Forming A Legal Partnership

Some states have adopted a new form of business registration known as a Limited Liability Company (LLC) or a Limited Liability Partnership (LLP). LLCs and LLPs offer their members protection from certain liabilities, something that's not found in general partnerships. (View a sample partnership agreement that you can adapt for your own club.) Although the sample partnership agreement clearly outlines the activities in which the club is permitted to engage, some people feel that a partnership doesn't provide enough protection of personal assets.

It's our understanding that it's possible that any partner in a general partnership could legally bind the partnership, or that a creditor could come after the assets of other partners if one member has financial troubles. The partnership agreement is designed to prevent these sorts of things, however. An LLP/LLC in this situation is a bit like wearing a life preserver while sitting in your boat -- while it's parked in your driveway. (Of course, it's quite possible that you could find an attorney who would argue why this is prudent.)

The downside of forming an LLP or LLC is they are more expensive to form and operate than a partnership. Some states assess organizational and continuing fees, which can exceed $800 per year. In order to form an LLP or LLC, you'll probably need an attorney to draw up Articles of Organization, which will be filed with the Secretary of State in your state (something you probably won't need with a general partnership if you follow the guidelines in the Sample Partnership Agreement).

In another regulatory disadvantage of LLCs, the Anti-Money Laundering Act of 2020 added new reporting requirements that affect LLCs and LLPs and that are effective as of January 1, 2024. The Corporate Transparency Act (CTA) stipulates that an LLC or any entity that is registered with a secretary of state or similar entity must provide Beneficial Ownership Information (BOI) to the US Department of Treasury. Reporting companies created or registered before January 1, 2024 will have one year (until January 1, 2025) to file their initial reports, while reporting companies created or registered after January 1, 2024, will have 30 days after receiving notice of their creation or registration to file their initial reports. Reporting companies have 30 days to report changes to the information in their previously filed reports. Contact the Department of Treasury's Financial Crimes Enforcement Network for more information.

In general, the general partnership has worked for tens of thousands of clubs, so it's probably the best route for most new clubs. Note that while this is not legal advice, we are reporting our experience of more than thirty years with investment club operations in the United States as the leading provider of investment club accounting and tax reporting tools.