Investment club
Encyclopedia
An investment club is a group of individuals who meet on a regular basis for the purpose of pooling money and retail investing. The invested sums can be $30 to $100 per month. For certain type of club pooling money is not mandatory. Investment clubs provide members a means to learn about markets, while meeting and working with people who have similar interests.
While the first investment club on record dates back to the 1800s in Western America, Various online communities devoted to this type of investing have recently emerged and have contributed to the personal investing boom in the United States
. One of the reasons that people come together in investment clubs is to learn how to invest.
Whereas, self-directed investment clubs
simply meet and learn about investing but invest on their own.
s, but could also be formed as limited liability companies
or limited liability partnership
s (in states that allow them). While an investment club could incorporate
, the double tax treatment
on corporate distributions makes the corporate structure less desirable than a partnership. Typically, a general partnership does not generate any tax liability on its own; instead, any tax liability is passed through to members each year.
In order to understand the legal structure that an investment club should choose, the club should first understand its club type, which according to the cited reference could be a small local club, large local club, small internet club, or large internet club. Each of the different club types will have different legal requirements as well as different reporting requirement to the SEC.
each year, and with states that require partnership filings. In the United Kingdom investment clubs and their members are required to submit form 185(new) to HMRC each year. Investment club accounting software
can facilitate the management of a club's books and the preparation of tax filings.
History
The world's first investment club was established in Texas in 1898, back in the days of the Wild West when few investments could be considered safe. Investment clubs were seen as an ideal way of spreading the risk - away from just cattle.While the first investment club on record dates back to the 1800s in Western America, Various online communities devoted to this type of investing have recently emerged and have contributed to the personal investing boom in the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
. One of the reasons that people come together in investment clubs is to learn how to invest.
Starting a club
Industry observers recommend prospective members adhere to these guidelines:- Consult a tax adviser on the taxation implications of the club's selected legal structure
- Establish an investment mission, policy and goals before investing
- Draw up a written operating agreement covering asset management rules and membership changes
Contributing versus self-directed
Contributing clubs require members to contribute monies to a collective pool on a periodic basis. The periodic basis is typically monthly.Whereas, self-directed investment clubs
Self-directed investment clubs
A self-directed investment club is a type of investment club in which members do not make financial contributions, but rather meet on a regular or informal basis to share stock tips and advice, and then invest in their individual portfolios, not in a common club portfolio...
simply meet and learn about investing but invest on their own.
Contributing classifications
The following 4 classifications or 'club types' Each of the different club types has caveats associated with its structure, size and members geographic location.- Small local clubs: Less than 15 members meeting locally.
- Large local clubs: 15 or more members meeting locally.
- Small internet clubs: 15 or less members who meet on the Internet.
- Large internet clubs: 15 or more members who meet on the Internet.
Conduct of business
In order to operate an investment club, business must be conducted in an orderly fashion. The level of formality will vary based on the club type (see club type). A typical club will have informal channels of communication via mailing lists, Twitter accounts or message boards. In additional to the informal channels of communication, an investment club must set up formal channels of communication to conduct business. Typically, this is done with monthly meetings. Typical meeting agendas include all the normal activity you would expect in an organization with elected officials. A typical meeting agenda:- Roll call
- Old business - list of any unfinished business from the previous meeting.
- Summary of votes - Summary of all voted decisions from the previous meeting
- NAV presentation - NAV or the Net Asset Value of the Club will indicate what each club member is worth on paper.
- Available funds - a presentation of Available funds to invest.
- Presentation of current research - each member assigned to present an investment option will present his/her research.
- Vote to hold or invest - A vote to hold cash, sell current assets or invest in one of the investment options
- Investment vote - A final vote on an investment strategy specifying an exact amount to invest and strategy to execute that investment.
- Other business - Typically, other business will include proxy votingProxy votingProxy voting has two forms: delegable voting and delegated voting, which are procedures for the delegation to another member of a voting body of that member's power to vote in his absence, and/or for the selection of additional representatives, as in the case with transitive proxies...
needs or other day to day business operational needs. This could also include options change a brokerage house, or discussions of couter party risk. - Formal close of meeting
Legal structure
Investment clubs are generally formed as general partnershipGeneral partnership
In the commercial and legal parlance of most countries, a general partnership or simply a partnership, refers to an association of persons or an unincorporated company with the following major features:...
s, but could also be formed as limited liability companies
Limited liability company
A limited liability company is a flexible form of enterprise that blends elements of partnership and corporate structures. It is a legal form of company that provides limited liability to its owners in the vast majority of United States jurisdictions...
or limited liability partnership
Limited liability partnership
A limited liability partnership is a partnership in which some or all partners have limited liability. It therefore exhibits elements of partnerships and corporations. In an LLP one partner is not responsible or liable for another partner's misconduct or negligence. This is an important...
s (in states that allow them). While an investment club could incorporate
Incorporation (business)
Incorporation is the forming of a new corporation . The corporation may be a business, a non-profit organisation, sports club, or a government of a new city or town...
, the double tax treatment
Double taxation
Double taxation is the systematic imposition of two or more taxes on the same income , asset , or financial transaction . It refers to taxation by two or more countries of the same income, asset or transaction, for example income paid by an entity of one country to a resident of a different country...
on corporate distributions makes the corporate structure less desirable than a partnership. Typically, a general partnership does not generate any tax liability on its own; instead, any tax liability is passed through to members each year.
In order to understand the legal structure that an investment club should choose, the club should first understand its club type, which according to the cited reference could be a small local club, large local club, small internet club, or large internet club. Each of the different club types will have different legal requirements as well as different reporting requirement to the SEC.
Tax implications
In the United States Investment club partnerships must file Form 1065 and Schedule K-1s with the IRSInternal Revenue Service
The Internal Revenue Service is the revenue service of the United States federal government. The agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue...
each year, and with states that require partnership filings. In the United Kingdom investment clubs and their members are required to submit form 185(new) to HMRC each year. Investment club accounting software
Investment club software
Investment Club Accounting Software is typically used to manage:* Member Subscriptions* Ownership / Unit Valuation System* Investment Transactions* Financial Reports* Income / Expenditure transactions* Performance reports* Manage tax returns...
can facilitate the management of a club's books and the preparation of tax filings.
See also
- List of finance topics
- National Association of Investors CorporationNational Association of Investors CorporationNational Association of Investors Corporation , also known as BetterInvesting, is a Michigan-based 501 non-profit organization whose aim is to teach individuals how to become successful long-term investors...
(also known as NAIC and BetterInvesting)
External links
- Investment clubs and the SEC - A FAQ on investment clubs provided by the SEC
- Stories from over 100 investment clubs about their experiences
Further reading
- Investment Clubs for Dummies by Douglas Gerlach and Angele McQuade (ISBN 0-7645-5409-3), published in 2001