Forex Trading as a Business

We all have our personality quirks. My quirk is collecting quotes. I have quotes in my trading log, in my success notebook (I will discuss this in another post) and even in my golf bag. One of my favorite quotes is “Act as if!” Act as if means that while you are in training to be a successful currency trader (my definition is one that makes consistent profits no matter the lots size being traded) you have to act as if you were already a successful forex trader.

So I began following and speaking with successful retail spot currency traders to gleam some insight into the characteristics of successful forex trading. Unlike those dentist commercial were 9 out of 10 recommends a product, 100% of all the forex traders I have spoken with said treating their forex trading as if it were a business was a key component of there success formula. In addition to merely treating their activities as a business, that their trading was done through a legal business structure. Businesses have plans, projections, profits target and capital spending; and so should your trading. All the FX traders I emulate trade through corporate entities, and now so do I!. If that is the path to success, then I am going down that road also and TRADE as if I were a business with all the planning aspects and legal framework associated with that action.

The tax code in the United States is generally established to collect tax from the employees of businesses and not the business themselves. Case in point, we as individual tax payers pay our taxes THEN expenses with after tax dollars. The business pays for expenses and THEN is taxed on the remaining amount (if any). Forex trading through a business entity makes sense from a tax standpoint; after all it is my business!

I am not a legal or tax professional, but I discovered that of the many structures to becoming a legal entity that there was one that fit the bill of turning my forex trading into a business perfectly; the Limited Liability Company, as a matter of fact I trade with my broker and educational company, FX TRAINER, as an LLC.

There are essentially 4 main business frameworks:

Sole Proprietorship
Partnerships (General and Limited)
Corporations (C- and S-Corporation)
Limited Liability Companies (LLC)

LLCs offer many advantages including:

Flexibility in structuring

Pass-through taxation

May distribute profits and loses in any manner that is desired without regard to each member’s ownership in the business

Different classes of ownership and may own 80% or more of another corporation

Avoids most legal complexities and rules found in corporations

Participation in management affairs does not result in loss of liability protection as it does in partnerships

No double taxation unless members opt for corporate taxation rules

No lists of advantages are complete without a corresponding list of disadvantages including:

LLC are relatively new so there is very little legal precedence available.

Tax liabilities pass to members even if there is no distribution.

Different states have different laws regarding the continuity of LLCs.

All in all, there is never any substitution for seeking professional legal and tax advice in forming a business entity. There are many factors associated with developing a sound business framework such as; location, estate planning and other assets, but one thing is for sure, forming a business plan and trading currencies as a business is another directional sign on the road to successful forex trading.

For more information please visit FX TRADE CENTRAL as well as the following links:

Anderson Law Group http://www.alglaw.com/
Success DNA www.successdna.com
Nolo http://www.nolo.com/
Inc, Guides www.inc.com/guides/start_biz/20676.html

Happy Trading!