Best entity for trading club

A couple of my mates are thinking of starting a sharetrading club. What is the best entity to use?

I understand that some active fund managers can trade without being subjected to capital gains tax - how do they do it?

Not quite sure but I think if you have a PIE structure then you can trade without paying tax on your gains.

The 2 share clubs that I know of simply trade as a partnership as they are small scale - $10k & $25k initial funds i think. They are more Share 'Investment Clubs too so don't actively trade and don't pay tax on capital gains.

IMO,if your mates are intending to trade, they should just pay the tax if they make any gains...

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Originally Posted by AMR

A couple of my mates are thinking of starting a sharetrading club. What is the best entity to use?

I understand that some active fund managers can trade without being subjected to capital gains tax - how do they do it?

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AMR, they do that by tracking the index only, which removes the trading aspect of it.

As for a share club, you would be best to use a Partnership, which keeps the admin side very simple.

Basically gives you the same benefits as an LAQC without the extra hassle & requirements

The Australians have limited liability Partnerships which would be even better, pity we don't have them in NZ

NZ does have LLP now, they were introduced at the end of 2008.

Paying tax depends on whether you intend to trade for growth or hold for income. I think Fisher funds said they held long term for income so didn't have to pay tax (prior to being a pie). All other active funds would have paid tax. Passive funds didn't.

Yes limited liability does sound good in case someone ends up buying something like Brisconnections "because they look cheap"!

I'm sure that funds no longer pay tax on capital gains, whether active or passive.

Rationale was mums and dads don't so why should they if they invest in a fund .... so they changed the law

No we have big traders like fund managers not paying capital gains tax but the little guys continue to do so

Prob not as simple as all that but something along those lines

CJ, Thanks for the update re LLP's, that change slipped past me.

Makes sense, so nice to see politicans get something right for a change!

LLP's are definitely a welcome addition. My only concern (with them being so new) is the cost of implementation.

Fine for large investments but for a small shareclub, it will probably wipe out a chuck of your capital.

sorry I can"t give good advice.The share club I was in in 1987 lost all it's money and owed the bank some!However we down sized from 10 members to 5 and increased monthly contributions to $50 each per month.From about 1990 onwards we had too much success and then with approx $120,000 we ran into problems as to whose name the shares should be in as registries would not accept a shareclub.Then there was the problem of having a tax number.We then had a member who had to go on a benefit as her husband left her and she had 4 children to look after.To do it properly meant lawyers and accountants.In the end we distibuted the shares to members,sold unwanted shares and split up the cash.I would expect it is still too hard unless you have an accountant on board;I do not think tax dept would worry about $500 each but as we found it can get out of hand.

You could set up a company with shareholdings and directorships. Might cost a bit more to set up and administer, but then you know who owns how much, and it's a legal entity for doing your share investing or share trading with. If a member wants to cash out you could just liquidate their portion of their shareholdings and buy them out then cancel the shares.

If you did it as an informal club and there was a dispute as to what someone contributes or otherwise, it could get messy.

At the end of the day, consideration of the costs & benefits involved of the suggestions made should result in a KISS. ;)

I was inquiring about a share club in another post. Thanks to percy for your reply. I'm interested in forming a shareclub too.

How many people will be in the club? If there are quite a few members and some that will be in a more senior role than others, then a company may be a suitable choice as you can have the senior members as directors. A limited partnership, if I recall correctly, only affords limited liability to the limited partners who are investors only and do not take part in the management of the partnership. A company is cheap to administer if you have someone who understands the required documentation and how shareholders interact with the directors/company. A company does need to prepare accounts which meet a certain standard. Possibly you could obtain a basic template from an accountant. The best structure really depends on whether you are an organised club with a range of members or a few close mates pooling your funds.

If you have more than 5 members you run into problems of long winded discussions and lack of focus.The more members,the more arguements,disagreements, time wasted, and poor "agreed" investments.We had a halfwit who spent most of the evening arguing over the minutes of the previous meeting. !!! In fact I think he even disagreed with himself.!!!

It sounds like if you have more than 5 members you might need some sort of hieracheal structure. There is also always the risk of thefts, disputes, and many opportunities to ruin friendships. One option is to run a club that meets and discusses investments etc. but does not actually invest on behalf of its members. To me it still seems like an interesting concept- each week one member has to present their reccomendation of a stock for example- run it kind of like a toastmasters meeting. It could help to avoid many of the isues that arise when dealing with other peoples money.