When Should Club Members Be Allowed to Join and Leave?
by Douglas Gerlach

Q. We have formed our investment club five months ago and have already invested in three different stocks. I would like to get some information regarding bylaws and operating philosophies, such as when and how should a partner be allowed to leave the club? When should new members be allowed to join? Any help you can give in this area would be most helpful.

A. The short answer to both of your questions is "anytime!" For most clubs, it's fairly common to have members depart the club for various reasons, or for club members to withdraw part of their holdings to cover some financial need (such as college tuition). Clubs should also be prepared to welcome new members to the club from time to time. It's important that your club's operating procedures set out clear policies for handling both new and departing members.

As far as withdrawals, it's a good idea to discourage members from "trading" in their club account, pulling out money and then redepositing it later on. Your bylaws should try to limit these types of transactions -- club members should consider their investment in the club to be a long-term endeavor.

Having said that, there will be cases where members should be allowed to have access to withdraw funds from their club account. Besides college tuition, a member may need funds to purchase a house, or start a new business, or pay for medical bills. There is no reason to prohibit members from withdrawing funds for cases like these or forcing them to withdraw altogether.

In order to balance the members' need of access to the money they've invested, as well as the club's need to a steady and growing base of capital, most clubs try to inhibit withdrawals without over-penalizing the member. The standard practice is to require members to pay a withdrawal fee (usually 3 percent or so) or the actual costs of paying out the member (such as commissions for selling stocks) whenever they withdraw some or all of their funds. In addition, most clubs set a waiting period of 60 days or so before they make a withdrawal payment to a member, to give the club a chance to raise cash for the withdrawal.

If you allow members to depart without a provision for adding new members, eventually your club would dwindle down to zero members! Most clubs add members whenever they find qualified candidates, up to the point where their club reaches the maximum numbers of members according to their partnership agreement. If you use the unit value system of club accounting, there's no problem with adding members at any time, without requiring a "buy-in."