As individual investor we are in a minority in the vast stock markets and in fact any other market. However, collectively we are a force to be reckoned with in the very same stock market.
To come straight to the point, individual investor or persons of like mind in all probability are also friends living within easy reach of one another, are in regular communication and probably go out for picnics together along-with their families. These individuals are working in different corporations, or are in business or are self-employed professionals; which represents a vast pool of knowledge and experience wider than that of an individual. And given a certain level of success on their part abide by an individual code of ethics. However, individually investors are prone to making errors of judgement with respect to their investments in the stock markets given both market action and volatility.
These and other drawbacks faced by individual investors can be overcome with the formation of an investment club. This gives much strength to the individual investor when he becomes a part of or a member of an investment club formed by like minded individuals or friends; where the wellbeing of the investment club is held higher than the individual and his vacillations.
Collectively the individual investors desirous to form an investment club would need to decide what type of entity they would like to adopt for the investment club for business purposes. Given below are some business models for consideration by the individual investors which their investment club may adopt; along-with their advantages and disadvantages.
Frankly, most investment clubs would avoid becoming a corporation. As corporations are taxed at a different and higher tax bracket. Further, it requires knowledge of accounting skills and government regulations. All this means a lot of paperwork and associated costs. And all this paperwork does not generate any income or profits for the investment club and its members.
Limited Liability Corporation:
This business model is quite like a general partnership and gives the members a certain amount of liability protection. However, this type of business entity also requires a lot of back office paperwork and would be expensive to maintain.
Most investment clubs (or groups) choose this business model due to its simplicity and advantages of lesser paperwork requirements and associated costs. This is because the share of the profits (or income) along-with the tax liability is passed onto each member of the investment club in their individual capacity and terms of reference agreed upon.
Thus, with this business model you would accomplish what you need to run an investment club with the least amount of tax influence.
The individual investors as members of an investment club would have to decide which business model best suits their requirements. However, you and the other members of the investment club would have to take a decision one way or another since establishing a business entity with respect to your investment club is required by law and also for tax purposes.