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One of the more important tasks of any investment club is record- keeping. Forget whatever inhibitions you may have about accounting procedures. You will most definitely have to track every single cash transaction right down to the penny. And you will have to calculate each member’s share, which will constantly change since new people will come aboard as others jump ship.
An accounting manual, featuring forms for recording financial data by hand, is offered by the National Association of Investors Corp. in Madison Heights, Michigan. Also available is an NAIC club accounting software program. Another option is hiring an outside accountant or bookkeeper to maintain the club’s books, but keep in mind that the cost for an accountant could run as much as $120 per hour.
Typically, the club’s financial secretary or treasurer handles the books. Most clubs elect to use an accountant for tax purposes only, says Walt Clark. Baltimore based vice president of investments at Gruntal & Co. Inc. Clark, who works with the Washington Women’s Investment Club, notes that these clubs, like any other entity, have to be aware of tax rules that apply to their members.
You may wonder about the need for complex calculations, since the monthly ante required of each member is the same. First, there may be club members who wish to contribute more than the set amount. Second, you need to adjust the account and record when members withdraw any of their shares or a new member joins the group. Each member’s account consists of two parts: the accumulation of cash deposits; and a valuation record of his or her deposits, which includes the sum of profits and losses.
The financial partner is ultimately responsible for the books, but all club members should be familiar with the process of record-keeping to protect themselves and the club, advises Thomas E. O’Hara, chairman of the NAIC board of trustees. “Every member should also be prepared to audit the work of the financial partner or treasurer if asked to do so,” he says.
Nearly every regional NAIC Council can provide programs on record- keeping and tax reporting. Moreover, your club might want to have one or more members take bookkeeping courses affiliated with some business organizations or at a local community college.
If you haven’t done so already, get a tax identification number (Form SS- 4) from your nearest U.S. Treasury office. You will be asked for the officers’ names, addresses and Social Security numbers. This tax ID number should be used on all tax filings, and should be given to your broker for the securities your club buys.
The tax return for partnership filings is Form 1065 and each member will have to file a K-1 Form on his or her individual tax returns. A word to the wise: the IRS could fine each partner for late or incorrect tax returns.
There are different rules for taxation and the treatment of investment club withdrawals. Given that the legal structure of most clubs is a partnership, your club will have to calculate