Should You Form An LLC For Forex Trading?

Should You Form An LLC For Forex Trading

These days, almost everyone knows how rewarding it can be to trade forex. Indeed, a report by The Modern Trader notes that there are more than 13.9 million global online forex traders, making forex the largest financial market in the world. Other than being a way for individuals to potentially earn some extra income, or even possibly have a trading career, forex trading also allows people to be their own bosses and be in full control of their time and finances.

However, forex traders need to undertake huge decisions to maximize their chances of success ⁠— one of which is choosing the correct business structure. As an individual or sole proprietor, forex traders are not given access to the tax advantages and asset protection strategies that are available in other business structures, such as an LLC. With that being said, in this post we’ll discuss what LLCs are and the possible benefits this structure holds for forex traders.

What does incorporating as an LLC mean for forex traders?

A limited liability company (LLC) is a business structure that protects company owners from being liable for their company’s legal troubles or debts. An LLC is structured similarly to a corporation, but it takes elements from other business entities such as partnerships and sole proprietorships as well.

What’s great about LLCs is that the ownership isn’t restricted, meaning anyone can be listed down as an owner.

ZenBusiness points out that LLCs bring plenty of benefits — the most crucial of which is a separation between your business and personal assets. This can protect you from business debts, claims, and lawsuits should they ever occur in the course of your trading career. For instance, in the event your trading business files for bankruptcy, your personal assets should be safe and cannot be used to pay your business’ debts.

But more than that, LLCs could also allow you to avoid double taxation and establish your trading as an official business. Double taxation happens when shareholders pay corporate tax on the earnings of the company and then personal tax on individual earnings. Small Biz Trends notes that unlike company shareholders, LLCs aren’t taxed as a separate business entity. This means that by incorporating as an LLC, your trading business can be considered as a flow-through entity that may exempt you from double taxation.

Moreover, you also get the chance to register your trading business as an official business when you form an LLC. By having LLC in your business name, you make your business more official as it shows that you’re registered with the state.

How can forex traders incorporate as an LLC?

Now that you’re aware of some of the numerous reasons why forex traders could form an LLC, let’s now discuss how you can switch business structures. There are five general steps in starting an LLC:

  1. You should pick a distinguishable name for your LLC. When choosing your desired LLC name, make sure that it’s available for use by searching it against existing companies on your state’s database.
  2. After choosing a name, you have to appoint a registered agent to physically accept any legal papers on your company’s behalf.
  3. Then, it’s time to file paperwork with your state to make your LLC official. This is done by filling out forms with the appropriate information about your trading business and paying a filing fee.
  4. Afterward, you should create an operating agreement. Individual traders may choose to skio this step. But for those who are partnered with other people and offer trading services, an operating agreement is necessary as it outlines the rules of ownership and operation of your business. You can choose to have a lawyer draft up your operating agreement if you want to make this task easier.
  5. Lastly, you’re required to apply for an IRS Employer Identification Number (EIN) if you’re employing other people in your trading business.

These rules might change depending on your state, but the process remains generally the same. Incorporating as an LLC can give some benefits to traders, so if you immerse yourself in exchanging currencies for profit, you might want to consider switching to this business structure.

This is not intended as tax advice. For more information about general trading, be sure to check the forex General Trading guides that we have.