When you start an investment club, you are starting a business and you need to decide on what type of business operating structure you will use. Different business types have different operating, federal and state reporting and taxation requirements.
We recommend you operate as a general partnership. This is the simplest structure to use when a group of people conduct business together. Setting up a general partnership is simple. You register a name, get an EIN number and develop and sign a partnership agreement. Each year you will need to file a federal and possibly a state partnership tax return. They are informational returns. A partnership is a "pass through" entity. All of it's income is distributed yearly to the partners. Taxes are paid by each partner on their portion on their individual tax returns. bivio is designed to let you easily do the accounting for a general partnership. It uses your accounting data to quickly generate the federal tax return (Form 1065) your investment club needs to file each year.
Sometimes people are concerned because members of a general partnership have personal liability for the actions of the partnership. This applies only when partners are acting within the defined boundaries of the partnerships business. The purpose of your partnership should be clearly spelled out in your partnership agreement. For example, your agreement might include a section worded in this way: "4. Purpose. The only purpose of the partnership is to invest the assets of the partnership solely in stocks, bonds, and other securities ("securities") for the education and benefit of the partners."
Within these constraints, if you file the necessary tax returns each year, it is unlikely that your partnership would incur any liability that you would cause you any personal issues. Many clubs have operated for many years successfully as general partnerships without any problems that we are aware of. For simplicity, we suggest you use this business set up.
Despite this, some clubs want to consider operating as an LLC or Limited Liability Company. Within an LLC, each members personal liability is generally limited to their percent of ownership. LLC's are set up with your state and do require additional annual reporting and fees. In general, however, they do have the same tax reporting requirements as general partnerships. This means that bivio would still provide your club with the accounting and tax forms that you would need to file.
Here is a website has some further information about LLC's along with links to each state and their LLC requirements. http://www.limitedliabilitycompanycenter.com/articles.html
We do get questions every now and then about whether a group should set themselves up as a corporation. We would highly discourage this. With a corporation, you will have much more complicated operating and state reporting requirements. bivio does not provide the accounting or produce the taxes you would need to file as a corporation. If you feel you must run your investment group as a corporation, you should do so with outside professional legal and accounting guidance.
FAQs
Usually, investment clubs are organized as partnerships—after the members study different investments, the group decides to buy or sell based on a majority vote of the members. Club meetings may be educational and each member may actively participate in investment decisions.
What is the best legal entity for an investment club? ›
We recommend you operate as a general partnership. This is the simplest structure to use when a group of people conduct business together.
Do investors prefer LLC or corporation? ›
Investors prefer C corporations over S corporations and LLCs because shares in a C corp are freely transferable.
Can an investment club be a corporation? ›
The Limited Liability Company (“LLC”) is a hybrid entity that is very flexible and, depending on how many owners (known as “Members”), should be deemed as a partnership (by default) for tax purposes if it has multiple Members, or as a corporation by election if it has only one member, while providing limited liability ...
What is better LLC or partnership? ›
A principal advantage of an LLC over a general partnership is that no member is held liable for debts, obligations and liabilities of the partnership. In the case of professional LLCs (e.g. law firms, CPA firms), however, members are liable for their own negligence and that of their subordinates.
What type of business is an investment club? ›
An investment club is typically organized as a general partnership. The partnership agreement should outline the operating practices and serve as the bylaws, addressing all issues that will confront members from formation through a specified ending date.
Why do investors not like LLCs? ›
One is because an LLC is taxed as a partnership (pass-through taxation) and will complicate an investor's personal tax situation. By becoming a member of the LLC to invest in it, the investor will be taxed on the LLC's profits even if receiving no cash distribution personally.
Why use an LLC instead of a corporation? ›
Pass-through taxation: Unlike corporations, an LLC typically does not pay corporate taxes. Instead, the profits and losses of the business “pass through” to the personal income of the members, who then report this information on their personal tax returns.
Why would anyone choose LLC over S Corp? ›
The Advantages of LLCs
In addition, it is not necessary to hold formal shareholder meetings and maintain annual minutes for LLCs. LLCs provide more flexibility than S Corps. For S Corps, there are pro-rata requirements for items of income, loss, or distributions.
What are the IRS rules for investment clubs? ›
An investment club must file Form 1120 if it is incorporated, is formed under a state law that refers to it as a joint-stock company or joint-stock association, or chooses to be taxed as a corporation (IRS Pub. 550, "Investment Income and Expenses"; see also Reg. §301.7701-2).
Investment clubs are a great way to ease into investing. Whether you start your own club or join an existing one, you'll find that being a member of a club is an enlightening experience. One of the valuable benefits of an investment club, especially for beginners, is the exposure to different points of view.
How many members should an investment club have? ›
Form a legal entity
The LLC or LLP usually consists of 10 or more members who will participate in the investment club. It can also serve as a legal framework to address any member concerns. Plus, it might have accounting records if your club invests its members' money.
Can an investment company be a partnership? ›
An investment company can be a corporation, partnership, business trust, or limited liability company (LLC) that pools money from investors on a collective basis. The money pooled is invested, and the investors share any profits and losses incurred by the company according to each investor's interest in the company.
Should I set up an LLC for my investments? ›
Forming an LLC is an ideal choice when investing since it can provide liability protection and tax benefits as well as allowing multiple members to invest together.
What is an investment group LLC? ›
What is an Investment LLC? An Investment LLC is a limited liability company that is established for the purpose of making investments. An LLC is a popular legal business entity because they are easy to create and provide the owner of the company with several benefits like liability protection and tax benefits.
How to legally start an investment club? ›
Form Your Investment Club
- Find Potential Members. ...
- Hold Club Organization Meeting. ...
- Put a Legal Structure in Place. ...
- Establish Club Operating Procedures. ...
- Open a Brokerage Account. ...
- Create a Club Accounting Structure. ...
- Structure the Monthly Club Meeting.
