How to Start an LLC for Day Trading (2024)

Open your LLC for day trading in a few simple steps with doola.

A limited liability company (LLC) is one of the most popular business entities, as this flexible structure allows you to protect your personal finances. With the options of pass-through taxation and the possibility of reducing your capital gains tax on day trading, starting an LLC should be the first step before you begin day trading. An LLC for day trading can have a single member, giving you total control, or multiple members. Read on for six steps to start an LLC for day trading.

What is an LLC for Day Trading?

An LLC is a legal business entity, meaning the company can file taxes, pay employees, open a bank account and function independently. However, unlike corporations, with an LLC, you can also elect pass-through taxation and report business income on your individual income tax return. For that reason, an LLC for day trading gives you legal protection (limited liability), flexibility to expand your business and minimal additional administrative costs.

While a sole proprietorship is simpler, it opens you to legal liability and puts your assets at risk during trading activity. Stock traders set up LLCs for the asset protection an LLC offers. With the stock market's volatility, an LLC can safeguard against personal losses and help protect day traders from lawsuits and other liabilities.

Should You Start an LLC as a Day Trader?

A day trader would choose to start an LLC for legal protection and to protect against personal losses. An LLC takes only a few minutes to create and costs less than $200, even if you use an online service to set it up for you. With minimal costs, time and significant legal protection, it makes sense to start an LLC as soon as you start day trading.

6 Steps for How to Start an LLC for Your Trading Business

Ready to start your LLC? There are just six simple steps.

Choosing a Name for Your LLC

The LLC name you choose will be the legal name of your business. It can also be your trading name. Pick an LLC name that is unique and not already taken. A distinctive, authentic and memorable business name is helpful, although you could also choose any name you like for private day trading. However, if you plan to expand the business later or bring on other day traders, look for a name that serves to build trust with your consumers and is easy to remember.

LLCs are governed by state laws in the state where the LLC is formed. According to most state laws, all names must end with "limited liability company" or abbreviations like LLC or L.L.C. Check with your state for specific requirements.

Once you've settled on top name choices, you'll want to ensure they're not already taken. Check the state registry to ensure there's no company already registered with that name. Then, do a quick Google search to see if other businesses have similar names; this is important for website branding and organic search traffic down the road. Finally, check the United States Patent and Trademark Office (USPTO) database to ensure the name isn't trademarked for the goods or services related to day trading.

Filing for an LLC in Your State of Residence

While requirements may vary by state, generally, you will need to appoint a registered agent on filing. This individual or legal firm receives mail and official correspondence on behalf of your business.

You will also need to select a physical address for your LLC. Then, you file the articles of organization with the state. Many states now allow you to do this online. Or, you can print and mail in the completed forms.

You can use an online service to file for the LLC, which is cost-effective and time-saving.

Obtaining an Employer Identification Number (EIN) From the IRS

Once you have created an LLC, you'll need to get an Employer Identification Number (EIN) from the IRS. An EIN allows you to open a business bank account or apply for a business loan. If you need to hire employees, an EIN allows you to do this. In many states, you must apply for an EIN if you have an LLC with employees or multiple owners or elect to be taxed as an S-corporation.

With an EIN, you also have the option to file taxes for the LLC as a separate entity. It also adds credibility to the business and builds customer trust if you offer day trading services.

Drafting an Operating Agreement for Your LLC

An operating agreement facilitates the daily operations of the LLC. If you have a sole-member LLC, this is not vital, but it can be helpful to clarify your day trading operations and goals. If you have a multi-member LLC, this document is crucial to avoid disagreements or confusion down the road.

An operating agreement will detail hiring, distribution of profits and dissolution. Once the operating agreement is complete, have all members review it, suggest amendments and sign the final agreement. Elements of an operating agreement include:

• The LLC's purpose, including products or services offered (in this case, day trading)
• Names and addresses of all LLC members
• Each member's role within the LLC, including their stake in the company, profit share and voting rights
• A schedule of meetings
• Voting procedures
• Procedure for admitting new members
• Procedure for electing a manager or hiring employees
• Terms for dissolution of the LLC and relevant procedures

You can find templates of LLC operating agreements online and adapt them to your day trading LLC needs. An online legal service or business lawyer can draft a simple operating agreement.

Opening a Separate Bank Account for Your LLC

Once you have the LLC and EIN, opening a separate bank account for your day trading business is essential to keep business funds separate from personal funds. Business bank accounts may also have extra perks like higher savings interest rates, a free debit card, cash back or other incentives. Research local banks and promotional offers for new business bank accounts to choose the right bank for your LLC.

To open a bank account, you'll need:

• EIN or Social Security Number (SSN)
• Personal identification (government-issued ID)
• Business formation documents
• Business license (if necessary)

Complying With State and Federal Taxes for Your LLC

As a day trader, it's important to understand state and federal tax requirements and their implications for your business. Day traders must pay applicable state and federal taxes on earnings. Unlike buy-and-hold investment strategies, day traders don't have favorable tax law treatment. Speak with a certified public accountant (CPA) to understand your tax liability and possible capital gains savings and to ensure compliance.

Benefits of Setting up an LLC for a Day Trading Business

• Legal protection
• Separated business assets from personal assets
• Pass-through taxation
• Flexible management structure
• Easy setup

Final Tips on Creating an LLC for Day Trading

An LLC for day trading is essential for asset protection and limiting personal liability. While each state has slightly different requirements, the steps above will help you navigate the process easily. For example, find tips for starting an LLC in Florida or opening an LLC in Texas.

Once you've set up an LLC, find the best day trading platforms and best day trading strategies.

Frequently Asked Questions