

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Running Your Own Business as a Trader

To take advantage of the tax savings afforded you the trader, who is involved with commodities futures trading strategies, options trading, or successful stock market trading strategies, you must first understand the best type of business organization that suits your purpose – or more specifically the various types of company structures there are available to you. Each will have an impact on the amount of money you will ultimately owe Uncle Sam. There are basically four different types of vehicles that you can consider: sole proprietorships, partnerships, corporations, and subchapter S corporations. Let’s have a look at each one in turn.

But first, you need currency trading strategies (a.k.a. forex trading strategies) to generate enough profits to make your trading enterprise viable to begin with. Go to www.forexmentor.com before you do anything else to get off on the right footing.

A sole proprietorship is a one-horse town – just you doing your own thing by yourself. All decisions, all liability, and all responsibility are yours and yours alone. Employees, if there are any, have no clout or power over you. From a taxation point-of-view, all income and expenses are treated as income and expenses accruing to you the proprietor. Taxes are levied based on what’s left over at the end of the year, at your own personal tax rate.

A partnership is where ownership is shared by two or more people. They can be equal partners, sharing equally in the joys of running the company and its inherent risks. Or, one or more of the partners may be limited in nature. This simply means that their liability is ‘limited.’ Here, there must be at least one general partner, who is ultimately responsible for the company as a whole.

In such an arrangement, taxation is achieved as follows: According to the share structure set up, the net profit of the company is divided amongst the partners to reflect their respective ‘ownership’ in the company. Each partner is taxed against his equivalent percentage of the net proceeds.

Corporations are effectively separate legal entities or persons, as far as tax law is considered. Profits are taxed directly to the business, regardless of who actually owns it. One individual could own all of the stock, but the tax consequences would work against him. This is because corporate tax rates are usually higher than individual rates.

Obviously, if you own the corporation and are an employee of it too, your wages would be taxed as income on your personal return, and the profits of the corporation dealt with separately on its return. A corporation of considerable size has the added advantage of providing for business continuity, should one of its owners die or retire. It limits the liability of individual players in legal situations, and it also eases the tax burden.

A subchapter S corporation, on the other hand, is a cross between a partnership and a corporation, but is only recognized by certain states. It affords its principals the protective mechanism of a corporate structure, while at the same time facilitating the tax treatment of a partnership. Business profits are taxed as if in the hands of its owners. Far from being a negative, this actually works in their favor, in that profits are not taxed twice – first at the corporate level and subsequently, when distributed to the owners. Hence, S corporation owners pay taxes only once. The tax hit is even more attractive, given that individual rates are usually lower than corporate rates.

In order to qualify as such a structure, your company can only have 35 shareholders, and there can only be one class of stock issued. Corporations and nonresident aliens cannot be shareholders, and incorporated subsidiaries are disallowed.

Being self-employed, you must still contribute to Social Security. Each year, you must also pay a self-employment tax, which is added to your federal income tax return. Further, you must file quarterly estimated tax returns, based on your previous year's income, or on current revenues. If you fail to pay such estimates, or underpay them, you would be facing a substantial penalty.

The best legal beagle advice I can offer you is that you hire a good accountant/lawyer, who can offer you the best advice on matters related to federal and state tax planning and returns. This will save you a lot of grief and aggravation down the road and, besides which, the advice is tax deductible. Pay a little up front, and save a whole lot later.

This information is effective as at September 24/04. Beyond that point, please consult the experts for more up-to-date amendments to the tax code.

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