Do I Need an LLC for My Currency Trading Business?

Starting a limited liability company (LLC) for your currency trading business can provide several benefits.

Most importantly, an LLC structure offers limited liability to its owners, which can protect their personal assets from lawsuits and creditors.

For a currency trading business, lawsuits can arise from things like fraudulent “get-rich-quick” scheme allegations, data breaches, and business debt accrual.

LLCs are also affordable, highly flexible (from a tax point-of-view), and can make your currency trading business seem more credible.

Recommended: Use Northwest to form an LLC for $29 (plus state fees).

Should I Start an LLC for My Currency Trading Business?

LLCs are a simple and inexpensive way to protect your personal assets and save money on taxes.

You should form an LLC when there's any risk involved in your business and/or when your business could benefit from tax options and increased credibility.

LLC Benefits for a Currency Trading Business

By starting an LLC for your currency trading business, you can:

Protect your savings, car, and house with limited liability protection
Have more tax benefits and options
Increase your business’s credibility

Limited Liability Protection

LLCs provide limited liability protection. This means your personal assets (e.g., car, house, bank account) are protected in the event your business is sued or if it defaults on a debt.

Currency trading businesses will benefit from liability protection when a trader is trading more capital than what they have or if they are trading with other people’s money. There is a risk of lawsuits related to financial data breaches, trademark infringement, responsibility for loss, and fraud.

Example 1: A former employee who feels he was unfairly dismissed from his job has filed litigation against you. In the event of an unfavorable court ruling and a hefty compensation fine, liability protection will ensure that only your business assets are affected.

Example 2: You took out a loan for your company, but you've run into financial difficulties and cannot make your loan payments. If you did not personally guarantee the loan, liability protection would prevent creditors from seizing your personal property if they came knocking.

Example 3: Your company's computer system was recently infected with a virus, and as a result, you were unable to issue withdrawals to your customers on the scheduled date. Even if they sue you and win, your limited liability protection will shield your personal assets from being jeopardized.

Example 4: While trading currency, your company profits heavily from a glitch in the global software system you’re using. Later, your company is accused of fraud and unfair practices.

An LLC will also protect your personal assets in the event of commercial bankruptcy or loan default.

To maintain your LLC's limited liability protection, you must maintain your LLC's corporate veil.

LLC Tax Benefits and Options for a Currency Trading Business

LLCs, by default, are taxed as a pass-through entity, just like a sole proprietorship or partnership. This means that the business's net income passes through to the owner's individual tax return.

The business’s net income is then subject to income taxes (based on the owner's tax bracket) and self-employment taxes.

Sole proprietorships and partnerships are taxed in a similar way to LLCs, but they do not offer limited liability protection or other tax options.

Currency trading is not considered a business activity by the IRS. Income from trading is considered unearned, passive income. The only advantage to this is not having to pay self employment taxes which is quickly outweighed by limitations to deductions. Most notably, only $3000 in net capital losses can carry forward against future income.

A currency trader can attempt to qualify for trader status to avoid this type of tax treatment. But, it’s not easy to attain qualified trader status and the same effect can be achieved by forming an LLC.

It’s generally much easier to change from an LLC to other forms of business structure or trading status than it is to change from one trading status to another.

S Corp Option for LLCs

An S corporation (S corp) is an IRS tax status that an LLC can elect. S corp status allows business owners to be treated as employees of the business (for tax purposes).

S corp tax status can reduce self-employment taxes and will allow business owners to contribute pre-tax dollars to 401k or health insurance premiums.

The S corp status requires that the business pay the employee-owner(s) a reasonable salary for the work they perform.

In addition, the business might need to spend more on accounting, bookkeeping, and payroll services. To offset these costs, you'd need to be saving about $2,000 a year on taxes.

We estimate that if a currency trading business owner can pay themselves a reasonable salary and at least $10,000 in distributions each year, they could benefit from S corp status.

You can start an S corp when you form your LLC. Our How to Start an S Corp guide will lead you through the process.

Credibility and Consumer Trust

Currency trading businesses sometimes rely on consumer trust. Credibility plays a key role in creating and maintaining any business.

Businesses gain consumer trust simply by forming an LLC.

A growing business can also benefit from the credibility of an LLC when applying for small business loans, grants, and credit.

