Why Do I Need a Tax ID to Open an Investment Club?
An investment club is a group of individuals who contribute money and make joint decisions how to invest that money in the stock market. The club will open a brokerage account to make the stock purchases and sales voted on by the club. It does not, however, make sense to put all of the investment club members as co-owners on the brokerage account.
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Investment Club Organization
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An investment club should be set up as a legal business entity, either a partnership or limited liability corporation -- LLC. For federal tax purposes, investment clubs are usually considered to be partnerships. Individual states may have additional rules how an investment club must be set up. A LLC can file taxes as either a partnership or corporation. The investment club will be required to file a tax return each year, therefore, needs a federal tax identification number.
Obtaining a Tax ID Number
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The IRS officially calls a tax ID number an Employer ID Number -- EIN. An EIN can be obtained by filing a form SS-4 with the IRS or immediately using the online interview style application process. You will need the type of organization for your business -- probably a partnership, the name of your investment club and the address. The IRS online information concerning EINs notes that anytime a partnership is formed, a tax ID number must be obtained. The online application process will provide your EIN upon completing the application.
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Filing Taxes
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Your investment club will file a tax return using the IRS Form 1065. This is the equivalent to Form 1040 for individuals, except the Form 1065 is for partnerships. The investment club tax ID number will be required to complete the form. Club members will receive a Form K-1. The K-1 provides each partner's share of dividends and profits the club has earned during the year. Club members will use the K-1 with their individual tax returns to pay taxes on the member's share of the club's profits.
Time Frame
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Before obtaining a federal tax ID number the investment club should be organized including a formal partnership agreement, rules and bylaws, a name for the club and a mailing address. After the tax ID number is received, the club can open a banking account and a stock brokerage account. The ID number will be required to open these accounts in the club name.
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