There are numerous issues regarding LLCs for gamblers.
You absolutely need to discuss this with your own tax advisor and an attorney before forming an LLC as a professional gambler.
A single-member LLC is generally a disregarded entity for tax purposes. That is, it files a Schedule C. That doesn't save you a penny in taxes.
What I suspect some of those who have LLCs have done is make a tax election to be taxed as an S Corporation. An S-Corp owner is required to pay himself a "reasonable" salary. The tax savings are from the non-salaried income that flows through to the owner; self-employment tax isn't paid on that income. There are additional costs: a second tax return, costs for forming the LLC, costs for maintaining it, etc.
There are many potential problems. First, professionals of any sort cannot form an LLC in California (where I live). My attorney advised me that a professional in a foreign (non-California) LLC wouldn't be legal in California, either. LLC law is not uniform among the states; you absolutely need to consult with an attorney in your jurisdiction as to whether or not you can form an LLC (or an S Corp) as a professional gambler.
There's also the problem with the purpose of the LLC: gambling. Some states (California is one of these) consider gambling to be against public policy. Except for licensed gambling, it may be against state law to form a corporation (or an LLC) for promotion of gambling. Business entities are creatures of state laws; you must consult with an attorney to see if it's legal.
Finally, there's the IRS. As JDalla noted,
Quote:
*however* my account ultimately advised me against this, as it is yet to be seen how the IRS will respond to someone doing this. As of now they "frown on it," (?) but should they decide to declare it illegitimate, you would owe tax retroactively on all that money, PLUS interest and penalties.
The IRS hasn't challenged such an entity. However, that doesn't mean they won't in the future. Gambling income is considered personal income by the IRS; moving it to a business entity would likely be seen as having no economic substance. There's a fundamental rule of tax that any transaction must have economic substance or it is considered null and void. President Obama has said that in his health care plan he would strengthen the economic substance rules; we are likely to see those rules tighten in the future. JDalla's comment about what would happen if a business entity is ruled invalid is accurate.
Most business entities are formed for liability protection--to protect the owner's personal assets from a potential issue with the business. That's likely irrelevant for most gamblers.
Is forming an LLC or an S-Corp a possible path for lower taxation for a professional gambler? Absolutely. Is it legal? In some areas of the country, definitely not. In other areas, it might be. Is it right for you? This is definitely not a one size fits all type of plan; you need to discuss this with your own tax advisor and attorney.
-- Russ Fox