Northwest will start an LLC for you for just $29 (plus state fees).

Get Started

How to Form an LLC

Forming an LLC is easy. There are two options for forming your LLC:

You can hire a trusted LLC formation service to set up your LLC for a small fee
Or, you can choose your state from the list below to start an LLC yourself

Select Your State

For most new business owners, the best state to form an LLC in is the state where you live and where you plan to conduct your business.

Do LLCs Need Insurance?

Yes. Without insurance, a company's assets and finances would be at permanent risk. For instance, companies dealing in currency trading should have business insurance since hackers could compromise their financial data and trading systems, which can lead to lawsuits.

Common Situations Business Insurance May Cover for a Currency Trading Company

Example 1: While trading currency, your company profits heavily from a glitch in the global software system you’re using. Later, your company is accused of fraud or unfair practices. General liability would likely help cover the costs of defending yourself against the charges.

Example 2: A friend comes to your office to meet you for lunch. While entering, he slips and falls on a floor that wasn’t properly cleaned, and he blames your company for his injuries. General liability would likely cover the resulting injuries in the case of a lawsuit.

Example 3: A currency trading company in a different country claims that your business name is too similar to their own. This similarity is causing confusion in the global market, and they feel they’re losing business. General liability insurance would likely help cover the costs of settling the matter.

Other Types of Coverage Currency Trading Businesses Need

While general liability is the most important type of insurance to have, there are several other forms of coverage you should be aware of. Below are some other types of insurance all currency traders should obtain:

Commercial Property Insurance

Commercial property insurance protects you from the cost of repairing or replacing owned real estate, equipment, and supplies. If you’re investing money in complex and powerful equipment, this insurance can also stave off heavy losses from theft or unexpected emergencies.

Business Interruption Insurance

Currency traders can be heavily influenced by global events and even local affairs. If your business is halted by an event outside your control, you may be able to file a claim for business interruption insurance. This insurance will help you recoup any lost income so you can continue to pay your expenses.

Commercial Umbrella Insurance

A lot of unexpected events can occur in the complicated world of currency trading. Owners may not even realize that certain factors threaten their business until they occur. Commercial umbrella insurance is designed to kick in when your general liability policy’s limits are reached, such as in the event of a costly lawsuit.

Professional Liability Insurance

Currency traders sometimes lose money on trades, which is why professional liability insurance may come in handy. This form of insurance can protect your business against lawsuits seeking compensation for losses that came as a result of negligence or errors.

Home-Based Business Insurance

If you work from home, certain work-related accidents and injuries may not be covered by your homeowner’s policy. Home-based insurance gives business owners the means to cover their property and business should something happen while they’re working from home.

Data Breach Insurance

Every company with a computer has to worry about data breaches, but currency traders may have additional cause for concern. This form of insurance will provide coverage if you lose sensitive electronic data in a hack.

Should I Start an LLC FAQ

Choosing the right business structure depends on your business’s unique circumstances and needs. However, unless your business is very low risk (like a hobby), an LLC is likely the better option.

Visit our LLC vs. Sole Proprietorship guide to learn more.

At a minimum, you’ll need general liability insurance.

Read our Currency Trading Business Insurance article for more info.

With a bit of capital, you can become an entrepreneur in the currency trading industry. All that is required to begin is access to a computer and FOREX trading platform; desktop PCs range from $600–$2,500, while more powerful versions are available for high-volume traders up to $10,000.

Visit our How to Start a Currency Trading Business guide to learn more about the costs of starting and maintaining this business.

A currency trading business needs a fast internet connection. It also needs to maintain and upgrade its computers and software regularly. Brokers also have server costs and costs related to servicing traders who use their platform.

Learn more about running a currency trading business.

A currency trading business makes a profit if a currency it buys rises in value compared to another currency it just sold. Currency brokers make money by charging other traders a commission. Some companies act as "pass-through" entities for large market-makers. These companies only charge a fraction of a pip commission which allows their traders to pay a thin spread that is only usually offered to very large or institutional investors.

Learn more about starting a currency trading business.

With this type of business, the owner buys and sells foreign currency to earn a profit from the foreign exchange market. Revenues for a currency trading business can vary with market conditions, and a very successful currency trading business can gross more than a million dollars annually.

Learn more about starting a currency trading business.