Investment Club Partnership Agreement/More Info


  Investment Club Partnership Agreement  
Additional Information 

Investment clubs can be a fun way to socialize, learn about investing and, hopefully, make a little money.  These clubs are usually formed by friends who take turns researching companies and making investment decisions.  Some clubs spend years together and make considerable profits. 

If you are new to investing or investment clubs, there are many good books to read to help you learn more.  One is "The Beardstown Ladies Common-Sense Investment Guide", from Hyperion Press.  It includes valuable investing tips from this club of 16 ladies in a small town that earned an average of 23% a year during one 10-year period. 

Getting Organized 
Most investment clubs are formed as partnerships.  This vehicle is convenient, easy to form and helps to ensure that each member has a voice in club affairs. Although some clubs choose not to, it's best for the members of the club to have a written partnership agreement.  When the agreement is written, the members are better able to avoid disputes about voting on important matters.  It also clearly establishes each partner's right to share in the profits (and suffer the losses) of the club. 

Most clubs also adopt bylaws that include rules for such things as investment philosophy and limitations, bringing guests, and other matters.  The program also includes an Investment Club Bylaws document so that your club can easier develop all of these rules for itself. 

Accounting And Taxes 
Most clubs hire an accountant to take care of the books and prepare tax returns, but some clubs have a member who handles these chores. Partnership net income equals all of the profits made on trading stocks, minus losses and expenses.  Expenses include things like commissions on trades, accountant and other professional fees and other expenses the club agrees should be paid.  

Partnerships are subject to unique rules in the Internal Revenue Code.  Partnerships must ordinarily file a tax return (Form 1065), but they do not pay any tax on income.  Instead, the tax code treats partnership income as if it was distributed to the partners, even though no cash may have been paid out.  If the club sells stock at a profit, each partner must pay income tax on his or her proportionate gains. Consequently, partnerships with taxable income must take into account the needs of the individual partners to pay taxes on that partnership income. 

Investment clubs may be excused from filing Form 1065.  To qualify, the club should fill out Form 1065 with the club name and address only and attach a letter with all the names, addresses and Social Security numbers of the member.   

The letter should be dated and read generally as follows:   
The [Club Name] (the " Club"), including the members identified below, declares that it is used for investment purposes only.  The Club also declares that its members are able to compute their taxable income from the partnership without the need for computing partnership taxable income. 

The Club qualifies as an investing partnership. A copy of the agreement under which the club operates may be obtained from [Club representative name and address].   

All of the members of the partnership as declared by their signatures below elect to be excluded for the partnership provisions of the Internal Revenue Code. 

[Signed by each club member, with address and Social Security Number] 
 
Make sure that you keep a copy of this mailing in the club's files.  The IRS will not acknowledge receipt. For more information about this exemption from the regular partnership tax rules, see IRS Publication 550. 

Remember that state and local income taxes may also be due.    

Some Drawbacks 
While a partnership has many advantages, there are also some disadvantages.  Each partner is personally liable for the obligations of the partnership and the acts of his or her co-partners while conducting partnership business.  For this reason, many clubs have rules that are intended to prevent one partner from creating some unfortunate liability.  For example, most clubs prohibit any trades on margin and trades in highly volatile securities like stock options and commodity contracts.  Make sure everyone in your club agrees with the club's investment philosophy and rules for investing.