What are the legal entities for Investment Club IN Zambia

 

$       Why the Legal Entity?

An investment club is either a legal entity or not. All legal entities are registered with the registrar of companies. Even an entity which is not traditionally a legal entity (like associations, cooperatives and partnerships) can be registered as a legal entity. An investment club ought to be a legal entity. A legal entity is an organization that the law treats as if it were a person, capable of entering into contracts and of being sued and in includes, but is not limited to, an individual (adult and sane), partnership, association, company, corporation and trust.

Unlike independent individuals investing directly, an investment club pools money from each member, and hence the need for clarity of rights and duties of the members. The legal entity enables the Investment club to have rules and a constitution to ensure smooth running and for the protection of its members by defining rights and duties of each member. Further, once it is legally established, standardized accounting records can be easily kept for it. Additionally, the legal entity also provides the Investment club with a solid structure to ensure the club's agenda is carried out efficiently and without friction. 

 

$       Four (4) Factors to Consider When Choosing a Legal Entity

The four issues to consider when choosing a legal entity are liability, governance, taxation, and membership.

Liability: We always want to limit our liability, and so, the best association is a corporation limited by shares, or limited liability partnership. However, the limited liability partnership has a general partner, who is generally liable without limitation. Cooperatives also have share limitations, as do companies limited by guarantee. Charitable organisations do not require any limitation of liability, since they do not trade. Sole proprietorships have unlimited liabilities.

 

Governance: The type of legal association will determine the type of governance model. Some associations are governed by boards of trustees, or boards of governors, and these are trusts, funds, and non profits. Others are governed by board of directors, and these are limited liability companies (LLCs). SACCOS are governed by member committees, while sole companies are governed by the single owner.

 

Taxation: It is important to determine how we want to pay taxes, because it determines the final amount of money that we take home. In case of noon profit organizations, we can apply for an exemption. In case of partnerships, all partners are taxed on their income, as is the case of cooperatives. In case of companies, there is double taxation since not only is the corporation taxed, but when dividends are distributed, the shareholders are also taxed on their capital gains.  The income of a sole proprietorship is taxed as the personal income of a proprietor. Partnerships and cooperatives pay taxes on income of each partner. Legal entities that do not file tax returns at a corporate level, like cooperatives, partnerships, and sole proprietorships are called pass through entities: the taxes passes to the owners who include their respective shares of the business’s taxable income in their individual income tax returns.

 

Membership: Every legal entity has criteria for membership, and limitation on members’ numbers. For instance, a partnership cannot have more than 20 members, or less than 2, whereas a limited liability company can have a minimum of 2, and maximum of 50 members. On the other hand, non profits can have unlimited numbers of members as do cooperatives. However, cooperatives must have a lower limit of members. These numbers vary with various jurisdictions.

 

$       Eight (8) Forms of Legal Entities for Groups

The rule in selecting a legal entity is,

“Form follows function”

I should not choose a particular legal model or management structure and then try to shoehorn my members into a model that does not fit their interests or investment orientation. I will let my members’ interests and comfort levels guide my ultimate decisions.

An investment club, as a group of two or more people who together to invest, and or conduct business, can be any of eight (8) forms of legal entities namely:

1.     Company/Corporation

2.     Partnership

3.     Cooperatives (SACCOS or Multi Purpose Cooperatives)

4.     Nonprofit Corporation (Foundations)

5.     Associations/Societies 

6.     Loose Affiliation/Informal Group (Implied Trust)

7.     Business Name with a Constitution/Sole Proprietorship With Constitution/Single Member Company with Constitution or Hybrid Entity

8.     Trusts

 

£        Company/Corporation

 

A company/corporation (sometimes referred to as a C corporation) is a form of Investment club organization/association that is separate and distinct from its owners. A corporation (sometimes referred to as a C corporation) is an independent legal entity owned by shareholders. This means that the corporation itself, not the shareholders that own it, is held legally liable for the actions and debts the investment club incurs. Corporations enjoy most of the rights and responsibilities that an individual possesses; that is, a corporation has the right to enter into contracts, loan and borrow money, sue and be sued, hire employees, own assets and pay taxes. 

 

For investment clubs in that position, corporations offer the ability to sell ownership shares in the investment club through stock offerings. “Going public” through an initial public offering (IPO) is a major selling point in attracting investment capital and high quality employees.

 

Corporations are more complex than other investment club structures because they tend to have costly administrative fees and complex tax and legal requirements. Because of these issues, corporations are generally suggested for established, larger companies with multiple employees.

