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Using an LLC To Day Trade

How can you best use an LLC to day trade?  Recently a student asked me the following question:

I’ve been on your email list for quite some time and I really appreciate all your great info.  I have always worked in the corporate world, but now I am working on my own in my home office, trading the stock market, doing day trading.  I’ve just begun making money and my question is, should I form an LLC?  Thanks!

As with many aspects of LLCs or Limited Liability Companies, whether it is advisable to be using an LLC to day trade depends on the circumstances of your particular business. There are three aspects to the decision as to whether or not to use an LLC to day trade or use an LLC to trade stocks:

1.  Management in Using an LLC to Day Trade

The formation of the structure may make management of a project under control of the LLC easier than if it wasn’t in the LLC.  If there are a ton of people in the business, then the establishment of a legal entity will force the appointment of a select number of people to manage the business.  It doesn’t matter whether you use an LLC or corporation, the management issue has about the same outcome.  Obviously, the question of using an LLC to day trade is not an issue on the management front, because you’re the one doing the trading.

2. Tax Considerations in Using an LLC to Day Trade

A company has a different tax status than you do as an individual.  There are many things a company can do with taxes that an individual can’t do.  The company can lower your adjusted gross income.  There isn’t much you, as an individual, can do to affect your adjusted gross income directly, but everything your company does either raises or lowers your adjusted gross income.

Using an LLC to day trade will produce only passive income.  There isn’t a lot of equipment or other things that a company can “deduct” from the trading business that you can’t deduct as an individual.  You certainly wouldn’t want to use a C corporation to do your day trading, because the only way you could “recover” the money out of the C corporation would be through a wage or a dividend, and so that would mean higher taxes.  Therefore, if you use a corporation or an LLC to trade stock, you would want it to be a “pass-through” entity.  Using an S corporation, a partnership or a sole proprietorship to trade stock will accomplish the pass through  OR  you could use an LLC to trade and have the LLC taxed as a sole proprietorship (disregarded entity), partnership (if more than one person) or an S corporation.  I would probably use the LLC for day trading, if I used any entity.  The tax advantages won’t be huge, so if the cost or pain of having and maintaining an LLC is high, then forget about using an entity to trade.

3. Asset Protection in Using an LLC to Day Trade

Asset protection isn’t a big deal in using an LLC to day trade.  You could lose your ass—ets, but nobody is going to sue you.  The only exposure you have is the money you are trading.  So, there is no need to use an LLC to do day trading for asset protection purposes – at least not from the “company” liability standpoint.

Having said that, it could be a good idea to use an LLC to day trade, if your trading account is bigger.  An LLC has the unique ability to protect the assets of the company (the trading account) from your personal liabilities.  For example, if you get sick and have to declare personal bankruptcy, a properly established and maintained LLC would protect the trading account from that bankruptcy.  You could declare personal bankruptcy and not lose the trading account.  If you already have an LLC and operating agreement, you can use my operating agreement package, LLC Wizard, to beef up your current LLC. It’s cheap protection if the account is big. A corporation can’t protect the trading account from your personal liabilities.  There is no need to use a corporate legal structure to trade with.  Your structure, if you establish one, has to be an LLC.  BUT, you can have the LLC taxed any way you want.  The IRS doesn’t recognize a specific tax structure for LLCs, so you can choose how to tax it.  In the case of day trading, just have your LLC taxed as a sole proprietorship (assuming only one owner) and use your Social Security number for the tax ID in the company.

Good luck on the trades!

Lee Phillips, JD

  1. Would this be the same if you were a cryptocurrency trader? I’m trying to find the best way to turn my personal cryptocurrency trading into a business for tax benefits. I trade a lot and would consider myself a more than part time trader making multiple daily trades. It’d just be me trading and no one else would be investing.

    • Nathan,
      You would need to talk to a tax expert for your particular situation, but to be considered a professional trader you typically need to be spending more than 50% of your work time trading. If you have a day job and just trade a few times a week you may not be considered a professional.

  2. My brother and I have put some money together in his personal brokerage account and we are day trading options. However, I don’t believe we would qualify as professional traders because we both have other full time jobs. Would it still be worth forming an llc even though our trading would not technically be business activity? It’s starting to become a pain distributing cash and taking out a portion for my tax (because everything is reported on his 1099-B)

    • Jordan,
      The LLC wouldn’t do much for tax saving but can provide asset protection if you are worried about it. You would be trying to protect your stock investments from anything that could happen to you. If you are worried about personal liabilities too much then an LLC may not be worth it.

  3. Would it be possible to use an LLC to account for your trades on a LIFO basis, while maintaining a personal holdings as an individual, which are accounted for on a FIFO basis? If so, I think an LLC might be a great way to manage risk with cash reserves.

    • Mike,
      This is a tax accounting question, not an LLC question. Consult an accountant. Generally LIFO and FIFO methods are not used in stock trading transactions.

  4. If I form an LLC in Nevada but execute trades in another state will those gains be considered out of state gains thus taxable based on the state im living in? What if they are operated through a virtual private server or a server hosted in Nevada?

