Looking to go into business as a day trader? Before you start picking up steam, you may want to take some time to consider an appropriate legal structure for your business.
The legal structure you choose can impact everything from taxation to personal liability to confidentiality. In other words, it’s nothing to take lightly.
One of the most popular options for day traders is the limited liability company, or LLC model. While there are some minor drawbacks, including some negligible LLC annual fees, this is ultimately a highly beneficial approach for anyone interested in trading stocks for their vocation.
In this post, we’ll reflect on some of the advantages of the LLC model before offering a guide to getting your LLC up and running.
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Why Choose the LLC Structure?
First and foremost, why does the LLC structure provide such appeal to day traders? The simple answer is that starting an LLC arms you with a shield against personal loss. It can also help protect you from lawsuits and other liabilities.
Here’s a quick rundown of some of the specific merits of the LLC model.
- It provides you with an extra level of anonymity. When you trade stocks under your own name, it requires you to put a lot of your personal information, including contact information, in public directories. But with an LLC, you only have to list the name of your registered agent, keeping your own details confidential.
- It offers more flexibility. Another benefit to the LLC structure is that, unlike a Sole Proprietorship, it allows traders to select the taxation status that’s best for them. In other words, you can opt into how you wish to be taxed based on your location, income level, and other factors.
- It makes it easier to hire employees. As your day trading business grows, you may reach a point where you want to bring in some additional personnel. LLCs make this pretty easy, even offering options to deduct some of your employee expenses.
- It requires less legal knowledge. Finally, just note that starting an LLC is quite easy, and can usually be done without the need for a business attorney. This makes it a workable model for day traders who are fairly new to their industry or don’t have a lot of startup capital to get their business up and running.
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How to Start Your LLC for Day Trading
With all of that said, what are the steps required to launch an LLC for day trading stocks, bonds, and other securities? Whether you handle everything yourself or enlist an LLC formation service, there are a few basic requirements for you to keep in mind.
1) Choose your location
To launch an LLC, you’ll need to denote the nation, state, or municipality in which the business will operate. This can have significant implications for taxation, among other legal and financial considerations.
2) Name your business
Again, one of the perks of starting an LLC is that you don’t necessarily have to put your own name out there. Choosing a less personally identifiable moniker for your business can be an important way to protect your confidentiality.
(Note that LLCs allow you to choose multiple dbas, or “doing business as,” which effectively means multiple business entities under one legal umbrella. This probably won’t be of much interest to the typical day trader, but is still an option worth knowing about.)
3) Choose a registered agent
Depending on your municipality, you’ll almost certainly need to appoint someone as the registered agent for your LLC. This person will receive legal and tax documents on behalf of your business. You can hire a professional service, choose a trusted colleague, or in some cases serve as your own registered agent.
4) File the relevant documents
Your state or country will require you to fill out a short form, typically known as the Articles of Organization, to provide some basic information about your day trading company. Completing and properly filing these forms is essential for the legal establishment of your LLC.
5) Create an ownership agreement
An ownership agreement outlines the duties and benefits available to the owners and members of your LLC. This is an especially important step if you’re bringing partners into your dray trading business.
6) Get a tax number
An employee identification number (EIN) or similar tax ID is required for you to operate any business. These numbers are available for free; it just requires you to fill out a simple form.
7) Set up a bank account
One of the primary benefits of the LLC is that it enables you to keep your personal assets and your business assets separate.
To facilitate this division, it’s important to open a business bank account, separate from your personal bank account. Shop around, comparing a few different institutions in terms of rates, fees, level of service, and online accessibility.
8) Set up a business brokerage account
In the same way that you need a business bank account to keep personal assets distinct, a business brokerage account is an important safeguard for your investment LLC.
9) Keep your funds separate
To ensure full legal compliance, and to avoid headaches down the road, you’ll want to be sure you only trade using your business funds. Transfer funds into your business bank account and brokerage account before you start trading. Also be sure you have the right accounting protocols in place to keep your funds distinct, and your financial records clear, at all times.
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Optimize Your Day Trading Business with an LLC
Day trading can be a great way to work autonomously, and potentially to command some hefty revenues. To make the most of your day trading business, consider the benefits of starting an LLC.
And, be sure you run your LLC in a way that’s fully compliant with local laws and tax regulations. Reach out to an LLC formation service if you have any additional queries about creating your day trading business.
