Day traders are individuals who devote their working hours to trading stocks, bonds, commodities and currencies, typically making many trades during a single day. They face the question of whether to structure their activities as a sole proprietorship or to incorporate. Either way, they can treat their activities as a business, as the Internal Revenue Service accepts Form 1040, Schedules C and D, from individual day traders who list their business expenses and capital gains.
Self-Employment Tax vs. Salary
Day traders who treat their business as a sole proprietorship must pay the self-employment tax, which in 2011 comes in at 15.3 percent, although half of that amount is deductible from gross income. They can also defer part of their income by putting money aside in tax-deferred accounts. A corporate structure allows the owner to receive a salary, contribute to a retirement account and deduct the payroll taxes and salary as deductible expenses.
Among the primary advantages of a corporate structure is the protection of personal assets, which are generally shielded from creditors who may seek to recover money from business losses. For a day trader, these may include trading losses, loans, rent or mortgage on a trading facility, expenses such as high-speed Internet access and utilities, financed equipment costs and judgments. By contrast, general partners and sole proprietors can be sued to recover assets from debts incurred by the business.
Day traders who choose to incorporate as a Subchapter S corporation or limited liability company (LLC) enjoy the name recognition and credibility that often come with an established brand rather than an individual name. Once a name is filed with the state of legal registration, no one else can use that name, and confusion is avoided. Business-to-business merchants, such as software and specialized-equipment vendors, often prefer to enter into business relationships with corporations because of their implied stability, given the filing fees and paperwork requirements of corporations over sole proprietorships.
Corporations can continue long after their founders have retired or died. A successful day trader may wish to pass her business to a child or relative who can then benefit from an established reputation, business relationships and accounts at banks and brokerages. Provided that owners adhere to all state and federal filing requirements, corporations can only be dissolved by a separate filing with the state.
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