When starting a family business, it is natural to focus on the business itself: developing products and services, building customer relationships and turning to a profit. The legal structure behind the business deserves the same attention. Choosing the wrong structure can create difficulties when family circumstances evolve or new opportunities arise.
There is no one-size-fits-all solution. The best approach will depend on the family’s objectives and the nature and scale of the business.
Private Limited Companies
A private limited company is often the most familiar and appropriate starting point. Shares can be held by family members and transferred over time as part of a succession plan. A company can also have different classes of shares, which may be useful where some family members are actively involved in management, while others are intended to benefit economically without taking part in daily decision-making.
Bespoke articles of association and a carefully drafted shareholders’ agreement can help establish clear arrangements for:
- voting rights;
- restrictions on share transfers;
- dividend rights;
- the admission of new family shareholders;
- what happens if a shareholder wishes to leave the business; and more.
Limited Liability Partnerships
Unlike a company, an LLP does not have shareholders. Its members’ rights and obligations are instead governed largely by the LLP agreement. This makes a well-drafted agreement important, including provisions dealing with profit shares, decision-making, retirement, death and the transfer of interests.
LLPs are different to general partnerships, which are simply two or more people “carrying on a business in common” with a view to a profit. Unlike a general partnership, an LLP is a distinct legal entity and the members liability is limited; similar to a private company limited by shares.
An LLP may suit a family business looking for a partnership-style model while retaining the benefit of limited liability.
Holding Company Structures
A business may acquire additional companies, diversify into new activities or even expand into different geographical regions. In these circumstances, a holding company structure can provide greater flexibility. Under this arrangement, a parent company owns one or more subsidiary companies. Each subsidiary may operate as a separate business, hold specific assets or undertakes different activities.
This structure can provide greater flexibility when acquiring, selling or restructuring parts of the group.
Trust arrangements
In certain circumstances, shares in a family business may be held through trust arrangements for the benefit of future generations. Trusts can provide a framework for preserving wealth and managing ownership across multiple generations whilst helping ensure that assets are dealt with in accordance with the family’s wishes. Trust structures can be complex and should be considered alongside specialist legal and tax advice.
Family Investment Companies
A Family Investment Company (FIC) is often used by families who are looking ahead to how their wealth will be managed and passed on in the future.
Rather than carrying on the day-to-day trading activities of a business, a FIC is typically established to hold investments and other family assets. It can provide a structured way for wealth to be built up and transferred between generations, whilst allowing senior family members to retain an appropriate level of oversight and control.
For families considering succession planning alongside their business interests, a FIC can form a useful part of the wider ownership and wealth-planning picture, helping to facilitate the transfer of value to future generations without necessarily requiring founders to relinquish control immediately.
Which is most appropriate for your family?
The best structure for a family business will depend on practical questions such as:
- Who will own the business in five, ten or twenty years’ time?
- Who will be involved in running it?
- Should all family members be treated equally, or should ownership reflect involvement in the business?
- Is growth through acquisition part of the plan?
- Are there valuable assets that need protecting?
- Is the objective to pass the business to the next generation, or eventually realise value through a sale?
A founder who, for example, intends to transfer ownership to their children who actively work in the business, may require a different structure to a family preparing to look for external investors.
For that reason, structural planning should be tailored to the needs of the family and the business. Taking advice early can help ensure that the chosen structure remains practical and capable of supporting future change.
Get in touch with our family business team to discuss the issues affecting your organisation. Send an enquiry or call us on 0345 209 1000.
