Division of shares, profits, and loss in an investment club
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Division of shares, profits, and loss in an investment club Rip and I, the Trez_Talk guys, were recently
asked...
I have about ten friends and we are interested in starting an investment club. I have dabbled in funds for quite some time now and my group wants me to be the president of the club. I want to know how are the shares divided. I understand the investment portion but lets say a member is leaving, what is his entitlements? what portion of the gain or loss in the investment club he receives. Please help!!! Congratulations of the formation of your new
investment club. Investment clubs are a great way to share
investment ideas and to learn more about investing with your friends, family,
co-workers, and colleagues.
An investment club, commonly established as a
partnership, is often set up much like a mutual fund. In other
words, when a member makes a monthly investment into the club, that
investment buys that member newly issued shares (units) of the club at the
current unit value. The unit value is calculated
each month by dividing the total value of the club assets by the number of units
outstanding. Much like the NAV of a mutual fund.
Each year REALIZED gains, losses, interest,
dividends, expenses, etc. are allocated to the club's members in proportion to
the value of their accounts in the club. Those taxable allocations are reported on the partnership tax return
filed by the club with the IRS and to each member of the club on the K-1 issued
to them by the club. For more information on the method of
allocation, please see... http://www.bivio.com/hp/tax-allocation-methods.html
When a member leaves the club their units are
liquidated by the club. The value of those units is based upon the current unit
value at the time of withdrawal. The withdrawing member's gain
or loss, realized upon withdrawal, will be the difference between the value paid
to the withdrawing member and their adjusted cost basis in the
club. The adjusted cost basis is equal to the amount they've paid
into the club as adjusted each year and at the time of withdrawal for their
share of any taxable allocations.
Much success and profits with your new
club! Thanks for using bivio!
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