The Business of Trading

The why & how of setting up a business for traders

Presented by: Keith Redman

Disclaimers

• I am not a lawyer or CPA• I am sharing my experiences of setting up

Redman Capital Management LLC• There will be positive and negative aspects to

everything presented• I cannot address anyone’s specific situation• Please consult an attorney or CPA of your

choice to address your particular situation

Rich people plan their financial affairs for three generations; poor people plan for Saturday night! - unknown

Why Go Through the Hassle?

• Better way to manage• Allows trader to take advantage of benefits

originally designed for large companies• Builds legitimacy• Provides Asset Protection• Reduce taxes• Facilitates Estate Planning

Failing to plan is planning to fail. - Alan Lakein

Better Way to Manage your Life

• Increased Cash Flow– Reduce the amount of cash drawn out of the

account to pay taxes• Flexibility in taking money out for living

expenses– Salary or Bonus

• Can take full control of retirement assets– Can become the custodian of your own 401(k)

If you don't like how things are, change it! You're not a tree. -Jim Rohn

Take Advantage of Benefits

• Last beyond the original owner– Can bring children into the trading company to

operate it when we’re no longer able or interested• Can do Mark-to-Market Accounting– Wash sale rules don’t apply– No carryover to future years

The incestuous relationship between government and big business thrives in the dark. -Jack Anderson

Build Legitimacy

• With the IRS and the Courts– Be a qualified trader without having to qualify

• With other organizations– Possibly negotiate a reduced commission

structure with your brokerage firm?

Integrity is crucial for business success - once you can fake that, you've got it made. - Henry Ford

Provides Asset Protection

• Conducting business can be highly litigious– Separate your personal assets from your business

• Family can be litigious– When you have assets, there’s no such thing as a

minor car accident. - attorney Nate Sutton

– Protect your trading assets from other activities

The diversity in the faculties of men, from which the rights of property originate, is not less an insuperable obstacle to an uniformity of interests. The protection of these faculties is the first object of government. -James Madison

Reduce Taxes

• Trading is not a business activity• All ordinary and necessary expenses count

against income.– Including Health Insurance

• Travel for business purposes, and education becomes a legitimate expense.

Anyone may so arrange his affairs so that his taxes shall be as low as possible. He is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes. -Judge Learned Hand

Facilitates Estate Planning

• Smoothly Transfer Trading Assets to your heirs– By making your heirs owners of the business

• Legally Avoid Estate Taxes– Especially from 2012 and beyond

There's no reason to be the richest man in the cemetery. You can't do any business from there. - Colonel Harland Sanders

Why or Why Not?

• If you can qualify for trader status• If you don’t need to protect assets• If you don’t mind extra scrutiny from the IRS

• Then you don’t need to incorporate a trading business

• Otherwise…To be, or not to be: that is the question: Whether 'tis nobler in the mind to suffer The slings and arrows of outrageous

fortune, Or to take arms against a sea of troubles... - William Shakespeare

How to Set Up a Trading Business

• Start developing a business / trading plan• Choose the structure that works for you• Choose the state to incorporate in• File with the state• Get a tax id (EIN) in the name of the business• File appropriate forms with the IRS• Organize your business • Have fun and Make money

Do what you can, with what you have, where you are. -Theodore Roosevelt

Develop a Business / Trading Plan• Very, Very Important

– Yet extremely easy to gloss over• Start with Why you want to trade• Inventory the resources available to you• Inventory your weaknesses

– These are the ones you’ll want to improve on• Document your Business Policies and Procedures• Document your Acceptable Trading Strategies

• The template I started with is available at: http://community.investools.com/docs/DOC-4791#comment-1657

The discipline of writing something down is the first step toward making it happen. - Lee Iacocca

Choose the Structure that Works For You

• C Corporation• LLC • S Corporation

• Close Corporation?

