Help regarding “Pooling of Money by Friends and Family in Trading”

Start a general partnership

No need to go with a limited partnership which requries state registration and costly lawyer fees to draft up the partnership agreement

You can get away with a general partnership for an investment fund, because yes you have unlimited liability in theory, but in reality interactive brokers will issue you a margin call before your account would ever go negative

With a general partnership you will only need 3 things

#1 employee identification number. Yes a partnership does not pay any taxes, all gains and losses flow thru to the partners, but the government still requires you to obtain an identification number so they can keep tabs on the partnership

#2 ficitious name registration (if you are going to use a different name for the partnership) - this is usually registered at your local county office, but varies by state

#3 partnership agreement - this can be drafted yourself - it's only when you try to set up limited liability partnership, do you need to get lawyers to make sure you are in accordance with all applicable laws to receive 'limited liability'. This partnership agreement will delinate the split of gains/losses, how to resolve ownership issues when a partner leaves or joins, etc

This is all you need to open a partnership account which would effectively 'pool' the money
 
Here is the collection of all the points which were posted over here, when I had requested for help regarding the "Friends and Family Money Pooling". Please go through the following compilation of your responses:

  1. SSN account is required, which a person shall hold & pay taxes. Others can pay their share of taxes.
  2. Form an investment club.
  3. Interactive Brokers (IB) friends and family account. It offers two types of account structures for individuals and small businesses:

    -> A Single Account and Friends

    -> Family Advisor Account for clients that wish to manage multiple accounts with one login.

    IB also has a Proprietary Trading Group Account where you and different individuals can trade together.
  4. Some of you had voted against this kind of pooling, especially “Maverickz” post as follows:

    Quote from Maverickz:

    One thing no one else has mentioned so I will. BEWARE of pooling money with family and friends. It never fails in these types of situations someone will get pissed and someone will get screwed.
    ………………………………………
    More...

    Thus, this point was really given an afterthought and we all do agree to it. However, we think that having an agreement might help sort things out. Moreover, we shall also think of having a majority vote’s count for investment purposes, just as we would normally do before investing in anything else. Besides that the sharing of profits or losses can be done on a "pro rata" share on the interests in the fund.
  5. Form a small hedge fund.
  6. Form an LLC, taxed as a partnership, for investment purposes, have things clearly defined and then open a trading account. It is considered similar to commodity pool, hedge funds, and investment club.
  7. Pooling via IB had more votes than via limited partnership considering the fact that IB is easier, less taxing, has lower startup costs and has no legalities (state registration, agreement) that go with the partnership.
  8. Other few ideas were to create shares as per the amount of money invested as mentioned by cdowis:

    Quote from cdowis:

    A few ideas.

    1. Create shares. One share for every $10k invested. Profits are distributed according to the number of shares.
    …………………….
    3. Have the account in a third party to whom the checks and account statements are sent. No one can withdraw money until the reporting date.

    Using this method, you should be able to use any broker. Just make sure that you can manage the trades even though your name is not on the account.
    ……………..
    More...
  9. Consulting various brokers and discussing with them the various issues and agreements of our pool. Consulting a CPA or tax lawyer regarding the taxes (a family trust or similar).
  10. Instead of a limited partnership, to go for a general partnership, as mentioned by Epiphany as below. It seems to have similar advantage of IB (lower costs and no legalities). It looks easy to set up and looks more structured and better than simply having a IB account for it has the advantages of both the broker (like IB) and the limited partnership.

    Quote from Epiphany:

    Start a general partnership

    No need to go with a limited partnership which requries state registration and costly lawyer fees to draft up the partnership agreement
    ……………………….

    With a general partnership you will only need 3 things
    #1 employee identification number. ……….
    #2 ficitious name registration …………….
    #3 partnership agreement - ………………….

    This is all you need to open a partnership account which would effectively 'pool' the money
    More...


After going through all the above, some queries remains as follows:

  • I think either a having an account at IB or a general partnership looks good at the moment as the Limited partnership has a lot of complexities. The general partnership has more votes from our side; however, please let us know of your final opinion. Thanks! :)
  • Quote from ProfitTakgFool:

    ................................
    Also, if all of your investors are family members I don't think their contributions count toward the 400k limit. You'll have to look that one up. Check out all the rules that fall under CFTC Rule 4.14. I think you'll fall under section 2a.
    ....................
    More...

    ProfitTakgFool, your post was really good, however, please explain the above. Thanks! :)
  • Moreover, how many investors can we have in our pool, without registering even if they are all family members? Is it under 15, i.e. is the maximum number one can have is 15? Thus, if 15 is the maximum one can have, so at $25,000 per person, we can have around $50,000 to $250,000.
 
Why not hire Mr. Murray Ruggiero as a consultant? You already have tremendous respect for him. He can give you the benefit of his many years of experience, and provide advice plus seasoned judgement in such matters. What he might charge for consulting like this, is a private matter between you and he; but I would expect it would come to, at most, one 8-hour billable day.
 
I did talk to Murray over this and he told me that he does not get involved in the logistics parts of the business due to legal issues. He has managers who trade his system and acts as a consultant to him. He only deals with the actual trading program part of it, the systems and money management overlays.

Moreover, he also mentioned that he can trade for 15 accounts at a time, but there will be separate accounts not a single combined one. Thus, I would not be able co-mingle funds and create a single combined account.

Since, no one could put in $100,000 to trade a trend following system; he could not provide me any more inputs on this issue, as this is not his expertise.

However, he did instruct me to buy Trend Harmony. I had informed him that I shall consider the offer, but I wish to first check out if I could develop something just as good by myself, if not then I would get back to him about it.
 
Seriously consult a securities lawyer, they can tell u all the pitfalls of this type of trading.

Most important, how will the relationship between the parties be affected, and what will u do if any of the following occur

you loose all the money

more than one person wants to trade the account

after u loose some money one party looses confidence and wants to take over the trading.

who decides what strategies to use to trade account.

what if opportunities in your trading vehicle diminish

what if there is an emergency, and one person wants his money out.

Best is consult a lawyer, write up a trading plan together. If ur able to write a trading plan that everybody agrees upon, u have passed step 1, consult a lawyer

These are some suggestions
 
Quote from The Jedi:

Seriously consult a securities lawyer, they can tell u all the pitfalls of this type of trading.

Most important, how will the relationship between the parties be affected, and what will u do if any of the following occur

you loose all the money

more than one person wants to trade the account

after u loose some money one party looses confidence and wants to take over the trading.

who decides what strategies to use to trade account.

what if opportunities in your trading vehicle diminish

what if there is an emergency, and one person wants his money out.

Best is consult a lawyer, write up a trading plan together. If ur able to write a trading plan that everybody agrees upon, u have passed step 1, consult a lawyer

These are some suggestions
More...

Thanks The Jedi, for the reply. A good one. :)
 
Quote from vhehn:

ib friends and family account.
More...

This is the best way to go, IMHO.

1- everyone has their own acct.
2- everyone pays their own taxes.
3- everyone can withdraw funds whenever they want, with no internal balancing with the other partners.
4- anyone can quit whenever they want to go trade themselves.

I do this now for my sister, niece, nephew, and a couple of friends. I don't charge them, since it costs me nothing to piggyback their trades on mine, and I do absolutely NO paperwork.
 
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