Why traders should not use a S Corp for trading.

S Corps are better than sole proprietorships, in that you do not have to pay self employment taxes, but with S corps you have to pay yourself a "reasonable salary", and take the balance of the income as either dividends or unearned income. The problem with the "reasonable salary" is that there is no clear rules’ regarding what is considered reasonable. You have to do a lot of research and document all the information that you find. Most Traders experience highs and lows during the year and having to pay a salary is just not feasible for most traders and why subject yourself to the 15.3% of additional taxes.

In some cases the best and logical solution would be to use a LLC (Limited Liability Company). You can take tax free distributions up to the amount of capital you contributed, and the income is passed on through a K1 and taxed at your personal tax rate. This is beneficial because any losses for expenses are passed on as an ordinary loss and is deductible from your ordinary income and you are able to pocket the additional 15.3%.