    Is there anyway to set up an LLC so that the trade gains are considered earned by the entity in Nevada despite being operated from a distance?

    • If you are trading stocks you will be taxed where you live. The only way you are going to get those trades taxed in Nevada is to set up a C-Corp in Nevada that will own the stocks but it will probably end up costing more in taxes.

  5. I have been trading cryptocurrency as a hobby for 2 years. Recently, I’ve moved to paper trading standard markets,commodities and forex. I have established profitability and would like to explore trading professionally. Should I form an LLC to do so? (I have a full time job that I plan to keep. However its a family business and allows me ample time to research and day trade…)

    • Steve,
      If your primary source of income not from trading then you would not be considered a professional trader and it may not be worth it to create an LLC. Trading is not a bit liability asset so you don’t need the asset protection as much.

    • If you are worried about liabilities from outside your trading then yes do the trading within an LLC. You probably aren’t to worried about the liabilities of the trading.

  6. Hi,

    I am kind of confused, so can I can start an LLC to trade, and therefore I can deduct trading expenses such as WIFI (the sole purpose for trading), cellphone (secured phone with great encryption), Cell phone bill ( phone only use for trading on the go)? This would be the main reason I want to start an LLC to deduct trading expenses.

    • Max,
      You can start an LLC to day trade and deduct your expenses, but just understand that deducting things that are used for both business and personal use is a gray area and that if you are audited it is not a guarantee that the IRS will disallow the deductions.

  7. I’m day trading and have a bit of success. However, the wife wouldn’t approve of the day trading… But I want to keep it up. I thought if I formed an LLC and simply give her my profit and losses of my “new business” at the end of the year when she compiles and compiles our taxes it would be a sound approach for keeping my trading activities undisclosed to her. Is a potential approach in what I wish to accomplish?

    • Steve,
      You can use an LLC to day trade. As far as your marriage is concerned, an LLC usually isn’t used.

      • I’m day trading and hoping to make a bit of money should I start all C to keep the money separate from my wife and social security because I am disabled.

        • Scott,
          The rules of disability are very complex. I am not sure what you need to do to trade and have the profits outside of the purview of the disability social security people.

  8. Hello…I trade the futures market and I have a job….if I make 50k in profits from trading the market,would an LLC help with reducing the amount ok taxes I must pay???or how much taxes would I pay on 50k with an LLC??

  9. Hello, may I have a copy of your operating agreement?

  10. Hi–I am in NY State and make money on day trading. I am contemplating an LLC but have a few questions.

    1. What are the annual charges for a LLC in NY. In other words. Once the LLC is formed and paid for. What are the expenses.

    2. Can I deduct travel expenses for going to attend board meetings or visiting company offices or research meetings at restaurants.

    3. Since I am retired, I will devote Full time to trading. Will I be subject to WASH SALE rules.

    • Pradeep,
      I don’t know what the NY fees are for an LLC. NY is one of the more expensive and harder states to deal with when setting up and maintaining an LLC. You can look on the state website, and see the fees. You can deduct the expenses you are talking about. The auditor may or may not allow them (depends upon what the auditor eats for lunch). But you certainly aren’t doing anything illegal by making the deductions. Remember, is it an expense that is “ordinary” and “necessary” to make you a good trader? I am not an expert on the Wash Sale rules, but I believe it applies to “all taxpayers.” So it would apply whether you are full time trading or just doing a little bit.

  11. I have a successful one person LLC biz for 15 yrs now; I go to people homes. I started day trading 2 months ago and thinking of registering an LLC to mostly protect my curent biz. Would it be worth it for me to do that?

    • Diane Lee,
      Because it sounds like your “business” and your day trading are two totally different activities, it would probably be wise to have two LLCs. It depends on how expensive they are in your state, how “risky” your business is, how much money you will have involved in each activity, and a lot of other factors. So it isn’t a given that you want two LLCs, but probably you do.

  12. Hi could I use an llc for day trading and pay myself as an employee. I’m having hard time getting loans as a day trader but I’m thinking if it’s a business and I pay myself consistently it would help.

    • Ross,
      You are right, a consistent paycheck will help on the loan, but when you pay the money out as a wage, you have to pay employer’s taxes on the wage money. The day trading isn’t active or earned income, so it normally wouldn’t be subject to social security, etc.

  13. I would like to explore an LLC, I have a trading account with a decent amount, I also have a lot of personal debt (from various reasons, anyway irrevelant) Would moving everything to an LLC protect the trading account in the event of a personal bankrupty a few years down the road? Trading is fairly active but I intend to have a full time job as well.

    • Nycevan,
      If it is far enough down the road (depends upon state law and federal bankruptcy law), the LLC could protect the trading account from personal bankruptcy.

  14. I want to start a LLC with my wife to do part time trading. One of the things I am looking for is to start a SEP IRA or SOLO 401K, which has significantly higher limits on money that can be differed for retirement(I believe around 56K in 2020). I won’t have the provision to do this if I trade in my personal account. Let me know your thoughts on this and if I am missing something here.