 

The most important aspect of a corporation is limited liability, that is, shareholders are not held personally liable for the company's debts. A corporation is created (incorporated) by a group of shareholders who have ownership of the corporation, represented by their holding of common stock. Shareholders elect a board of directors (generally receiving one vote per share) who appoint and oversee management of the corporation.

 

Although a corporation does not necessarily have to be for profit, the vast majority of corporations are setup with the goal of providing a return for its shareholders. When I purchase stock I am becoming part owner in a corporation. A corporation can be either private or public. Being public means that the company is allowed to borrow money from the public, through initial public offer, or sale of its shares in the stock exchange. This is only possible when the corporation has done Investment club for quite some time and has good Investment club health.

 

I will remember the principle of business incorporation is to protect owners in case of debt arising out of Investment club dealings, or unsatisfied Investment club obligations-for this matter, limitation of liability is key; on the contrary, Investment clubs are not business organizations, hence, do not engage in debts, and business deals, but rather, collect and invest money, for this matter, increasing returns and reducing loses (even through taxes), is the key factor, hence registration as partnerships; equity funds; real estate investment trusts (REITS); mutual funds; hedge funds; and venture capital funds are more preferred.

 

There is a special form of corporations, sometimes called an S corporation (sometimes referred to as an S Corp) is a special type of corporation created through an tax election for the purposes of avoiding double taxation (once to the corporation and again to the shareholders). Profits and losses can pass through to the personal tax return. Consequently, the investment club is not taxed itself. Only the shareholders are taxed. There is an important caveat, however: any shareholder who works for the company must pay him or herself "reasonable compensation." Basically, the shareholder must be paid fair market value, or the tax authorities might reclassify any additional corporate earnings as "wages." To file as an S Corporation, I must first file as a corporation.

 

The advantages of a Corporation include Limited Liability (When it comes to taking responsibility for investment club debts and actions of a corporation, shareholders’ personal assets are protected. Shareholders can generally only be held accountable for their investment in stock of the company); Ability to Generate Capital (Corporations have an advantage when it comes to raising capital for their investment club - the ability to raise funds through the sale of stock); Corporate Tax Treatment (Corporations file taxes separately from their owners. Owners of a corporation only pay taxes on corporate profits paid to them in the form of salaries, bonuses, and dividends, while any additional profits are awarded a corporate tax rate, which is usually lower than a personal income tax rate); and Attractive to Potential Employees (Corporations are generally able to attract and hire high-quality and motivated employees because they offer competitive benefits and the potential for partial ownership through stock options).

 

The disadvantages of a Corporation include Time and Money (Corporations are costly and time-consuming ventures to start and operate. Incorporating requires start-up, operating and tax costs that most other structures do not require.); Double Taxing (In some cases, corporations are taxed twice - first, when the company makes a profit, and again when dividends are paid to shareholders.); and Additional Paperwork (Because corporations are highly regulated by federal, state, and in some cases local agencies, there are increased paperwork and recordkeeping burdens associated with this entity.)

 

£        Partnership

 

A partnership is an investment club organization in which two or more people (but no more than 20) going into investment clubs together. Both owners are equally and personally liable for the debts from the Investment club. Partners (owners) share with each other the profits or losses of the Investment club. Typically, a general partnership does not generate any tax liability on its own; instead, any tax liability is passed through to members each year. Further, an investment club can also register as a partnership and then when the portfolio has evolved over the years, then the partnership can register a limited company arm for the purpose of pursuing Investment club ventures and alternative investment. Partnerships are mainly found in professional services, such as lawyers, doctors, accountants, etc. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the investment club.

 

A partnership must file an annual information return to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax. Instead, it "passes through" any profits or losses to its partners. Each partner includes his or her share of the partnership's income or loss on his or her tax return.

 

There are three general types of partnership arrangements: General Partnerships assume that profits, liability and management duties are divided equally among partners. If I opt for an unequal distribution, the percentages assigned to each partner must be documented in the partnership agreement; Limited Partnerships (also known as a Partnership With Limited Liability) are more complex than general partnerships. Limited partnerships allow partners to have limited liability as well as limited input with management decisions. These limits depend on the extent of each partner’s investment percentage. Limited partnerships are attractive to investors of short-term projects; and Joint Ventures act as general partnership, but for only a limited period of time or for a single project. Partners in a joint venture can be recognized as an ongoing partnership if they continue the venture, but they must file as such.

