club_cafe: Member withdrawels

Jim Thomas on

I hit send before I was quite done editing. Please just ignore the previous message (can it be deleted?) and read this one instead.

Ellen,

Having the new members "buy out" the withdrawing members is not the way to approach this. Pay the withdrawing members their market value. Have the new members join with a modest initial investment amount (why require anything more than the minimum monthly investment?). Let the "unit accounting" software do its job of handling members with "unequal" ownership.

Do the remaining club members want some tax deferal for as long as they remain in the club? If so, have they considered transferring highly appreciated stock (Apple, for example) to the withdrawing members? Paying the withdrawing members in any way other than with appreciated stock will probably result in the remaining members paying capital gain taxes earlier than necessary.

Are you saying your club insists that a new member make an initial lump sum investment equal to the current market value of existing members? Why would the club want to maintain such a serious barrier to finding willing new members? A major reason for using unit accounting is to make that sort of thing unnecessary.

> Two of our 6 members want to withdraw, and two new people want to buy them out and enter the club. As the accountant, I'm curious how to do this/tax implications/anything else we might need to know? As an additional FYI, we have some apple stock, and we would like to make this switch ASAP, as we don't want our withdrawing members to profit after having given notice and --more importantly--the new members have given us the top amount they can afford to buy in at and it is very close to what our exiting members shares are now. We are nervous that if we wait apple will shoot up and the new members wont be able to afford to join. <

-Jim Thomas

Henri-TRLEA on

Would it not work to have the two new people just make an initial partnership contribution (“buy-in”) to the club for the amount of the withdrawing members’ valuation. They would have their valuation as of the date of the club’s portfolio on the date of their initial payments and then the club would have the funds to pay the withdrawing members their withdrawal funds, and the cash funds in the club would remain the same. This is only a question on my part…this is just the way I would handle it. Of course, our partnership agreement allows a partner to pay an initial amount to join. Their partnership agreement may have other wording to exclude this.

Henri

> Two of our 6 members want to withdraw, and two new people want to buy them out and enter the club. As the accountant, I'm curious how to do this/tax implications/anything else we might need to know? As an additional FYI, we have some apple stock, and we would like to make this switch ASAP, as we don't want our withdrawing members to profit after having given notice and --more importantly--the new members have given us the top amount they can afford to buy in at and it is very close to what our exiting members shares are now. We are nervous that if we wait apple will shoot up and the new members wont be able to afford to join. <

Jim Thomas on

> Would it not work to have the two new people just make an initial partnership contribution ("buy-in") to the club for the amount of the withdrawing members' valuation. <

It's certainly possible to do that. However, it's generally not best tax-wise (which prompted my initial replies). Also, the club in question apparently felt the necessary size of the initial investment might be unrealistic for the new members.

-Jim Thomas