Investment club? investment companies?

[D***@gmail.com]

Few friends of mine and I are considering starting an investment club
or company. We are trying to minimize the tax liability if possible.
Can somebody give some advice on:

1] The pro- and cons of taxing this club as a corporation, from tax /
cost perspective?
2] Do we need to register with SEC or whatever? ... we have less than
10 persons and considering corporation format instead of partnership.

Thanks.

[Paul Thomas, CPA]

Post by D***@gmail.com
Few friends of mine and I are considering starting an investment club
or company. We are trying to minimize the tax liability if possible.
1] The pro- and cons of taxing this club as a corporation, from tax /
cost perspective?

The corporation structure may create some surprises in the way of taxes.
You also lose the opportunity to take personal losses if those arise. There
would be annual fees for the corporate structure in most states that (like
in California) can be quite high and eat up any earnings for the year. And
you run the risk of being bitten by the PHC rules and having a higher tax
than anticipated.

Electing "S" status helps some, as interest, dividends and capital gains
pass through, but even that contains enough pitfalls on the accounting side
to make it far less desireable than a partnership form.

Post by D***@gmail.com
2] Do we need to register with SEC or whatever? ... we have less than
10 persons and considering corporation format instead of partnership.

No SEC registration, and generally none at the state level with that few of
shareholders.

Most investment clubs form up as partnerships. The reason is the more
simplistic accounting for the (usually) monthly investments by the club
members.

To handle that type of cash infusion structure at the corporate level, it's
either an equity (stock) purchase or a loan to the company. Either way,
it's much more complicated of a venture in the corporate structure than
going partnership. I'd steer clear of it at all costs.

There are several accounting packages for investment clubs, it's well worth
investigating them and making that purchase for your treasurer to use in the
accounting and reporting to the members.

[D***@gmail.com]

Thanks for the advice.

So from the tax perspective, is there any difference between investing
myself and participating a (partnership) investment club? Let's take
an extreme example,

case 1 - my wife and I invest ourselves
case 2 - we start an investment club by just our two (assuming this
type of club is legal)

Any difference from cost/tax perspective? I would guess the capital
gain tax etc will be probably same (as they are taxed on individual
basis anyway), but maybe the "club" allows deduct some "business"
expense which are not allowed in the case 1?

Actually, by considering investment club/company, both my friends and I
are not looking for combine small monthly "subscription" to invest.
What we are looking for is the best structure to reduce the overall
cost, minimize tax etc.

Thanks.

[Paul Thomas, CPA]

Post by D***@gmail.com
So from the tax perspective, is there any difference between investing
myself and participating a (partnership) investment club? Let's take
an extreme example,

There are no tax differences in the tax rates of interest, dividends and
capital gains held individually or through a partnership (investment club).
Through the investment club you'll need to get the K-1 first showing your
share of - and types of income.

Post by D***@gmail.com
case 1 - my wife and I invest ourselves
case 2 - we start an investment club by just our two
(assuming this type of club is legal)

#1 and #2 are the same as far as I can tell. Just have individual or joint
accounts.

Post by D***@gmail.com
Any difference from cost/tax perspective? I would guess the capital
gain tax etc will be probably same (as they are taxed on individual
basis anyway), but maybe the "club" allows deduct some "business"
expense which are not allowed in the case 1?

For a partnership, the expenses fall where they would if those same expenses
were paid by an individual. Generaly to Schedule A (Line 22 I believe) as
investment expenses. The partnership accounts for them and they are
reported via the K-1 (line 20 with a "B" code).

So no. There are no advantages to forming an investment "club" to garner
additional tax benefits.

Post by D***@gmail.com
Actually, by considering investment club/company, both my friends and I
are not looking for combine small monthly "subscription" to invest.
What we are looking for is the best structure to reduce the overall
cost, minimize tax etc.

You have both tax and legal issues to consider. It'd be wise to consult
with a tax or legal professional in your area (because state law ~does~
matter) to know what you're at risk for under various types of entities.

[Arthur Kamlet]

Post by D***@gmail.com
Thanks for the advice.
So from the tax perspective, is there any difference between investing
myself and participating a (partnership) investment club? Let's take
an extreme example,
case 1 - my wife and I invest ourselves
case 2 - we start an investment club by just our two (assuming this
type of club is legal)
Any difference from cost/tax perspective? I would guess the capital
gain tax etc will be probably same (as they are taxed on individual
basis anyway), but maybe the "club" allows deduct some "business"
expense which are not allowed in the case 1?

Sort of silly to form a legal partnership for you and spouse to
start investing.


But if you did, you would need to get an Employer ID Number and
each year file Form 1065 and schedule K and K-1.

The Form 1065 also calls for balance sheet information, though if
there's just the two of you and it's a small account, you can
choose via Form 1065 Sch B not to report the balance sheet.

The K-1 would report each partner's share of the interest,
dividends, including qualified dividends, and long and short term
gains/losses.


You could also report investment expenses on the K-1.



When preparing your own Form 1040 tax returns, you would use the
information from the K-1s to pass through the investment
partnership income and expenses.



There should not be any bottom-line difference between doing it
the partnership route or just having a joint brokerage account.

But the reporting mechanics are different.



See IRS Publication 550 which has some information on investment
clubs.

Post by D***@gmail.com
Actually, by considering investment club/company, both my friends and I
are not looking for combine small monthly "subscription" to invest.
What we are looking for is the best structure to reduce the overall
cost, minimize tax etc.

A general partnership is simple and probably aqccomplishes your
goals. Several Investment Club tax software packages are
availabel to help you track the stock information and prepare
the partnership tax returns.