Warren Buffet raised 105’000$ from family members and friends and started a first investment partnership fund. It appears that he set it up in a simple and convenient way with minor costs, no admissions and few regulations. How would one setup such a partnership in Switzerland if he / she invests money of friends and family?
Also, later on he quit the partnership and transformed Berkshire Hathaway into a holding firm. Would such a vehicle be the equivalent to a Swiss holding?
Thanks!
What Buffett did at the beginning was an investment limited partnership (he was the only general partner and all his investors were limited partners).
As far as I know, the equivalent in Switzerland is the Kommanditgesellschaften für kollektive Kapitalanlagen, but it is regulated by FINMA.
Kommaditgesellschaft is the direct swiss/german equivalent of anglosaxon limited partnerships. Be careful with what you wish for however, in such a partnership the general partner (you) has unlimited personal liability
AG or GmbH. The big disadvantage is that they have a legal personality (that’s a plus but:) and you’d suddenly start owing corporate taxes on all profits and capital gains and when you pay dividends out, the investors get double taxed on them too, so that’s why they’re rather unpopular as a vehicle to invest some wealth
For institutional investors, yes
Investing for friends n’ family however is specifically exempt from the law: “Diesem Gesetz nicht unterstellt sind insbesondere: … Investmentclubs, sofern deren Mitglieder in der Lage sind, ihre Vermögensinteressen selber wahrzunehmen”.
How far you can stretch the definition of that before you get busted by FINMA is given by https://www.admin.ch/opc/de/classified-compilation/20062920/index.html#a1a
Before you go all crazy and gamble other people’s money, have you even tried to beat the market yourself and survived different market conditions? It’s not 1960’s anymore. Investment landscape is vastly different and much more competitive. Most people are better off just sticking to the indexes. That’s what Buffet’s saying these days too. Don’t be stuck in the 1960’s and read some of his modern pieces.
Thank you for the warning words, it is not my intention to gamble away other people’s money. I’m fascinated by investing and still young enough to shape my career in every possible direction, hence it would be tremendous if I were able to connect investing with my profession in the future. What modern pieces of him / someone comparable do you recommend?
I’m very grateful that you share your knowledge with me and I’m eager to learn more!
This doesn’t mean that if my fund loses money (e.g. market downturn) I must pay the money back, right? In which cases am I liable? Assuming that I built a successful “investment club” and want to transfer it into a Kommanditgesellschaft, what criteria would I have to meet to get the OK by Finma?
I believe that Switzerland has the unique possibility to add the “holding” status (which is solely a TAX RELEVANT status) to AG’s GmbH if they meet certain criteria - then, double taxation is (reduced) / removed.
Thank you, that’s incredibly interesting and new to me. How would the accounting and reporting be done in that setup?
Kind regards
Merlin
Well, at the time Buffett specifically put this in his partnership. If the fund went down, he had to pay from his own pocket. No better motivation than skin in the game.
For sure you can remove this clause if you want, however if someone of your family is not happy because you lost money, he can sue the partnership, and hence you directly. If you lose the trial, you have to pay with your own money (and not the partnership money).
You have some options to minimize taxation:
Holding companies. If two-thirds of a company’s assets are financial participations in affiliated companies (at least 20 per cent owned, directly or indirectly, by the holding company), it will be fully exempt from income taxes at cantonal and municipal level. At the federal level, all dividend income from underlying investments is also tax-exempt. In many cases, the effective income tax is nil; it is almost never greater than 2 per cent. At cantonal level holding companies must nonetheless pay a capital tax on net assets at a flat rate of 0.001 per cent (as applied in the most competitive cantons).
Domiciliary companies. When at least 80 per cent of business income is generated abroad, a company qualifies as a mixed company, whereby only the part of foreign-source income attributable to management activities in Switzerland is taxed (at the same reduced rates as applied to holding companies). Up to 95 per cent of income can be tax-exempt as a result, on the basis of case-specific tax rulings. Such structures are used in particular by international trading companies.
Service companies. Such companies provide affiliated entities with assistance in administrative, financial, technical, or scientific matters. They require a minimum invoicing of these services for tax purposes, in order to achieve taxable profits equal to at least 5 per cent of expenses. Case-specific tax rulings can be obtained.
Principal headquarters. Favorable tax rulings are also provided to principal structures acting as centers for international activities, whereby the Swiss company acts as the principal in a commissioner or contract-manufacturer structure. Principal headquarters take on operating risks and the legal ownership of products in addition to management, control, and administrative functions. Profits from foreign affiliated companies are tax-exempt in Switzerland.
Finance branches. Generally designed as subsidiaries of foreign holding companies, finance branches deal with lending, cash management, foreign exchange hedging, netting, and reinvoicing. There is a minimum funding requirement of CHF 100 million (USD 82.6 million). Reduced tax rates also apply.
Source: http://www.libinst.ch/publikationen/Bessard-Swiss-Case.pdf
I’d recommend not Buffet’s, but books of Burton Malkiel - especially Random Walk Down Wall Street. It will really make you think twice before you’ll start picking stocks.
PS. There are some other books, that I’m willing to share with you, if you’d like.