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How Should We Handle Inactive Members in Our Club?


Donna asks, "We have a member who has requested that she be put on "inactive status" for a few months. Would she still be required to pay her membership fee each month?"

Dear Doug:

We have a member who has requested that she be put on "inactive status" for a few months. Would she still be required to pay her membership fee each month? We don't seem to have anything related to this in our constitution or by-laws.

- Donna M.

Dear Donna:

Most investment clubs certainly have provisions in their operating agreements that set out the minimum monthly payments that members must make to the club. Contributing money alone doesn't make a successful investment club, however. After all, there's work to be done -- whether it's serving as a club officer, preparing stock studies, making educational presentations, watching stocks in the club's portfolio, or baking cookies for the meeting.

Some clubs go so far as to set out specific requirements for member participation, whether it's that members must serve in an officer position every few years, attend a minimum number of meetings in a year, or serve on a rotating stock selection committee, for instance. Partners who don't live up to the clearly-stated expectations are considered inactive members and subject to being automatically withdrawn from the club. These clubs understand that a club's chance of success increases when each member takes an active role in the club's operations.

While I firmly believe that clubs are generally better off without inactive members, there's nothing that prevents your club from allowing occasional "silent" partners or not requiring monthly payments. (While there is an SEC rule that could possibly affect certain clubs that allow inactive members, it is a remote possibility that would only be a problem if other conditions were met.)

In fact, some clubs do specifically allow inactive members (sometimes for only a temporary period of time) or will grant inactive status to a long-standing member who moves to a new area. My first investment club had many members who worked in New York City's theater industry, so it wasn't uncommon for some of them to be away for a few months while on tour or working out of town. As a result, we accommodated these temporary absences as long as they continued to make their monthly member payments.

On the other hand, one of the reasons that I don't generally like the idea of allowing inactive members is that it can put your club at the edge of a slippery slope -- if you allow one member to become inactive, what happens to the second, and third, and fourth, and fifth (etc.) members who want to request the same status? Pretty soon, your club has nothing but a large number of inactive members and a handful of embittered and overworked members. That's certainly not a recipe for a successful investment club.

Barring any specific requirements or prohibitions in the partnership agreement or bylaws regarding inactive members, though, your club will have to address the issue now, and decide whether or not to allow a member to become "inactive" in the first place, whether or not "inactive" status could be temporary or permanent, and whether or not you will require inactive members to continue to make regular monthly payments to the club. I would suggest that you also take this opportunity to formulate a formal policy regarding inactive members in order to avert future confusion. I recommend that all clubs make the effort to lay out their minimum requirements for member participation before it becomes an issue.

- DOUG GERLACH is the world's most popular tool for investment club accounting and operations. Sign up for a free trial to see for yourself why thousands of investment clubs choose to manage their club's books and operations.

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