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Politics : Idea Of The Day -- Ignore unavailable to you. Want to Upgrade?

To: Hans who wrote (13070)	10/28/1997 11:25:00 PM
From: ViperChick Secret Agent 006.9	Read Replies (1) \| Respond to of 50167

This is for the "investment club" people. It is a letter posted on a listserv about the legal ramifications. There will obviously be alot of discussion about this. One of you might want to subscribe to the list. Antonio ( who is using Lisa's account periodically while she is out regrouping) Dave, your questions are good ones and I put some suggested answers after each paragraph. You are surely going to get lots of responses to this one, so sift through them at leisure and hopefully there will be a 'consensus' about how to proceed. My opinion, obviously, is just that, and I am confident others will come up with different solutions. >I have been asked by a professor how to set up an investment club for his >students, and whether an LLC would be a wise entity choice. I gather the >plan is for students to invest up to $500 each, and all students would have >a vote as to investment decisions. At least 100 investors are expected. >Any investor could withdraw his account at the end of each quarter, which >would reflect any gain or loss during the period of the investment. The >professor, and any other organizers, would receive no compensation of any >type. He hopes that an LLC would shield organizers from liability. (He >approved my providing this information on this website). A: you can set up an LLC, a LP, a LLLP or even a general partnership. I must ask "what liability" are you concerned with? A typical investment partnership should not be that concerned with liabilities. If it is, it should invest in fidelity or liability insurance. >1) Even in a "member-managed" LLC, the sale of memberships in the LLC may >be viewed as a sale of securities, since even if the members all vote on >each investment, there will surely be some management. Is there a solution >to the securities issue, either in an LLC or other entity choice? A: in many states a GP or LLC interest is not a security, while a LP interest may be. I really don't see a real problem here given the facts, although 100 persons is probably too large (as your comments point out) to handle efficiently. >2) The constant entry and exit of members may become a large paperwork >headache, and may be unmanageable. A: How about creating 4 25-person entities to spread the paperwork load a little bit? >3) The burden of preparing accurate K-1s for all members may be too great. A: In my opinion, the NAIC notwithstanding, an investment club taxed as a partnership can elect NOT to file Form 1065 and prepare K-1s under existing IRS regulations. >4) I'm not sure an LLC provides much protection against liability between >members - the corporate veil seems much more protective against the outside >world. I suppose provisions of the Operating Agreement could provide >fairly good protection against liability of decision makers for negligence. A: When one speaks of "liabilities" you are generally looking at liability toward a third person (the outside world you mention), not liability for negligent decision making. The latter 1) can be controlled by the OA, as you mentioned, excluding any such liability, and 2) I don't think a member can be liable for mistakes or errors. That's the kind of thing a bank or trust company worries about because it is a professional fiduciary. >Does anyone know how investment clubs are normally structured? There do >seem to be a fair number of them, so there should be a way to do this. A: I suggest a plain, simple general partneship, following the NAIC guidelines and form partnership agreement, which can be reviewed on their Web page, and electing not to be taxed as a separate entity. >Dave Johnson (davej@lava.net) >Paul, Johnson, Park & Niles >Honolulu, HI 96812 ------------------------------- William B. (Bill) Prugh Shughart Thomson & Kilroy, P.C. wprugh@kc.stklaw.com or wbprugh@sound.net stklaw.com >> How to change to a daily digest of messages, stop your subscription or get copies of prior messages or find us on the our Web, send an email to LISTSERV@USA.NET with the following text: INFO LNET-LLC