Investment Clubs

June 11th, 2008

What are the basics investment clubs?

Individuals in an investment club open an investment account together to purchase securities and agree to share account earnings and expenses, gains and losses in proportion to their relative contributions.

While the dynamics of an investment club may be thrilling, attention should be paid to a number of factors. Consideration should be given to the account set up, the club’s legal structure and record keeping issues.
Record keeping problems may occur, especially if one or more members miss monthly contributions or wish to join or leave the club at different intervals.
The club may or may not have a written agreement. The club can have one member make investment decisions or have the membership vote on all purchases and sales. It is best that one member of the club has the trading authority for the account.

How are investment clubs taxed?

The taxation of the income and gains depends upon the way the investment clubs are organized.

Generally, if formed as a partnership, the entity itself does not pay income tax. A partnership reports its income, gains, and losses to the IRS on Form 1065 and sends each partner a K-1 form for his share. The partners report their share on their own personal income tax returns.
If the account is held in the name of one or more members of the group, as under a tenant in common account, the tax statements will be sent in the name and social security number of the first person on the account. This member will have to report the other members’ proportionate shares to them using nominee reporting.

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