GreenTraderTax Blog
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The Best Entities for Traders and Investment Management Businesses

June 20, 2012

On Thursday, June 21, join noted trader tax CPA Robert A. Green and investment management attorney Brent Gillett as they discuss the best entity structures and strategies for trading your own funds vs. managing money for others. (Webinar Recording.)

Trading your own funds can be considered a business. If you qualify for “trader tax status” (business treatment), it’s much safer to claim business tax benefits using a separate unincorporated entity (general partnership) or incorporated entity (LLC or S-Corp.). Without an entity, sole-proprietor business traders file a Schedule C included with their individual tax return, and that’s a red flag with the IRS. An entity solves the red flag issue and it unlocks additional tax breaks, too.

Business traders use entities to create earned income (administration fees) to provide AGI deductions for retirement-plan contributions and health-insurance premiums. They maximize income tax savings versus SE tax costs.

Robert Green, CPA will explain the best types of entities for traders, depending on filing status, state residence and tax-saving strategies. Forming a new entity now in the middle of the year is a good idea since it makes available tax elections through year end. Conversely, for individuals and existing entities it’s too late to elect Section 475 MTM (tax loss insurance).

Brent Gillett, JD will discuss how investment management businesses need liability and asset protection. Choosing between filing a management company LLC as a taxable partnership, S-Corp., or disregarded entity depends on how profits are shared among owners, and if saving payroll or SE taxes are important. While management fees and incentive fees are earned income triggering payroll or SE tax, profit allocation (or carried interest) is not. Learn how to use S-Corps in some limited cases to reduce SE taxes on fee income.

Gillett will also explain how Delaware courts are the most supportive of hedge funds and management companies. He will explain how management companies need to register to do business in the manager’s home state, whereas the Delaware Limited Partnership (LP) or LLC hedge fund does not.

While investors usually don’t need an entity, it comes in handy in some cases. Some families use family limited partnerships (FLPs). Entities also avoid the problematic Form 8949 for cost-basis reporting.

When it comes to entities, one size doesn’t fit all and they must be customized to your exact needs. Stay clear of snake-oil salesmen promising asset protection in Nevada and Wyoming. This often fails in your home state, and what’s the point if you're using a pass-through entity, anyway?

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