• Limited Liability Partnership

We accept the verdict of the past until the need for change cries out loudly enough to force upon us a choice between the comforts of further inertia and the irksomeness of action. -Judge Learned Hand

Choose the State to File In

• Generally you have four options:– Your home state– Delaware– Nevada– Wyoming

• Technically you can set up a corporation anywhere in the world • (Bahamas, Panama, British Columbia, Cayman Islands)

– Know the laws of that country / province– Know the laws of the US and your home state

Government, even in its best state, is but a necessary evil; in its worst state, an intolerable one. - Thomas Paine

File With the Chosen State• Legal Zoom

– Document preparation & filing service that operates in all 50 states(I used them to set up my wife’s LLC in Oklahoma)

• My Corporation– Document filing service that operates in all 50 states

• Wyoming Corporate Services– Consultant, Document preparation & filing service & Registered Agent in

Wyoming (This is who I used)• CSS Nevada

– Consultant, Document preparation & filing service & Registered Agent in Nevada (I would have used this firm if I incorporated in Nevada.)

• Other Attorneys– Note that some attorneys will use a document preparation & filing service

instead of doing the work themselves.

A dream becomes a goal when action is taken toward its achievement. -Bo Bennett

Get an EIN in the Name of the Business

• Easiest way – Online– https://sa1.www4.irs.gov/modiein/individual/index.jsp

• Download and mail or fax SS-4– http://www.irs.gov/pub/irs-pdf/fss4.pdf

• Call– 215-516-6999

The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries. - Winston Churchill

File the Appropriate Forms with the IRS

• Setting up an LLC has one nuisance problem– An LLC is a Disregarded Entity for Tax Purposes

• File form 8832 to elect to be taxed as a corporation (if needed)

– This will require the LLC to file it’s own Tax Return• File form 2553 to be taxed under subchapter S

– Tax liability & payment passes to the shareholders to the shareholders of the corporation.

– Can eliminate the double taxation (corporate & individual)

Note, I found out later that all I had to file was form 2553, and the 8832 election would have been assumed.

The American businessmen, as a class, have demonstrated the greatest productive genius and the most spectacular achievementsever recorded in the economic history of mankind. What reward did they receive from our culture and its intellectuals? Theposition of a hated, persecuted minority. The position of a scapegoat for the evils of the bureaucrats. -Ayn Rand

Organize the Business

• Hold the first “Board Meeting”– Document the meeting even if you’re the only attendee

• Open a bank account in the name of the business– Salary, Bonuses, and expenses are paid out of this

account– Deposits come from your trading accounts

• Open a trading account in the name of the business– You’ll need at least one– You can have more than one depending on how you want to

manage your trades

The essential question is not, "How busy are you?" but "What are you busy at?" -Oprah Winfrey

Have Fun and Make Money

• Remember why we all wanted to trade in the first place– Freedom? – Time with those important to us?– No Office Politics?

• Keeping more money in the trading account enables the account to grow faster.

All of us need to be learning to trade, and not taking time away from that to learn how to keep books or records because of the IRS. - James Crimmins

Final Thoughts

• Start simple• Run the business as a business• Additional resources

Don't wait. The time will never be just right. -Napoleon Hill

Start Simple

• Set up your LLC to trade in– Save the more complicated stuff for later

• If something changes, dissolve the existing LLC and create the new structure.– The only thing you lose is the document filing fees– Consultation with your lawyer and CPA is education

• Later you can become the custodian of your own 401k–Has much higher deferral limits than IRA

A man is rich in proportion to the number of things he can afford to let alone. -Henry David Thoreau

Run the Business as a Business

• Make sure your annual reports get filed on time

• Document your corporate meetings even if you’re the only attendee

• Have a consistent salary, or a documented criteria and schedule, for paying yourself

We know nothing of tomorrow; our business is to be good and happy today. -Sydney Smith

Additional Resources• Robert A Green & Company

www.greencompany.com

• Traders Accountingwww.tradersaccounting.com

• Investopedia www.investopedia.com/articles/trading

• Wyoming Corporate Serviceswww.wyomingcompany.com

• CSS Nevadawww.cssnevada.com

• IRSwww.irs.gov

Don’t let what you can’t do stop you from what you can do -John Wooden