My account is all from my father. We basically split it 50/50 after taxes. We have yet to take any profits out however. He doesn't need any money immediately, and neither do I except for stuff like no hardware/software. In that case the money just comes from the account.
Would the arrangement to manage money for family and friends constitute some type of entity that must be registered with the SEC? Or, is there a certain threshold that must be met in terms of $ size or other before it must be registered? Thanks
I think there are few practical issues: * you can make it into an "investment club". Schwab and others will open Investment Club accounts and it will all be legal * if you want to trade "public" money, I believe that takes registration with the SEC, passing exams etc. Be very careful.
Interesting thread... I have always thought it was illegal to trade OPM unless it's in a joint account, partnership or something like that, or with a trading authorization for trading in someone else's account. If a friend, girlfriend or relative is willing to give me some money to trade with, should I consider it a loan and put it in my account , should I open a joint account, or should this person open an account and give me trading authorization?
Good points Kicking. These different options are exactly what I am looking at. I was leaning towards some type of loan where the interest paid is variable: Set up the loan to where no principal is paid ("investment"), but the "interest" paid will be determined ("trading returns"). Anyone have any ideas about this (legal, tax implications)? Thanks again guys.
If you use interest income as the method to pay out profits the IRS will frown on that. They want income classified into its proper categories, i.e. capital gains/losses, interest, ordinary income, etc. That way their special rules can be applied correctly, like the $3,000 limitation on capital losses and the differing capital gain tax rates. Also, Investment Interest expense can be offset with Interest income, so you could be overstating their interest income and thereby allowing disallowed deductions on your investors tax returns. If any of them get audited by the IRS, and they find the problem, they will probably look at all tax returns that invested in your "fund" and want to adjust them. This won't make people happy. At the least, you need to split up your capital gains/losses and interest income and expenses separately for each participant and give them a statement each year for their taxes.
No problem. On paper, it's all my money. Let's say there is $50k in the account, and one family member has put in $10k. so he is 20% share holder. At the end of year, account grew to $70k, so he is entitled $4k gross profit. let's say I pay ~~30% in taxes, if he wants to take out the $4k gross, I give him $2.8k in cash.
This is fine, but technically if you are in different tax brackets it either penalizes or helps one of the parties. If you pay more taxes overall than you should (if you really want to), then your probably fine with the IRS , but if you start paying a lower overall tax rate between all your members you could run into trouble. Also, this is rare, but when your family member receives $2,800 in profits, and the IRS audits their cash receipts on their bank statement, they will want an explanation of what the deposit is. If the family member says it was received "after-tax" from your investment account the IRS will want them to claim the full $4,000 as capital gain and adjust their taxes accordingly. So you may get away with it, but you run the risk of problems if one of the parties gets audited.
IMO, the problem with Other People's Money and being legal or not with the SEC revolves around how the individuals involved 'got together'. I investigated this issue in the past when I was involved with a company that borrowed money from private lenders. The concern was that if the loans were not paid, what recourse would those lenders have, given the natural tendancy of people to seek remedys beyond what they are actually entitled to (for example - 'If I had really understood I could lose money, I would have never loaned any', or 'I was swindled/conned/misled/victimized', or just simply 'The transaction/company/guy is fraudulent and he should be prosecuted'). Most everything I have seen has to do with how the people who got involved learned of an 'investment' opportunity. There are very defined rules about giving presentations to, sending solitcitations to, and advertising to potential investors. Individuals can come together and agree and enter into transactions that result in investments. The limitations are that a presentation can't be made to more than 35 people or that advertising can't be made in a general publication that would be expected to have an audience of more than 35, etc unless the 'security' is registered and the presenters are liscensed securities dealers. Thus widows, ophans and unsophisticated investors dumping their last dime into cattle leases 2000 miles away would be protected from such a 'scam'. The kind of things that seem to be allowed are friends or business associates learning by word of mouth about an opportunity and then proceed further with the knowledge and understanding that some or all of the investment is at risk and may be lost. No mass mailings or mailing lists soliciting investors or investments. No 'free investment seminar tonite at the Marriott'. No ads in the newspaper or classifieds. A Limited Liability Company, structured with a manager who is paid a fee and manages the LLC investment activities with 'members' who own the interests of the LLC and have no decision or operational authority, is legal and serves the purpose of using OPM, as long as everyone agrees and did not form as a result of illegal solicitations (defined above). Then the LLC trades stock, pays the manager a fee, and the members divide the profits. Sounds great right up until moeny gets lost. Then everbody wants out with the full original investment. As with all business ventures that involve more than 1 person, the problem is never about forming or operating the business, it's always about dissolving it. Hope this provides additional information to those so inclined to proceed.
BigEd, Thanks for the reply. Is it your understanding that if the people in the LLC or LLP have not been solicited (ie. are friends and family) then no registration is required with the SEC, even if the fee structure is that of a hedge fund (2%/20% or simlar)? Thanks