    • Srini,
      I am not sure I understand the question. The LLC will not have earned income if its only income is from your investing. You have to have earned income to fund an IRA, 401(k) etc.

  15. DeAngelo,
    There really shouldn’t be much of a tax benefit for a day trader to form an LLC. Expenses that are “ordinary and necessary” no matter what form your business is structured in are deductible. There may be some asset protection advantage to doing your business in an LLC, and the tax advantages may tip in favor of the LLC, but if you are in a state that charges a fortune (CA NY NJ) I wouldn’t probably form an LLC. Otherwise, sure do it.

  16. Can I form a S corp (solely for trading purpose) and day trade, and pay myself a salary from the capital gains. and use part of that salary to fund a solo 401k for tax reduction? would this salary considered to be “earned income?” just trying to see if there are any retirement plans available for day traders, thank you for your time !

  17. I have read more since my last comment, so if I trade enough to qualify as the Trader Tax Status, and I form a separate entity to conduct my business of trading security to make a living, can I use the gains to fund retirement vehicles?

    • YSL,
      I assume the income would be considered “earned or active” income, and that would be allowed to fund a retirement account.

  18. In filing the LLC certificate of formation document, where one describes the type of business, is there any recommended language specific to trader in securities activities, or is the typical “any lawful business” language sufficient.

    • Wayne,

      You can just use any lawful business as the business purpose.  Where you are the only one in the LLC.  Are you dealing with a Utah company to set up the LLC?  I have had a couple of questions about a Utah company that is working with traders to set up LLCs.

  19. Hello there, I have recently started investing through my personal brokerage account and started day trading. I am learning about this field and wants to hire a financial consultant to help me learn how to be successful in this field. Will I be able to hire one and pay his compensation as part of my expenses/salary under an LLC.

    • KJ,
      You could deduct his expenses as an employee or 1099 under Schedule C.  I would call him a computer tutor or something.  I don’t believe investment expenses are tax deductible any more.  Talk to your tax guy.

  20. I have been day trading commodities for a long time now and becoming a licensed broker. Some friends and family want me to trade for them but don’t feel comfortable with a small amount of money to work with. Can I create a LLC to combine funds and trade futures?

    • Thomas,
      You could use an LLC for the trading vehicle. HOWEVER, you are forming a mutual fund type situation and they have huge laws with huge teeth to control the pooling of money to trade. You had better check out all of those types of laws.

  21. Is the a certain amount of profits an individual has to make in order for trading under an LLC to make tax sense? And could you connect teaching how to trade stocks while trading profitably in your own brokerage acct for a business?

    • Christopher,
      Trading stocks in an entity (probably and LLC) won’t give you much if any tax advantage. The LLC charging order protection could protect your trading account from the personal liabilities you may have. You don’t really need the corporate shield protection, because you’ll never run onto a liability in trading. You will just lose your investment.
      P.S. if you want me to help you learn to trade stocks in an entity, my investment strategy works every time for me. Buy high and sell low. When I invest the stock doesn’t just go down, the company goes under.

  22. My broker is requesting an amendment to my operating agreement (LLC) stating that the entity can trade futures / options / commodities / derivatives. Where can I find a boiler plate amendment to add to my operating agreement.

    Thank you

    Responce to my email would be great.

  23. Hi, I want to form a LLC for my trading activity for asset protection and anonymity.

    1. I reside in NY – can I form a LLC in another state?

    2. Does an LLC protect my identity?


    • Max,
      It is really hard to protect your identity. New York is a hard one. It wants its tax and fees. You could form in a different state, but NY will get you anyway, so just do it in NY.

  24. Does an LLC for trading provide anonymity? Can I create an LLC in a different state from where I reside? Thx.

  25. Hi
    I’m an international student in the US looking to establish an LLC to have someone else manage the company’s investments (day trading futures) since I’m not legally permitted to make these investments myself. I trust a few people with managing this account and need to understand the laws to allow someone to manage money for an LLC. My questions are:

    1. If I hire someone to manage my money will they need to have any sort of certification or license to do so? What if I make them the manager of the LLC? Would any licensing conditions still apply?

    2. If I make someone a member who is legally allowed to day trade their own money without any licenses in the US, could they be allowed to manage money for all the investors within the LLC? (Note they would only be managing the money of the members and not anyone else outside the company)

    3. Could managing the company’s brokerage account be outsourced to an international financial company? Would that company require a FINRA certification ot any type of license to do so? Would it be different if the company is an American company?

    I can work with any of these situations if any of them are legally pursuable. Even a direction on which option to pursue would be helpful.


    • Kunal,
      If you make them the member and manager of the LLC, they own the money in the account. I am not sure of your tax situation or the licensing situation. A lot of it will depend on state laws.

  26. can a LLC carry back losses from security trades?

    • Albert,
      It depends upon how your LLC is taxed. If it is a disregarded entity for the IRS, then it can do anything you can do under the tax laws.

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