Part one explained how mutual investing uses strength in numbers to create financial leverage. People utilize the synergy of an investment club for the purpose of building a portfolio in less time. This collective effort also allows individuals, with only a small amount of money to invest, the opportunity to own a piece of several assets that they would have never had access to on their own. How does an investment club operate? The portfolio’s investment focus vary, making each club’s operation unique from the next, but each club’s set up is similar in standards.
Setting up the Club
Step 1 - An investment club can have anywhere from five to fifteen members or more, so for tax purposes the first step to setting up a club is to create a new legal entity. Let’s say your legal entity’s name is “Fast Track Capital LP”. This means individuals may come and go from the club and this will not affect the integrity of any contracts the club has in place, because all investments are owned by “Fast Track Capital LP” and not any one particular member of the club.
Step 2 - Open business accounts for your club’s legal entity. Personally I’d set up a few accounts with different banks (for logistical reasons), but you will want at the very least one checking, one savings, and one brokerage account owned by “Fast Track Capital LP”, or whatever your club’s entity is named.
Step 3 – Hire a lawyer to help write an agreement that will illustrate all of the legal guidelines and expectations for the club and all the members of. Every member will be required to sign this agreement before the club can accept or use any of their money.
Step 4 – Have a process for collecting and accounting for each member’s contribution and equity within the club. Some club’s may have a designated treasurer that will maintain the books, but since each member’s equity is constantly changing based on the amount of money they contribute to the club, it may be easier to use accounting software to create reports.
Step 5 – Best practice would be to set up monthly meetings, so all the club’s members can get together. These meetings are not only an opportunity to share insight on the club’s investment direction, but also a chance for members to become acquainted and to learn. Meetings can have guest speakers, and may include presentations from professionals, as well.
Operating the Club
I would set up my club so that operations would fall into one of two logistical categories, either general operations or vested operations. I would want to keep overhead costs as low as possible, so keeping everything as simple as possible would be a must. Separating all operations into either column A or column B would make delegating tasks a cinch, for example:
Step 1 - An investment club can have anywhere from five to fifteen members or more, so for tax purposes the first step to setting up a club is to create a new legal entity. Let’s say your legal entity’s name is “Fast Track Capital LP”. This means individuals may come and go from the club and this will not affect the integrity of any contracts the club has in place, because all investments are owned by “Fast Track Capital LP” and not any one particular member of the club.
Step 2 - Open business accounts for your club’s legal entity. Personally I’d set up a few accounts with different banks (for logistical reasons), but you will want at the very least one checking, one savings, and one brokerage account owned by “Fast Track Capital LP”, or whatever your club’s entity is named.
Step 3 – Hire a lawyer to help write an agreement that will illustrate all of the legal guidelines and expectations for the club and all the members of. Every member will be required to sign this agreement before the club can accept or use any of their money.
Step 4 – Have a process for collecting and accounting for each member’s contribution and equity within the club. Some club’s may have a designated treasurer that will maintain the books, but since each member’s equity is constantly changing based on the amount of money they contribute to the club, it may be easier to use accounting software to create reports.
Step 5 – Best practice would be to set up monthly meetings, so all the club’s members can get together. These meetings are not only an opportunity to share insight on the club’s investment direction, but also a chance for members to become acquainted and to learn. Meetings can have guest speakers, and may include presentations from professionals, as well.
Operating the Club
I would set up my club so that operations would fall into one of two logistical categories, either general operations or vested operations. I would want to keep overhead costs as low as possible, so keeping everything as simple as possible would be a must. Separating all operations into either column A or column B would make delegating tasks a cinch, for example:
|
General Operations:
· Scheduling/Planning Meetings · Maintaining Contact w/members (email, etc.) · Collecting monies · Basic Clerical work · Networking/Campaigning/Promoting |
Vested Operations
· Maintain relations with financial professionals and contractors · Buying/selling/Maintaining contracts and assets · Hiring contractors and financial professionals · Maintaining club accounts and cash flow · Maintaining club’s legal entity and tax information · Releasing earnings/performance reports for all members (usually quarterly) |
