| If you trade foreign exchange (FOREX), especially full | | | | than the sole proprietor or individual investor formation, |
| time, you may have wondered from time to time | | | | since a U.S. Tax Form 1065 must be prepared and K-1 |
| which business formation you should operate under. | | | | forms issued to each partner. As to liability against third |
| As with most businesses in the USA, the choice of | | | | parties, you, along with any of the other general |
| entity that you choose will depend on your personal | | | | partners, may be held responsible for the full extent of |
| and business needs. This article explores three | | | | the amount imposed, unless you fall within the |
| possible choices available to the FOREX trader. | | | | category of a "limited partner". |
| Sole Proprietor | | | | Licensed Limited Company |
| This type of business entity allows the trader to simply | | | | Also referred to as an "LLC", this type of entity is of |
| conduct business in the name of the trader without the | | | | statutory creation and a relative newcomer in |
| need for filing complex legal documents with regulatory | | | | comparison to the sole proprietorship and the |
| agencies. In most jurisdictions, an assumed or fictitious | | | | partnership. In theory, it is a hybrid with the positive |
| name certificate would be required if you were | | | | traits of both the partnership and the corporation. |
| conducting business in a name other than your | | | | Operating as an LLC, you may also have the ability to |
| personal name. As a practical matter, however, most | | | | deduct or offset certain expenses that would |
| traders simply set up an account with a broker and | | | | otherwise be unavailable to the individual investor or |
| begin trading in their personal name. | | | | sole proprietor. |
| The real concern here is whether you are interacting | | | | Although not discussed in detail here, the corporate |
| with the general public in such a way as a business | | | | structure theoretically provides the distinct advantage |
| that the authorities would want to charge you with | | | | of limited liability for its owners known as shareholders. |
| some level of accountability. As an investor simply | | | | Consequently, you and the other owners of the LLC, |
| going online to trade without the visibility and public | | | | are exposed to liability from third parties only to the |
| interactivity of a full-fledged business, your responsibility | | | | extent of your investment in the LLC. As with the |
| may just be to make sure you properly report your | | | | corporation, however, if somehow the veil is |
| trading results to the tax authorities. Your own social | | | | successfully pierced by a litigant, you can be held |
| security number would serve as the Federal Tax I.D. | | | | individually and fully responsible for the liability. |
| Number for income tax purposes. One final thing to | | | | The similarity between the partnership and the LLC |
| note here is that, as a sole proprietor, you are | | | | relates to the "pass-through" feature regarding the |
| personally exposed to the full extent of liability against | | | | income, losses and tax impact. While the entity itself is |
| other parties in the relatively rare situations giving rise | | | | not taxed, you, as owner, will receive your respective |
| to such. | | | | portion of the tax income, loss, and consequent tax |
| Partnership | | | | impact. Both the LLC and the partnership assume |
| A partnership is an agreement between two or more | | | | there is more than one trader in the picture as, for |
| parties to conduct business and share profits and | | | | example, in the case of a formal investment club or |
| losses according to an agreed formula. In the context | | | | other common fund approach. |
| of the FOREX, this would involve investors who | | | | Conclusion |
| decide to pool their financial and possibly other | | | | As between this entity and the partnership form of |
| resources for trading purposes. The benefit of this | | | | operation, the LLC would generally be the better |
| form of operation is that the entity itself pays no taxes. | | | | choice for investors. Again, that all depends on your |
| Rather, the tax losses and gains are determined as of | | | | personal and business needs. Overall, however, you will |
| year end and then passed along to you and other | | | | find most retail FOREX traders utilizing the single |
| respective partners according to the agreed formula. | | | | investor or sole proprietor approach for its simplicity |
| The split income or loss is then accordingly applied to | | | | and convenience. Nonetheless, be sure to check with |
| your personal tax return. | | | | an attorney in your jurisdiction to see which business |
| This type of entity requires more administrative duties | | | | entity is best for you. |