An investment club is a great way for novices to learn the intricacies of stocks, bonds and mutual funds with relatively low cost and low risk. The general idea is this: Each club has its own rules and requires members to donate a designated amount of money each month that the club then invests. Profits and dividends are reinvested in the club until it reaches a stated financial goal. Each member of the club actively participates in investment decisions. After the members study different investments, the group decides to buy or sell based on a majority vote of the members.
Here's how investment clubs work:
Structure: Most clubs are formed as partnerships rather than corporations. Partnerships steer clear of the paperwork, are easier to maintain and often minimize taxes.
Meetings: There is an established time and place where regular meetings are held, be they weekly, monthly, etc. Also, remember that an investment club is a learning environment, so there should be an agenda, periodic portfolio reviews, stock analyses and recommendations, and voting for stock choices.
Rules: There should be a document on the club's procedures and policies. What do they invest in? What's the maximum contribution any member can make? How do you join or leave the club? There are several areas that should be spelled out, but the document can be changed. Alterations may be necessary as the club matures.
Responsibilities: There should be an election of officers and assigned responsibilities for each position. Not everyone can be an officer, but you're looking for full member participation so it's important that every member of the club be assigned some kind of responsibility.
Tax-ID Numbers: The club should have a federal ID number from the U.S. Treasury office and a bank account under the club's name.
Brokers: Depending on the club's investment objectives, they may or may not have a broker.
Research: Again, one of the primary functions of an investment club is to help everyone learn about the principles of good investing through researching sound investment principles, etc. For instance, some programs may require each member to investigate and analyze a company stock. Going on field trips and having host speakers on various investment subjects are another great way to increase learning value.
The Legal Ramifications:Most Clubs have a partnership agreement that describes their formation, and by-laws that dictate how the Club will be run. In terms of tax liability, a partnership as an entity is usually not liable for taxes on the investment gain or loss, but rather each individual member is responsible for reporting his/her share in the partnership, and the gain or loss involved. Direct investment expenses are usually deductible if you itemize your tax return; as would be a potential capital loss during each year of the Club’s operation. Likewise, an increase in the value of your share in the Club would be taxable as income.