 

There is a special form of partnership, refered to as a limited liability company is a hybrid type of legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. The "owners" of an LLC are referred to as "members." Depending on the state, the members can consist of a single individual (one owner), two or more individuals, corporations or other LLCs. Unlike shareholders in a corporation, LLCs are not taxed as a separate investment club entity. Instead, all profits and losses are "passed through" the investment club to each member of the LLC. LLC members report profits and losses on their personal federal tax returns, just like the owners of a partnership would. However, aside from ease of filing records, limited liability and sharing of profits; there are disadvantages, including and mainly, the limited life, where if a member leaves an LLC, the investment club is dissolved and the members must fulfill all remaining legal and investment club obligations to close the investment club.

 

Advantages of a Partnership include partnerships are generally an inexpensive and easily formed investment club structure. The majority of time spent starting a partnership often focuses on developing the partnership agreement; In a partnership, each partner is equally invested in the success of the investment club. Partnerships have the advantage of pooling resources to obtain capital. This could be beneficial in terms of securing credit, or by simply doubling my seed money; A good partnership should reap the benefits of being able to utilize the strengths, resources and expertise of each partner; and partnerships have an employment advantage over other entities if they offer employees the opportunity to become a partner. Partnership incentives often attract highly motivated and qualified employees.

 

However, partnerships have disadvantages such as Joint and Individual Liability where similar to sole proprietorships, partnerships retain full, shared liability among the owners. Partners are not only liable for their own actions, but also for the investment club debts and decisions made by other partners. In addition, the personal assets of all partners can be used to satisfy the partnership’s debt; Disagreements Among Partners with multiple partners, there are bound to be disagreements Partners should consult each other on all decisions, make compromises, and resolve disputes as amicably as possible; and Shared Profits because partnerships are jointly owned, each partner must share the successes and profits of their investment club with the other partners. An unequal contribution of time, effort, or resources can cause discord among partners.

 

£        Cooperatives (SACCOS or Multi Purpose Cooperatives)

Cooperatives are also a form of Investment club entity, which involves many people in a particular trade activity and coming together to pool resources for marketing their products, and sometimes, also to invest in other ventures.

 

There are two basic forms of cooperatives, namely, multi-purpose cooperatives, which cooperatives can carry out various forms of Investment club, except lending/loaning money; and Saving And Credit Cooperative Societies, SACCOs, which having been registered with the ministry or department of cooperatives, must again be registered by the central bank, or other institution registering deposit taking financial institutions.

 

This is especially relevant when the members are more than 20, in which case we cannot register as a partnership. However, a cooperative must have at least 30 members; though the number varies in jurisdictions. It also works where we are more than fifty members, in which case we cannot register as private limited company anymore. In registering as a cooperative, it is important to note that there are two types of cooperatives, multi-purpose cooperatives, which can do any kind of investment club, including collecting member savings and giving out credit; and savings and credit cooperatives (SACCOs), whose sole job is collecting and lending money, and which is strictly regulated by the authorities. It is better to register as a multi-purpose cooperative.

 

Cooperatives have several advantages including enjoying various tax exemptions; obtain government support; and earnings derived by a cooperative from transacting investment club with and for its patrons are taxed once at the patron level rather than twice at both the cooperative and patron levels, hence avoiding double taxation treatment. In addition, members can leave and join at any time, without need for dissolution, or complex resolutions of company law.

 

However, while the "one member-one vote" philosophy is appealing to small investors, larger investors may choose to invest their money elsewhere because a larger share investment in the cooperative does not translate to greater decision-making power. Not all cooperatives are incorporated, though many choose to do so. To conduct its investment club effectively, a cooperative must exist as a legal entity separate from its members.  Incorporation is necessary to achieve such status. Like other corporations, cooperatives obtain significant advantages from incorporation.  The primary one is limited liability.  Under incorporation, the personal liability of the individual owner/ members for the co-op’s losses are limited to the amount of equity each member has invested in the co-op.

 

If I decide to incorporate my cooperative, I must file Articles of Incorporation to legitimize my cooperative and includes information like the name of the cooperative, investment club location, purpose, duration of existence, and names of the incorporators, and capital structure; create bylaws to list membership requirements, duties, responsibilities and other operational procedures that allow my cooperative to run smoothly; create a Membership Application to recruit members and legally verify that they are part of the cooperative including names, signatures from the board of directors and member rights and benefits; conduct a Charter Member Meeting and Elect Directors where all of the charter members (also known as the incorporators) should vote to adopt the bylaws; obtain Licenses and Permits for relevant investment club licenses and permits; and hire employees.

