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A single-member LLC (SMLLC) is a disregarded entity

A single-member LLC (SMLLC) is a disregarded entity, a tax nothing in the eyes of the IRS. An SMLLC trader qualifying for trader tax status (TTS) files a Schedule C for their trading business expenses. Trading gains and losses are reported on other tax forms - Form 8949 for securities, Form 6781 for Section 1256 contracts and Form 4797 for Section 475 MTM. Trading gains are not earned income, except for a full member of a futures exchange trading futures on that exchange (Section 1402i).

Sole prop traders, including SMLLC disregarded entities don't have earned income. That means no SE tax on trading gains and no AGI deductions for retirement plans and health insurance premiums on trading gains, either.

That's why we recommend S-Corp elections for SMLLCs, so they are separate tax-filing pass-through entities. The SMLLC S-Corp can pay the owner a fee or salary, to financially engineer some earned income to unlock AGI deductions. S-Corp elections can be filed late with Rev. Proc. relief. But, S-Corp 2012 extensions were due March 15, 2013 and the late-filing penalty is $189 per month, per partner (which is just one partner).

A Schedule C trader - sole prop whether SMLLC or unincorporated - can not pay themselves a fee.

-- Robert A. Green


Mar 28, 2013

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