Invite Potential Members and Hold a Meeting
An investment club typically has 12 to 15 members. To gauge the level of interest, the initial meeting should explain the purpose and goals of a club. Invite friends, relatives, co-workers and acquaintances or anyone who may be interested in learning more about the stock market and making money by investing in stocks. In the meeting, explain to prospective members that the club will be a formally established partnership, with regular monthly meetings and a minimum monthly investment contribution. Investment decisions will be by member votes, after the investment stories for specific individual stocks are presented by members and discussed. Provide an overview of the costs to set up the club, such as filing to form the partnership and the fees to join the National Association of Investment Clubs through its BetterInvesting website (see Resources). On that website, you can find the forms, templates and software you will need to manage the club.
Set Up the Club as a Business
Your investment club will be a separate legal entity. Most clubs form a general partnership or a limited liability company. File partnership or LLC paperwork with your state's business division. You will also need to obtain an employer identification number from the Internal Revenue Service. As a separate entity, the club files a partnership tax return each year under the tax ID EIN. On the partnership return, you report the members' proportional share of profits, losses and income to be claimed on their individual tax returns.
Club Procedures and the Operating Agreement
The partnership operating agreement covers in detail how the investment club will function. Include in the agreement items such as the responsibilities and rights of members, the timing of club meetings, minimum monthly contributions, rules to withdraw money, and how the financial aspects of the club will be handled. The club also needs an accounting system to track each member's share of the portfolio value. With most clubs, members can contribute more than the monthly minimum and the accounting software will track member shares based on the amounts and dates of contributions.
Open a Brokerage Account
Open a single investment account in the club's name using the tax ID number acquired from the IRS. Designate one member and a backup member to act as the contact between the club and the brokerage firm and account. The responsible member will deposit contributions into the account and handle the orders to buy and sell the stocks as agreed during the club meetings. Typically, members must contribute a minimum of $20 per month, which means a club with the average number of members will add $250 to $300 or more to the club's account each month. Provide copies of the account statements to all club members.