Investment Club Liability
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Investment Club Liability Margaret Eskew writes.......
Given the litigious
nature of our society, what vehicle can an investment club use to protect
individual members from being sued for the debts of other members of the
group? Is a limited partnership or an LLC the safer
vehicle?
No argument about the litigious nature of our
society, but I am not convinced that a LLC or LLP is necessary or even
desirable.
First of all, there is a common misconception
that one partner will be liable for debts of other members not related to the
investment club. This is simply not true. As a member of an investment club, I
can be held liable for all the debts of the club under certain circumstances,
but I am not liable for non investment club related debts of my partners. Even
if I am found liable for investment club type of
liability, I have recourse
against the other members for their fair share.
LLCs and LLPs probably will be subject to annual
state fees, and, thus, in my mind, are just not worth setting up.
Some lawyers, and, alas, some accountants not
familiar with investment clubs recommend avoiding the general partnership
entity. However, lawyers with whom I have worked who are familiar with
investment clubs continue to recommend the general partnership form of business.
One of these was quoted as saying.........
All that
said, remember that the plain vanilla general partnership works just fine for
most clubs. The official guide says that NAIC is not aware of any partner being
sued for a club liability nor has there been any comment on this list that I am
aware of suggesting that any club member has faced personal
liability
Another, who lives in a state that has a very
small, one-time fee for LLPs, said that it is almost a no brainer to organize as
an LLP in that situation, but admits that his club still operates as a general
partnership.
Conclusion:
If the state fees involved are not too burdensome, there is nothing wrong
with organizing as a LLC or LLP. However, there is no pressing need to do
so.
Thanks for using bivio
and for submitting a very interesting question that has interest for many
clubs.
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