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    19 Replies Latest reply on Aug 6, 2010 8:09 AM by bastron06

    How to start an investment club?

    TOO-LATE Newbie
      I personally enjoy investing stocks and I've been accumulating experience for a long while. I have a blog and sharing my buying and selling transaction and explanations. Now I want to set up a investment club to gather more people to discuss the stocks. What do I need to do?
      I've heard of there is fee for membership which I can make some profit of it.
      Do I need some partners?
      any qualifications required?
      do I need a website for the investment club?
      do i need to register it?

      I'm sophemore in college and finance major.
      Currently, I've seen many people complains about the stocks in their porfolio is all red and now they are looking for some recommended stocks from other people. I believe its time to do this business and the same time I can become a more sophsticated investor.
      Your opinion is greatly appreciated!
      My blog
        • Re: How to start an investment club?
          LUCKIEST Guide
          Starting an investment club O K
          There are many steps involved in getting an investment club up and
          running, most of them are relatively straightforward.
          Start talking with friends and see who's interested. It's best
          to gather a variety of people who will bring to the club a variety of
          interests, experiences, and perspectives. Once you find a few
          interested friends, let them invite a few of their own friends. Aim to
          form a club with roughly 6 to 15 members.


          The people in the investment club should be the ones to research and recommended stocks.
          Good luck, LUCKIEST

          1 of 1 people found this helpful
          • Re: How to start an investment club?
            Ed O'Gee Adventurer
            The first step is to get members. Talk to friends, family and other like minded people. Then once you have the members you guys will need to incorporate and develop the bylaws that will govern the investment club. They you'll likely have to make the decision on if you'll select your own investment or enlist the help of a broker.
            1 of 1 people found this helpful
            • Re: How to start an investment club?
              Mozart Wayfarer

              Congratulations for your entrepreneurial spirit! Before you start an business endeavor it's important to carefully evaluate the competitive landscape and understand how you would differenciate your business. For example, have you checked out all the existing resources out there that provide investment related information without a fee? What would differenciate your website/services/club? Good luck.
              • Re: How to start an investment club?
                slavaret Adventurer
                I believe the purpose of an investment club is to buy and sell stocks that members select collectively.

                So the first thing you need is startup capital contributed by all members to fund a brokerage account. I would check with the IRS or an accountant to see what the rules are and what you can and cannot do. I would think it's OK to charge a small membership fee as long as it cannot be construed as a management fee. I am also sure members would want to have the terms of capital contribution, profit and loss sharing, and withrawals in writing.

                There are many successful investment strategies. Your club members should share the same one - or you will never agree on a sigle stock.

                If, on the other hand, all you want is to discuss stocks, setting up a group on Yahoo or Google will do.
                • Re: How to start an investment club?
                  DomainDiva Ranger

                  There are IRS documents that you must prepare with all names, SS #'s and the PURPOSE of the club. The online brokers have a section for investment clubs and you can download all the documents you need from the website. Then you must fund the account and decide WHO gets to place trades. You will also need an internal specification detailing HOW the club is to be run, % of profit splits etc.
                  • Re: How to start an investment club?
                    MetroGal Adventurer
                    A lot of great businesses have started right out of college dorms. You are at the head of the pack by participating on this website for advice. Welcome and good luck with your endeavor. It doesn't sound like you're "too late."
                    • Re: How to start an investment club?
                      bastron06 Wayfarer
                      Hi Too-Late,

                      I just saw your post and since I recently started my investment club, I thought I'd share some valuable information I found out along the way.

                      Everyone responding seems to have the gist of what is required. I only want to add:
                      1. Investment clubs provide no liability protection to the members. E.g. when tax times comes, if everyone does not pay their individual share of taxes on the gains, the club as a whole will be held liable for any back taxes not paid. I thought this was really important.
                      2. If you want to make money from this venture, that means you're classified as being paid for your services to the club (stock recommendations, decisions, trade executions, etc...). If you are compensated, some states mandate you become a registered investment advisor (RIA). To become an RIA, you need to take a pass the series 65 exam, adminstered by FINRA. You may need to fulfill some additional state requirements. If you plan to solicit investors to become members that aren't family and friends, they will probably want to know if you're registered to do what you say you "CAN" do, which is make money with a pool of other individuals money.
                      3. I'm with OptionsXpress, Inc. They have low fees for trades. I specialize in option and option spreads. If you need an online broker that's relatively cheap, may I suggest them?
                      4. Get an EIN from the IRS. Your investment club will be recognized by the IRS as a general partnership. You'll also want to know what the IRS expects from the club concerning filing.
                      5. I don't have officers in my club. I take care of all management decisions and trading. I structured to Partnership Agreement to say so. You may want to do something like that if you want to be responsible for the stocks that are selected for the club to invest their resources.

