Partnership Agreements- The treasurers' perspective (Withdrawals)
I'm the treasurer of a new club and we are in the process of writing our partnership agreement.   Specifically, as treasurer, what issues should I be most concerned with?
Member Withdrawals and the Terms of Payment are probably the two most complex issues addressed in a partnership agreement.     This is primarily due to the complexity of the tax code related to
partnership distributions.    Failure to understand these issues may lead both the club and/or the withdrawing member to realize taxable income long before it is really necessary to do so.
There are two types of Member Withdrawals......partial and complete.    The tax code treats these two types of distributions differently.     Rather than going into all of the specific details here, let me point you to a couple of documents on the NAIC web site that might help you understand this complex issue.    First,  you'll find a treatise that I wrote some time ago about withdrawals at .    Once there, pay particular attention to Question's #12 through #16.   Also, the article at provides some insight on partial withdrawals.   
A typical partnership agreement may require notification of the withdrawal from the withdrawing member in the following fashion.   "WITHDRAWAL OF A CLUB MEMBER: Any club member may withdraw a part or all of his interest. He shall give notice in writing to the secretary. His notice shall be deemed to be received as of the first meeting of the club at which it is presented. If notice is received between meetings it will be treated as received at the first following meeting. In making payment the valuation statement prepared for the first meeting following the meeting at which notice is received will be used to determine the value of the club member's account."
In the case of a partial withdrawal, most clubs determine that a payment may be made in cash, securities, or a mix of each at the option of the partner making the partial withdrawal.   Where securities are to be distributed, the remaining partners get to select the securities.  The reason that the withdrawing partner is given the choice of cash or securities, in the case of a partial withdrawal, if the withdrawing member were to receive securities that have appreciated, he/she may realize taxable gains sooner then if cash was paid in the withdrawal.
Since the  tax code treats total withdrawals differently, a totally withdrawing member is not susceptible to this same possibility of the acceleration of taxable income.   A typical partnership agreement might go on to say "In the case of a full withdrawal, payment may be made in cash or securities or a mix of each at the option of the remaining partners".     Again, where securities are to be distributed, the remaining partners select the securities.   If the withdrawing partner immediately sells stock given to him/her in a total withdrawal, they will realize the same tax consequences as if they had received payment in cash.   On the other hand, the withdrawing partner may choose to hold the stock and, therefore, defer the realization of any gains from the withdrawal until the stock is sold.
Also, many clubs establish a withdrawal fee in their partnership agreement, usually somewhere in the neighborhood of 3% of the amount being withdrawn.   This fee serves two purposes.   First, it reimburses the remaining members for the eventual cost of liquidating securities and/or the cost of transferring securities as part of the withdrawal.   Secondly, a withdrawal fee discourages members from treating the club as another bank account, simply putting money in and then taking it right back out on a whim.
NAIC and the Motley Fool have the partnership agreements of several clubs posted on each of their web sites.  I recommend that you take a look at some of those agreements to get a idea of  how other clubs set up theirs.   Click here to go to the search facility on the NAIC web site.  Once there, type in "partnership agreement" and a whole list of available partnership agreements will pop up for you to review.
 In any case, IRS Publication #541 - Partnerships should be your 'official' guidance about these partnership tax issues.
As always, feel free to send you questions, comments, and suggestions to Trez_Talk.
St.Louis, Missouri