A Diagnosis for Tardiness and Equality
I am the treasurer of an investment club that's about 3 months old. We have ten members and ideally would like each member to own 10% of the club. The problem is that some members have paid a $5.00 late fee, which has changed their ownership to slightly more than 10%. The other members don't think it is fair that they now own less than the penalized members. While I realize that our percent ownership will change as we gain and lose members, I can't convince the members that the difference is insignificant. They insist we correct this so all members own an equal 10%. I use NAIC's Club Accounting software to keep our books, and if I enter the late fee as a member "Fee" instead of a member "Payment," it appears to correct the problem. I am not sure if this is the correct way to do this and am afraid it could have bad consequences at tax time. What should I do?
- Guy G.
Dear Guy:
Your experimentation with NAIC Club Accounting software has yielded the proper results: "late fees" paid by members should indeed be recorded on the books as "fees" and not payments. (Of course, reading the documentation that came along with the software could have provided the same results with little or no tinkering!) The basic rule to remember is that a "payment" purchases units for the contributing member, while a "fee" does not purchase units.
Member late fees are probably the most common type of fees that are levied by clubs, but some clubs collect fees for other investment-related expenses as well. These might include NAIC membership dues, the purchase of club software, postage for club mailings, or subscriptions to magazines or data services. (I should point out, however, that there's nothing wrong with recording member contributions for these expenses as payments if you wish.)
As for your other club members and their insistence on equal ownership, I'm glad to hear that you're on the enlightened side of the argument. In fact, I think it's an unhealthy obsession to worry about maintaining equal ownership in your club. After a few years, a successful club with an equal ownership proviso will find it much harder to recruit new members, and, as you've discovered, late payments and fees by members throw a wrench into the equal ownership works.
In your club's case, you'll now find that the members who have paid fees will see those sums included in their tax basis in the club. A member who has paid a late fee will have a larger tax basis (will have slightly lower returns) in the club than members who were not assessed a penalty. Even though their percentage ownership in the club may remain the same, the notion of true equality within the club has gone out the window.
- Doug
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