While starting a business isn’t necessary for trading stocks, it can have some benefits for the active trader. Here’s what you need to know:
Is stock trading a business?
Yes and no. For individuals participating in the stock market, the IRS does not consider trading to be a business activity. However, businesses themselves—like LLCs and corporations—may participate in the stock market. So, for financial and liability reasons, individual investors may choose to trade through a business entity.
What is trader status?
Trader status is an IRS designation that recognizes an individual’s participation in the stock market as a business activity. However, it’s not easy to receive tax benefits as an individual participating in the stock market—the IRS requires individuals to meet strict criteria before they can officially be considered Traders in Securities. It’s a good idea to consult a tax professional if you’re considering trader status for yourself.
Can I start a business for trading stocks?
Yes, although trading stocks as a business endeavor is quite risky—as is playing the stock market, in general. But if you’re already an active trader, creating an LLC or a corporation can have its benefits. At the very least, creating a business entity like an LLC or a corporation can protect your personal assets from your company’s liabilities.
LLC vs. Corporation
When it gets down to the nitty-gritty of setting up a stock-trading business, it’s a good idea to consult a business adviser or CPA to discuss whether an LLC or a Corporation would work best for you.