While investment clubs provide an opportunity for friends or family to meet, learn about investments, and make money, it's best to treat a club as you would any other business relationship.
- Written agreement. Most clubs are formed as partnerships. Every partnership should consider adopting a written partnership agreement.
This legal contract outlines how the business will operate and how profits and losses will be allocated among the partners.
In the beginning, your investment may seem small, and it's easy to dismiss the need for this document. However, a successful club can accumulate substantial assets. Having this document in place from the beginning can prevent problems later, such as how to liquidate a partner's interest when one leaves.
- Taxes. Partnerships don't pay income tax, but they must file an annual return with the IRS. They must also provide a Form K-1 to each partner. This form reports each partner's share of income and deductions, which the partner must include on his/her individual income tax return. If the partnership fails to file a return, the IRS can assess late filing penalties.
- Duties. As in any business, it's a good idea for club members to share financial duties. Consider requiring two signatures to transfer funds between accounts. Periodically review the treasurer's records to make sure that transactions were properly authorized by the club, that the recordkeeping is adequate, that tax returns were filed, and that all money and stocks are properly accounted for.
An investment club that gets off to a good start has a much better chance of a long and successful existence.