Fees and Administrative Expenses
Few accounting topics cause more confusion than the use of fees and administrative expenses. This is an attempt to clear up a few common misconceptions.
When a member makes a contribution to the club, it can be classified as either a payment or a fee. Payments are awarded units at the then prevailing unit value for the club. Therefore, total assets increase, the member's units and value increase and the unit value remains the same.
No units are awarded to a member whose contribution is classified as a fee. Therefore, total assets increase, but the number of units outstanding does not increase. Since unit value is computed by dividing the total value of the club by the units outstanding, the receipt of a fee contribution will increase the unit value.
There are two main reasons for classifying contributions as fees - 1. to attempt to spread the burden for certain administrative expenses equally among the partners, and 2. to assess a penalty against one of the partners.
Let's take the matter of administrative expenses. There is absolutely nothing wrong with spreading all these expenses in accordance with ownership, and thus eliminate the use of fees entirely. However, a club may well decide that certain expenses should be spread equally among members rather than in accordance with ownership. This is a matter of club preference, and should be decided by each club. If a club decides that it wants to spread the burden of certain expenses equally, it is very important that the amount of fees assessed and the expenses to which these fees will be applied be roughly equal. Otherwise, a real distortion in members' values occurs.  See my article on Payment vs. Fees at
Some clubs go to great lengths to keep funds for administrative expenses separate from funds for investment. In my mind, this is completely unnecessary. Having said that, however, there is nothing inherently wrong with using a bank account for administrative expenses and the broker's account for investments. If, as a matter of course, the club designates all funds going into the Administrative Checking Account as fees, it is very important to keep this account roughly equal to the expenses it will cover in one year.
I will take up the matter of the use of fees to assess penalties against certain members in a separate article.
I should also add that bivio plans to implement a feature that will allow certain expenses to be allocated equally among members, both for tax and financial purposes. When this is done, the need for fees will diminish greatly.
Rip West
Saint Paul, MN