 

On the other hand, there are disadvantages including Obtaining Capital through Investors since cooperatives may suffer from slower cash flow since a member's incentive to contribute depends on how much they use the cooperative's services and products. Further, there can be lack of Membership and Participation and if members do not fully participate and perform their duties, whether it be voting or carrying out daily operations, then the investment club cannot operate at full capacity. If a lack of participation becomes an ongoing issue for a cooperative, it could risk losing members.

 

£        Nonprofit Corporation (Foundations)

 

Furthermore, an investment club can legally constitute itself as nonprofit corporation, in which case it needs a governing board; and is able to get a bank account in its name, and enter into contracts as a legal entity. Typically, nonprofit organizations are either mutual benefit entities, such as private clubs, which exist for the benefit of their members, or public-benefit entities, such as community food banks, which exist for the public benefit. The groups always apply for and obtain a “tax-exempt” status through a “determination letter” granting the exemption. Most tax-exempt organizations are nonprofit corporations or charitable trusts. The tax-exempt status is well suited for groups in which individual members make their own investments and the angel group exists to promote the group’s purpose or to educate its members, but the individuals invest on their own. Further, it is unworkable if we desire compensate the group manager or others through a portion of the investment, sometimes called the “carry” since we do not distribute profits/dividends.

£        Associations/Societies  

An investment club could also be registered as an association with the institution where the members are enrolled, for instance, at a university. Further, there are various countries which allow professional societies to registers as legal entities with the registrar of societies. Accordingly, the investment club can register as such. In addition, various district administrations and local government authorities in certain countries also allow form registration of associations, and issue certificate which allow for opening of bank accounts. An association is any group of people who have joined together for a particular purpose, ranging from social to investment club, and usually meant to be a continuing organization. It can be formal, with rules and/or by-laws, membership requirements and other trappings of an organization, or it can be a collection of people without structure. An association, of however many members, can decide to entrust their investment club operations to one or more individuals, through a constitution, and trust deed.

£        Loose Affiliation/Informal Group (Implied Trust)

An investment club can also decide not to constitute itself as a legal entity, but a lose affiliation/informal group of friends, coming together, and discussing about investments, but then investing individually. Many organizations that start out as informal groups to test member interest before they migrate toward a more formal structure.

Such a group will most of the time appoint a few members from within them, or from outside, to be trustees, and this will be a trust, a legal relationship whereby property (real or personal, tangible or intangible) is held by one party for the benefit of another.  This is called a trust, and can either be actual or implied.

£        Trusts

 A trust, as a legal investment club entity, is a relationship whereby property (real or personal, tangible or intangible) is held by one party for the benefit of another. Trusts go by many different names, depending on the characteristics or the purpose of the trust. Several people can come together, and form a trust, thus, relegating their property to a trustee, to take care of it. The trustee can be an individual, a company, a law firm, or a real estate investment company. Because trusts often have multiple characteristics or purposes, a single trust might accurately be described in several ways. Trusts can be taxed as corporations, partnerships, or not at all depending on the circumstances.

£        Business Name with a Constitution/Sole Proprietorship With Constitution/Single Member Company with Constitution or Hybrid Entity

Some financial institutions, in a bid to quickly create products for investment clubs, have come up with a strategy of advising investment clubs to register a business name, and then, draft a constitution for the members. These are effectively sole proprietorships or single member companies, with constitutions.  They can also be refered to as hybrid entities.

 

A sole proprietorship or single member company, as its name states, there is only one strict legal owner, but for the purposes of the investment club which has more than one member, there shall be a constitution signed by all members, which guides the activities of members, and the bank account shall be jointly signed.

 

There are some advantages namely simplicity and low costs in set up; ease of registering and de-registering the Investment club and tax advantages since income is treated as personal income, as it is a constitutive group, more or less like a partnership, or cooperative. Further, operating costs are minimal, with legal costs limited to obtaining the necessary license or permits; complete control because I am the sole owner of the investment club, I have complete control over all decisions.

 

However, there are also disadvantages, the main one being that such groups cannot buy property in the name of the group, but rather, a few people purchase the same, as trustees of the others.

 

Hence, the sole proprietorship is a risky form of investment club for its owner. Other disadvantages are unlimited personal liability because there is no legal separation between the trustees and the investment club. This risk extends to any liabilities incurred as a result of employee actions; hard to raise money since sole proprietors often face challenges when trying to raise money.

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