DECEMBER 2002

Frequently Asked Questions on Investment Clubs

How do I start an investment club?

A copy of the Official Guide, Introduction to Successful Investing Handbook is the place to begin. The Official Guide guides you through the process of forming and operating a club. Information is also available on this website in the Club Resources area.

What is the recommended form of organization for an investment club?

Most investment clubs are organized as general partnerships. They are the easiest and most economical entities to form, operate, and maintain. The club's income or losses are "passed through" to its partners and are reported on their individual tax returns. Although partners may be personally liable for the debts of a partnership, investment clubs which operate under BetterInvesting guidelines should not incur obligations that exceed club assets. BetterInvesting provides a model partnership agreement in the Official Guide.

Are there advantages to organizing as a limited liability company (LLC)?

The members of a LLC normally cannot be held personally responsible for the liabilities of the organization. However, there is very little likelihood that members of a club following BetterInvesting principles will face personal liability for club debts. LLC's are treated like a partnership for federal income tax purposes. In some states, an LLC may be more expensive to form and operate than a partnership, because some states assess organizational and continuing fees which can exceed $300 per year.

May a club form as a non-profit organization for tax purposes?

No. Even though investment education is the primary reason for forming an investment club, making a profit is also an objective. Each member's share of the club's dividends and realized capital gains is subject to federal and state income taxes just like realized capital gains or dividends received by individual investors. Clubs are not commercial businesses, and many banks, brokerage firms, schools, and libraries offer their facilities, without a charge, for club meetings.

Is an Employer Identification Number (EIN) necessary for the club?

Yes. Your club will need the EIN to open an account with a bank or a brokerage firm.

It is not advisable to use a member's social security number for the club. Using someone's social security number results in a personal tax liability. Securing an EIN is simple and cost-free.

How do I get an Employer Identification Number?

Contact the IRS, on the internet or by telephone. Complete form SS-4 before requesting your EIN. You will then be able to request a number by calling your local IRS office.

How do the members of an investment club make decisions for the club?

Members of investment clubs vote on administrative matters and whether to buy or sell stocks. There are two common voting methods:

• One member, one vote; or
• A weighted vote based on ownership percentages.

A weighted vote is accomplished by each member voting their percentage of ownership of the club's assets. Let's assume that the club's assets total $20,000.00. Member A's capital account is $1,000.00. Member B's capital account is $2,000.00. Member A has 5% of the voting power and Member B has 10%. BetterInvesting's suggested partnership agreement provides for voting in proportion to the value of members capital accounts. However, the members of a club should decide which is best for them and specify that method in their partnership agreement.

May a husband and wife share one club membership?

Some clubs have husband and wife teams as one membership. Your club can establish membership in a way that meets the needs of the members.

What are my options for a club checking account?

Savings & Loan Associations, Savings Banks, and Credit Unions have all been mentioned by club members as being more friendly toward investment clubs. For a Credit Union account, one of the club members usually must have a personal account. Stock Brokerage firms may also offer free and interest bearing accounts.

Will BetterInvestng help me find an investment club to join?

No. The Securities and Exchange Commission (SEC) prohibits BetterInvestng from helping individuals find investment clubs to join or vice versa. Many BetterInvestng Regional Chapters post a list of clubs looking for members and of members looking for clubs. Attend your local Chapter's events and review the lists. You may even find yourself talking to others about forming an investment club!

How does an investment club keep track of the money?

BetterInvestng provides assistance for investment club accounting. The Accounting Manual and the Club Accounting Software are helpful tools in maintaining accurate records.

Are investment clubs regulated by the Securities and Exchange Commission?

The SEC addresses some common questions about investment clubs. For further assistance, e-mail help@sec.gov.