Club change of business classification

Keith Glenn on

The club I'm in established themselves as an S-Corp. The
previous club I was in was a general partnership. I think
I'm going to have issues with convincing some of the
membership of switching from S-Corp to General partnership
(or an LLC). Anyone have any guidance as to why not an
S-Corp and why we should switch to a partnership or some
other? I think the previous president is concerned with
liability. What kind of liability should an investment club
be concerned with?

Rip West on

Keith,

S corporations have considerably less flexibility than partnerships. The first thing that comes to mind is that a partnership can use appreciated stocks to pay off a departing member without incurring tax liability. S corporations can not do that. In some states, S-corporations sometimes incur substantial fees for the pleasure of doing business in that form. I have never worried about the liability exposure of a general partnership for an investment club, but if that is a concern, Limited Liability Companies [LLC] provide the same limited liability as an S corporation, and they retain all the flexibility of a partnership.

Finally, as I think you have discovered, the investment club packages on the market do not prepare S-corporation returns.

Rip West
Saint Paul, MN

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