Should You Open an Investment Club Under an Individual Account or Joint Account?

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    Function

    • Investment club accounts are different from both individual and joint accounts. Most brokerage firms offer an investment club account type. This account type recognizes that there are multiple owners. This is important due to accounting and tax reporting on the activities of the club. The investment club account operates similarly to other accounts. Some activities may be restricted or limited, such as borrowing against the account. Each brokerage account application details the operations of the account.

    Identification

    • When an investment club is created, the members must decide what type of business entity to become. The entity must be registered with the state just like any other business. The club should request a tax ID number from the IRS. The tax ID number is used in place of social security numbers on all account forms. For most states, registration and tax ID requests can be processed quickly online. Some states charge business registration fees. Additional information on forming an investment club is available through the nonprofit organization, Better Investing (see Resources).

    Types

    • Investment clubs can be corporations or partnerships. Corporations protect the members by limiting liabilities of the organization to the entity itself. Taxable activities of the club are reported for the organization, not the club members. Club members draft a letter of incorporation which details the purpose and proposed activities of the club along with officers. Partnerships share the liabilities of the club between the individual partners. Club members report taxable activities on their individual tax returns using Schedule K-1. A partnership agreement details the club purpose, how member ownership percentages are determined and the club officers. It is more expensive to incorporate and more time consuming to record accounting activities and process taxes, but club members should weigh the pros and cons of each before agreeing on an entity type.

    Misconceptions

    • Even though multiple people own an investment club account, specific individuals can be authorized to place trades, withdraw funds and make other changes. The club officers and authorized users must sign the account applications. These persons can be changed as club officers change by signing new authorization forms. This is important because it gives the brokerage firm a specific point of contact with the club and allows consistence of activities. The brokerage firm usually also requires a copy of the letters of incorporation or partnership agreement.

    Potential

    • Some investment brokers cater to investment clubs offering investment information and speaking at club meetings. Brokers can be resources for explaining and offering advice on market conditions and investment selection.

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