Legal Question in Business Law in California

Business Sales,Revenue

firstly is it permitted by law for a non-professional trader to incorporate a company solely for the purpose of trading(buying and selling of shares of publicly listed companies).

i invest $1000 and buy&sell the same shares of various companies for about 25 times and in the end make little or no profit as such.

would the sales of such a company be $25,000, and $0 profit?

if buying and then selling shares of publicly listed companies through electronic brokerages like E*Trade, Ameritrade cannot be construed as sales by a company, please let me know of any other form of transactions like trading in futures, energy exchanges etc. where an ordinary indivdual can trade if not for profit atleast towards establishing a good trading history - for an incorporated enterprise.

your help is greatly appreciated


Asked on 6/20/03, 10:20 am

1 Answer from Attorneys
Bryan Whipple Bryan R. R. Whipple, Attorney at Law

Re: Business Sales,Revenue

You can form a California for-profit corporation for any lawful purpose other than the banking, trust company or insurance business. Since buying and selling stocks for your own account is lawful, you can form the corporation.

However, I don't understand what possible purpose or benefit there might be in repeated buy-sell transactions. If the purpose is to manipulate the price of a particular security, that would be unlawful. If you (or the corporation) were using other folks' money without being a licensed broker or a registered mutual fund or the like, that would be unlawful.

And, if the sole purpose is to create a company that appears to have a large sales volume to impress someone ("My company did $2 million in sales last year!") I don't think many would be impressed when they looked behind the numbers.

Buying and selling stocks is considered investment activity for tax purposes unless you are a licensed securities dealer buying for and selling from inventory. Investment activity is reported differently than other business purchases and sales. For example, an individual reports purchases and sales of merchandise on Schedule C, but purchases and sales of investments on Schedule E.

The answer would be the same regardless of the nature of the security traded.

The IRS rules would also deny you any special tax advantages from using a corporation to do your personal securities-trading activity.

So, the bottom line is that there is no advantage that I can see to what you propose.

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Answered on 6/20/03, 11:40 am


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