More Success = More Entities
For highly successful traders, some advisors will suggest structures that include multiple entities to maximize the tax and protection benefits. Even though the actual structure is determined by an individual's financial goals, it usually includes a C corporation, which exists to be the general partner or managing member of several limited liability companies. In this way, extra income can be transferred to the corporate entity (usually up to 30% of revenue) through a contracted management fee to take advantage of the myriad of additional tax strategies available.
For example, in order to fund college expenses or to give children money tax free, family members can become employees. The corporation can then take advantage of deductible salaries and education expenses, while building Social Security and Medicare accounts. Medical reimbursement plans can be created to fund all types of elective healthcare and medical insurance premiums. Retirement accounts such as IRAs and 401(k)s can be transferred into a 401a, an ERISA pension fund that allows contributions of up to $49,000 per year and can never be attacked by creditors or through a legal claim. Because the corporation pays taxes on net income, the goal is to pay as many expenses as possible with pretax dollars and to minimize taxable income. (Find out how becoming a corporation can protect and further your finances in Should You Incorporate Your Business?)
This type of business structure also provides excellent asset protection because it separates the business from the individual. Long-term assets can be held by other limited liability companies that can use accounting methods better suited for investments. All assets are protected from creditors and the legal liabilities of the individual because they are held by separate legal entities. The amount of legal protection is determined by state law. Many advisors suggest forming these entities in states that will not allow the piercing of the legal structure. Most prefer Nevada because of its lack of corporate sales tax, flexibility to charge orders as sole remedy by creditors, the anonymity of not having to list shareholders, and the nomination of corporate officers. (Could incorporating your business help protect it? Find out in Asset Protection For The Business Owner.)
ConclusionAlthough trading through a complex legal structure has obvious benefits, it also can add a significant amount of complexity to one's personal affairs. For traders who have been consistently profitable but cannot or do not want to qualify for trader status, trading through a simple business is essential. If you wish to set up a pension fund to defer taxes, pay salaries to loved ones or recoup significant medical expenses tax free, then the added complexity is a decent trade-off to gain the benefits of a compound structure. Either way, to receive the best tax treatment and legal protection, one should speak with advisors who understand the formation and operation of these entities for traders. (For related readings, see Build A Wall Around Your Assets.)
For highly successful traders, some advisors will suggest structures that include multiple entities to maximize the tax and protection benefits. Even though the actual structure is determined by an individual's financial goals, it usually includes a C corporation, which exists to be the general partner or managing member of several limited liability companies. In this way, extra income can be transferred to the corporate entity (usually up to 30% of revenue) through a contracted management fee to take advantage of the myriad of additional tax strategies available.
For example, in order to fund college expenses or to give children money tax free, family members can become employees. The corporation can then take advantage of deductible salaries and education expenses, while building Social Security and Medicare accounts. Medical reimbursement plans can be created to fund all types of elective healthcare and medical insurance premiums. Retirement accounts such as IRAs and 401(k)s can be transferred into a 401a, an ERISA pension fund that allows contributions of up to $49,000 per year and can never be attacked by creditors or through a legal claim. Because the corporation pays taxes on net income, the goal is to pay as many expenses as possible with pretax dollars and to minimize taxable income. (Find out how becoming a corporation can protect and further your finances in Should You Incorporate Your Business?)
This type of business structure also provides excellent asset protection because it separates the business from the individual. Long-term assets can be held by other limited liability companies that can use accounting methods better suited for investments. All assets are protected from creditors and the legal liabilities of the individual because they are held by separate legal entities. The amount of legal protection is determined by state law. Many advisors suggest forming these entities in states that will not allow the piercing of the legal structure. Most prefer Nevada because of its lack of corporate sales tax, flexibility to charge orders as sole remedy by creditors, the anonymity of not having to list shareholders, and the nomination of corporate officers. (Could incorporating your business help protect it? Find out in Asset Protection For The Business Owner.)
ConclusionAlthough trading through a complex legal structure has obvious benefits, it also can add a significant amount of complexity to one's personal affairs. For traders who have been consistently profitable but cannot or do not want to qualify for trader status, trading through a simple business is essential. If you wish to set up a pension fund to defer taxes, pay salaries to loved ones or recoup significant medical expenses tax free, then the added complexity is a decent trade-off to gain the benefits of a compound structure. Either way, to receive the best tax treatment and legal protection, one should speak with advisors who understand the formation and operation of these entities for traders. (For related readings, see Build A Wall Around Your Assets.)
