What is an 'Entity Trading Account'

An entity trading account is a dedicated account type belonging to a legal entity such as a corporation or limited partnership. There are certain advantages to entity trading accounts over individual trading accounts, such as tax deductions and certainty in tax law.

BREAKING DOWN 'Entity Trading Account'

An entity trading account needs one or more persons with authority to trade in the account. Such persons should be competent and honest traders in order to avoid losses in the account arising from poor trading decisions or unscrupulous behavior.

Institutional investors naturally set up formal business entities to conduct their operations. For select individuals, particularly day or active traders who wish to make a living trading securities, it makes economic sense to establish a separate entity, rather than individual investment accounts. Avoiding taxes is a principal motivation. Preventing wash-sale losses can be avoided by moving from individual taxable investment accounts and IRAs to an entity trading account.

The proliferation of online and discount brokerages have played a significant role in elevating the average investor to a pseudo-professional trader. As such, the demand for business and tax planning around the migration from individual brokerage accounts to the incorporation of business entities for investment purposes has grown as well.

Benefits of Trading Through Business Entities

While technical in nature, the benefits of trading through a business entity extend beyond taxes advantages. Several include paying salaries in connection with retirement plan contributions, greater flexibility in accessing certain asset classes and establishing a performance record. The latter benefit is significant for individuals who wish to capitalize on their investment prowess or methodology by creating an investment fund which other investors can contribute to. Such as a hedge fund or separately managed fund under a registered investment advisor.

Moving individual investment accounts to a business account also has the advantage of allowing for the deduction of expenses related to trading activities (Bloomberg subscriptions or specialized equipment). Although more subjective in nature — but still a significant advantage — by conducting investment activities through an entity, individuals can gain access to certain other investment providers and potential counterparties. For instance, a hedge fund may not consider doing business with an individual through their vanilla brokerage account but may consider engaging in transactions with a serious individual investor who manages their assets with an entity linked trading account. In this sense, because an entity account is established, it may be transferable, allowing for the sale of a business form and the monetization of an individual's investment abilities and track record.

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