When you start an investment club, you are starting a business and you need to decide on what type of business operating structure you will use. Different business types have different operating, federal and state reporting and taxation requirements.

We recommend you operate as a general partnership. This is the simplest structure to use when a group of people conduct business together. Setting up a general partnership is simple. You register a name, get an EIN number and develop and sign a partnership agreement. Each year you will need to file a Federal and possibly a state Partnership tax return. They are informational returns. A partnership is a "Pass Through" entity. All of it's income is distributed yearly to the partners. Taxes are paid by each partner on their portion on their individual tax returns. bivio is designed to let you easily do the accounting for a general partnership. It uses your accounting data to quickly generate the Federal tax returns your investment club needs to file each year.

Sometimes people are concerned because members of a general partnership have personal liability for the actions of the partnership. This applies when partners are acting within the defined boundaries of the partnerships business. The purpose of your partnership should be clearly spelled out in your partnership agreement. For example, your agreement might include a section worded in this way: "4. Purpose. The only purpose of the partnership is to invest the assets of the partnership solely in stocks, bonds, and other securities ("securities") for the education and benefit of the partners."

Within these constraints, if you file the necessary tax returns each year, it is unlikely that your partnership would incur any liability that you would cause you any personal issues. Many clubs have operated for many years successfully as general partnerships without any problems that we are aware of. For simplicity, we suggest you use this business set up.

Despite this, some clubs want to consider operating as an LLC or Limited Liability Company. Within an LLC, each members personal liability is generally limited to their percent of ownership. LLC's are set up with your state and do require additional annual reporting and fees. In general, however, they do have the same tax reporting requirements as general partnerships. This means that bivio would still provide your club with the accounting and tax forms that you would need to file.

I found this website has some further information about LLC's along with links to each state and their LLC requirements.
http://www.limitedliabilitycompanycenter.com/articles.html

We do get questions every now and then about whether a group should set themselves up as a corporation. We would highly discourage this. With a corporation, you will have much more complicated operating and state reporting requirements. bivio does not provide the accounting or produce the taxes you would need to file as a corporation. If you feel you must run your investment group as a corporation, you should do so with outside professional legal and accounting guidance.

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Laurie Frederiksen
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