For a retail day trader startup, an LLC is often the preferred choice due to its simplicity and favorable tax treatment for individual traders. However, if you're considering significant growth and investment opportunities, a C Corp may be worth exploring.
Setting up an LLC for investing is a safe way to build a group of investors and take advantage of the liability protection and tax benefits given to LLCs. Investing as an individual brings added risks to your personal finances and leaves you solely responsible for raising the money to invest.
Just like an individual, an LLC can invest in the stock market. Unlike using an LLC to invest in real estate, opening a brokerage account for investing in stocks, bonds, ETFs (exchange-traded funds) and mutual funds comes with significantly less risk to your personal assets.
Limited Liability Company (LLC) for Trading Stocks
LLCs taxed as partnerships are becoming the most popular choice for active traders due to their ease and flexibility. To be taxed as a partnership, your entity must have at least two members, and it is then considered to be a pass-through entity.
Day traders do not necessarily need a license to trade stocks or other securities. However, they may need to meet certain requirements set by the Securities and Exchange Commission (SEC) or other regulatory bodies, depending on the type of trading they are doing.
Assuming they make ten trades per day and taking into account the success/failure ratio, this hypothetical day trader can anticipate earning approximately $525 and only risking a loss of about $300 each day. This results in a sizeable net gain of $225 per day.
Day-Trader Salary
Whether they're trading for themselves or working for a trading shop and using the firm's money, day traders typically don't get paid a regular salary. Instead, their income is derived from their net profit.
Forming an LLC is smart. It can provide liability protection and help you make more from your real estate investment, including paying less in taxes. It also can protect you from legal jeopardy, including bad tenants. But you can't just set it and forget it.
If you treat your day trading as a business and you meet certain IRS requirements to be considered a "trader in securities," you can reduce some tax impacts. Any net profits may be subject to self-employment tax, which also comes with some advantages.
Unless an individual can qualify for qualified trader status, as determined by the IRS, all income they generate from trading activities is considered unearned or passive income when they file their individual income taxes.
LLC members can tap into their own personal assets to fund their company. This can take different forms, such as investing savings, using personal assets as collateral for a loan, or liquidating assets and putting the proceeds into the LLC.
As a trader (including day traders), you report all of your transactions on Form 8949 Sales and Other Dispositions of Capital Assets.
Pass-through Taxation
Investment LLCs have pass-through tax status, meaning they don't pay income taxes at the entity level. Instead, everything they earn or lose through their investments is passed on to their owners or LLC members, who then report these profits or losses on their individual tax returns.
Day Trading
In the U.S., pattern day trader (PDTs)—those who perform four or more day trades within five business days—are subject to the pattern day trader rule. This requires a minimum account balance of $25,000.
The reality is that consistently making money as a day trader is a rare accomplishment. It's not entirely impossible, but it's certainly an imprudent way to invest your hard-earned cash.
Quick Summary. You should start an LLC for day trading to reduce capital gains taxes and gain liability and asset protection. An LLC offers advantages such as pass-through taxation, limited liability protection, and a flexible management structure for day traders.
LLCs Can Complicate Investor Tax Situations
Investors frequently do not want to complicate their personal tax situation by becoming a member in an entity taxed as a partnership, and LLCs are most frequently taxed as partnerships.
Rental Activities
This second type of passive income is more common with LLCs. People sometimes use the LLC business structure, which shields them from personal liability risks, for rental properties that they own. Rental income is not subject to self-employment tax.
As of Jan 6, 2025, the average annual pay for a Day Trader in the United States is $96,774 a year. Just in case you need a simple salary calculator, that works out to be approximately $46.53 an hour. This is the equivalent of $1,861/week or $8,064/month.
Typically, investors are allowed to offset their capital gains with capital losses. In other words, if you make a profit on one trade but take a loss on another, you can reduce your taxable income for taxes by claiming and deducting your losses. Investors can also deduct losses above and beyond their gains.
The 11 a.m. trading rule is a general guideline used by traders based on historical observations throughout trading history. It stipulates that if there has not been a trend reversal by 11 a.m. EST, the chance that an important reversal will occur becomes smaller during the rest of the trading day.
George Soros is perhaps the most renowned trader in the world, famous for “breaking the Bank of England” in 1992. His audacious bet against the British pound earned his fund over $1 billion in a single day.
A common approach for new day traders is to start with a goal of $200 per day and work up to $800-$1000 over time. Small winners are better than home runs because it forces you to stay on your plan and use discipline. Sure, you'll hit a big winner every now and then, but consistency is the real key to day trading.