INVESTMENT CLUB
I see the idea is taking off. We've had some valid points on fraud, vioalting Fed rules, etc. which is why I indicated it will take time to establish the structure and financial controlls. There is some work to do (Karun, I haven't read your complete post, just printed it and will read later, only 102 to read from yesterday). I assumed I'd be doing some of the financial research on this and have already started.
I'll assure any "potential investors" that as long as I'm working on this we will have a valid legal structure, operational guidelines and financial procedures to ensure the protection of your investment. We will have a "prospectus" before any money is collected.
I'll post a short bio on myself later and send a resume to anyone interested by e mail (provided I can send the file over the net, I'll test out my new MS Office 97 Word).
Heres a couple of points.
1) Easiest structure of an "investment club" is a partnership. This is what you see or hear about. This would not work for this group for a number of reasons. (a) I think we'll be too large and violate some SEC statutes but I indicated yesterday that I'm not sure on this. (b) From a tax standpoint any change in partners interest disolves the partnership from a tax standpoint (expensive logistical issue).
Small investment clubs work because its normally a small group that meet weekly or monthly and they make the investment decision and follow it.
With our decisions made on a daily / hourly / by minute basis this is impractical and we'll have to have a manager (like Peter Lynch @ Fidelity Magellan) make the decisions.
In a partnership if you don't like the fund managers decision (what if Ike made a trade that lost money) you could actually sue the manager. While it would be difficult to sue Ike as a board member you could also sue me. With that said you can see why I don't like the partnership from the legal standpoint, I want to have minimal liability exposure.
Why are investment clubs typically partnerships and if the particular state allows a Limited Liability Company. A partnership is the most advantageous from a US tax standpoint. No double taxation, only at the owner / investor level.
Why not a corporation.
Look at Berkshire Hathaway. This is an old manufacturing / mill company acquired by Warren Buffet that has turned into a great investment vehicle. True but Warren used this company to acquire an insurance company with an investment portfolio. An insurance company collects premiums today to pay claims tomorrow. Warren wisely invested the premiums, obtained well above average returns and amassed a fortune for himself and investors.
From a legal and operational standpoint this is ideal (I say this without knowing all the legal issues). Why shouldn't we follow Warren? You need to look at Warren's investment style. He invests in companys that he wants to own for 10 years. Why is that. To not have to pay the 35% corporate tax rate (corporations are @ flat 35% vs. individuals long term break of 20%/). Warren has all of that unrealized capital gains that he trys to not trigger. From a GAAP accounting perspective BH records the unrealized gain on its portfolio and also records a deferred tax liability but neither is "cash".
Heres the tax problem. The corporation will pay a tax @ 35%. Then on any distribution (dividend) or sale of shares the shareholder pays tax again (the double tax).
I'm not rulling out a Limited Liability Company (has the corporate liability benefits and most of the partnership tax benefits), Mutual Fund or hedge fund.
I haven't addressed any Treasury issues regarding movement of money (Americans remember those boxes you have to check on schedule B of your personal tax return, those are due to IRS rules to check on individuals laundering money). More rules <ggg>.
I'll write about LLC and mutual funds later and need to do more research.
I may not have indicated it but I'll buy a share once were ready (I think you can tell by my posts on this that I'm interested).
We'll the wife just came in so its time to go.
Tim
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