                      I don't want to belabor the point, but if you're interested in anything I might be able to provide, just let me know.
                        • Re: How to start an investment club?
                          obijuan Newbie

                          I too am looking to start an investment club, so I appreciate all the responses. I had a few questions of my own:

                          1. Is there any preference to what business structure is used for this club? I am leaning towards a LLC, with the intention of eventually paying officers some compensation for managing the club.
                          2. If these officers are performing operational duties for this club (e.g., accounting) and receive compensation, do they need to be an RIA and register with the state/federal government even when that compensation is nonperformance-based -- i.e., no relevance to profits/losses?
                          3. Is there a limit to how much and how often contributions can be made?

                          Thanks again!
                            • Re: How to start an investment club?
                              bastron06 Wayfarer
                              The structure would depend on which state you form in. E.g. in Texas, forming a LLP requires a registration of each partner, and renewal annually. So if you start off with 10 members, you have to pay $200/ member. If the club grows, every year, you have to pay $200/member for all the members in the club. VERY STIFF!!. The investment club is going to be a general partnership (that's a given) You must let the IRS know whether you want the club to be recognized as an LLP or LLC or maintain its general partnership status.

                              LLC would more than likely be the way to go.

                              If you are paying anyone in your club for advisory services, such as, stock selection or research, then yes, they must be registered. Some people get away with not registering because the members of the club aren't really pushing them to. But if you want to attract other investors that don't know you, they'll want to know you're legitimate at what you do. Being registered is considered some sort of validation. Depending on the size of the money being managed will dictate if you need to register with at the Fed level. In TX, under $25 million and you don't need to register federally, however, I do need to register at the state level. Check with your state securities board. They should have a website that can give you better direction.

                              There is absolutely no limit of how much and when contributions are made. You can set up your requirements in your Club partnership agreement. In my club, there was a one time contribution to make everyone feel comfortable with the idea of allowing me to manage the fund. The success of the fund will make the decision of contributing more easier, I hope, for the club members. But I don't mandate a monthly contribution.
                                • Re: How to start an investment club?
                                  jacket11 Newbie

                                  How do you make money off an investment club without being a registered broker or money manager?
                                    • Re: How to start an investment club?
                                      bastron06 Wayfarer
                                      If you write in the operating/ partnership agreement that you will pay an individual for they investment savvy, then you may run into trouble when you begin accepting outsiders into your club. If it were just your family, paying another family member may not be that big a deal, but if you bring in an outsider and they agree to pay someone in the club, chances are, the new investor will want to know why one person(s) are being paid and will want to know the person's credentials. E.g. if a person is being paid for their advice to the club, they must be registered with the state or SEC. If, through taxes paid, the state or SEC finds out that there is a person acting as an Investment Advisor or Investment Advisor Representative unlawfully, that would definitely put you in a bad situation. The only true and harmless way to make money in an investment club is to just pick some great stocks/investments and share in the profits.

                                      The flip side, if you want to pay the treasurer, secretary, or other person for the duties they perform that have nothing to do with picking the investments, you can do that any day of the week. Just put that in your operating agreement so everyone knows that select individuals are being paid. You only need to worry if the person paid is influencing investment decisions. That's when you'll want to worry about following the steps to get registered.
                                • Re: How to start an investment club?
                                  ljfredsite Newbie
                                  I understand liability issues for partners in a general partnership however I did not think that applied to individual tax liabilities. Where did you find the information that partners could be held liable for other partners failing to report partnership income correctly?
                                    • Re: How to start an investment club?
                                      bastron06 Wayfarer
                                      This was something I read after already deciding on how to form the business entity. The partnership has to fill out a form K-1 during tax season. That will dictate what each member is responsible for regarding their taxes. In an example, if the club does not fill out a form K-1, the partnership will still owe taxes. Who, in the eyes on the IRS, will be held accountable for those taxes being paid? In my estimation, it will be the person under whose name the partnership was formed (unless it was formed under multiple names). If I'm incorrect in my assumption, I apologize. This conclusion was reached after finding out there is no limit to the liability a general partnership can face. Everyone shares in liability, taxes included.
                                        • Re: How to start an investment club?
                                          ljfredsite Newbie
                                          I think you have a misunderstanding. A general partnership is a "Pass Through" entity. It files an informational return, Form 1065 each year. Income is reported to each partner on a K-1 and they pay taxes on their share on their individual tax returns. The partnership is responsible for filing the partnership return. The partners would be liable for any penalties associated with failure to file the 1065 or an incorrect filing. However, once the1065 return has been filed and all the partners have received their K-1's, it is the individuals responsibility to pay the taxes on their portion on their own returns. If they do not do that, the partnership would not be liable for their failure to pay.

                                          If you have any more questions about investment clubs or investment club taxes, I suggest you check out

                                          Laurie Frederiksen
                                            • Re: How to start an investment club?
                                              bastron06 Wayfarer

                                              I may not have conveyed my point eloquently, however, I believe my understanding is parallel with yours. The key is that the partnership actually files the K-1. In the example I gave, my counsel (personal friend) mentioned that family investment clubs are the ones that struggle with this. Someone has to carry out the responsibility of filing all necessary paperwork with the IRS for the partnership. If not, the partnership would be responsible, as a whole, for paying taxes (if they owe). Once its actually filed, I agree, the "pass-through" ability would remove any liability from each member not taking care of their personal tax situation.

                                              Thank you for the additional reference.