Finance Questions

Archive for the ‘Investment Clubs’ Category

How are Investment Clubs organized?

Since a partnership is the most common form of organization, this memo will primarily discuss that type of entity. A partnership is where a group of individuals pool their resources and share gains and losses among the members of the group. The partnership generally does not have to be formally organized. A W-9 Form, Account Agreement, and an Investment Club Certification of Investment Powers are needed to open up an investment club account. If there are four or fewer participants, a tenants-in-common account could be used instead of the investment club status. 
In order to set up an investment club as a partnership, trust, or corporation the entity would have to obtain a tax identification number by filing out Form SS-4. The identification number may be obtained by phone from the IRS. The numbers to call are listed by region in the instructions to Form SS-4. Go to the IRS web site or call the IRS at (800) 829-1040. 

Where can I find more information on Investment Clubs?

Many books are available at bookstores on this subject.

What are the basics investment clubs?

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?

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.