Family Holding Company
A family holding company is a legal entity established by a family to manage their wealth and assets together. It can provide many benefits compared to individual wealth management. In this article, we give an overview of what a family holding company is and the advantages it offers. We also provide a step-by-step guide on how to setup a family holding company, look at how much it can cost to do so, and discuss where you should incorporate. We end by answering the question of whether you should set up a family holding company.
Table of Contents:
- What Is A Family Holding Company?
- Advantages Of Starting A Family Holding Company
- Asset Protection
- Estate Planning
- Tax Optimisation
- Increased Control Over Assets
- Improved Cooperation
- How To Setup A Family Holding Company
- How Much Does A Family Holding Company Cost?
- Incorporating In Your Home Country
- Incorporating In A Tax-Friendly Offshore Jurisdiction
- Should You Set Up A Family Holding Company?
What Is a Family Holding Company?
A family holding company is a type of business entity that is created and owned by a family, with the purpose of holding and managing their assets. Technically, there is not much difference between a family holding company and an ordinary holding company other than the fact that the directors/members of the company all belong to the same family.
This type of company is designed to provide a centralized and protective legal structure for holding and managing family assets under one umbrella. A family holding company can hold a wide range of assets, including real estate, stocks, bonds, mutual funds, private equity, and even subsidiary operating businesses.
Advantages of Starting a Family Holding Company
A family holding company provides many benefits, including:
One of the main benefits of a family holding company is that it can help protect the family's assets from potential creditors, lawsuits, or bankruptcy. Trading companies operating in high-risk sectors are at risk of lawsuits and other claims against their assets. By transferring the assets of separate operating companies to the holding company, the risk of claims significantly decreases, as the holding company does not directly engage in high-risk activities itself.
A holding company can also be used to protect other assets belonging to individual family members. When a family member transfers ownership of their assets to the holding company, they effectively place a legal barrier between themselves and the assets, nullifying the power of creditors to directly claim against them.
Family holding companies can be used to pass on assets to future generations in a more tax-friendly and efficient manner. By keeping the assets in the family holding company, and providing the next generation with controlling shares in the company instead of directly handing them the assets, inheritance taxes can be greatly reduced or negated completely. It also removes the need for a complex will & testimony and arduous probate procedures.
A family holding company can significantly improve tax efficiency by lowering the overall tax liability that you would otherwise have to pay in a personal capacity. Incorporating a family holding company in a low corporate tax jurisdiction like Delaware or Wyoming can minimise income tax, capital gains tax, and inheritance taxes (as mentioned above). The assets can remain in the holding company for generations which means individual family members can avoid paying personal taxes on the assets.
Increased Control Over Assets
Making use of a holding company to manage your family’s assets and investments allows you to retain control and decision-making power over how they are used. At the same time, you get to enjoy the advantage of limited liability protection that a corporate entity provides. On the other hand, handing over your assets to an investment manager would result in losing much control over how the assets are handled while still being exposed to personal liability.
A family holding company brings about family cooperation through managing your assets together in the most efficient way possible. By pooling your portfolio in a holding company, you can increase your diversification and make more informed decisions with the combined strategic work of various family members. The larger source of funds will enable you to invest in financial instruments that may not have been possible individually, and lead to overall greater returns at lower risk.
How to Setup a Family Holding Company
The process for setting up a family holding company is quite straightforward and does not differ in essence from setting up an offshore holding company. The exact steps and requirements vary in different jurisdictions, but generally includes the following:
Step 1: Determine the Purpose and Objectives of the Holding Company
Before setting up a family holding company, it's important to determine why you want to create one and what its purpose will be. A family holding company can serve a variety of purposes, including asset protection, estate planning, and tax optimisation. By clarifying the objectives of the holding company before you begin, you can ensure that the company is set up in a way that best meets your family's needs. Knowing the purpose of the company will also help to decide where it is best to incorporate it and the type of legal structure it should have.
Step 2: Decide the Type of Entity and Where to Incorporate
Once you have determined the purpose of the holding company, the next step is to choose a legal structure for the entity and the jurisdiction in which you will set it up. This will depend on various factors, including the family's tax requirements, investment goals, and the level of privacy and asset protection they desire. Some popular legal structures for family holding companies include limited liability companies (LLCs), corporations, and limited partnerships.
Step 3: Consult with a Legal Expert
Next, you need to obtain professional advice and support from a lawyer and/or accountant when setting up a family holding company. They can help you navigate the legal and tax requirements involved and make sure that the company is set up in a way that meets your family's needs.
It is a good idea to do the preliminary research and decision-making processes outlined in steps 1 and 2 before consulting with an outside professional about setting up your company. This will allow you to come to the first meeting prepared, with at least a basic idea of what it is you want. It will facilitate the process and make your lawyer’s job much easier. It will also decrease the overall cost of legal fees as you would have done the necessary groundwork yourself. The legal professional can discuss with you whether the type of structure and jurisdiction you have selected is indeed the most appropriate to accomplish your objectives or if you need to rethink these and incorporate elsewhere.
Step 4: Prepare and Submit the Documents for Incorporation
In partnership with your lawyer, you will prepare and submit the documents required to officially register the holding company. The requirements depend on the type of entity chosen and where it is incorporated, but may include some of the following:
- The company’s name (in accordance with all relevant naming requirements in the chosen jurisdiction).
- Information about the shareholders/members and directors/managers, which may include full names, proof of identification and proof of address.
- Memorandum and Articles of Association.
- Information on any subsidiary companies and the assets they hold.
- Shareholder/management structure of any subsidiaries.
- Information on the company’s authorised capital and issued shares, as well as those of subsidiary companies.
These documents would have to be submitted to the appropriate company’s Registrar in the jurisdiction in which you incorporate and you will then need to wait for approval. Once the application has been approved, the company is officially registered as a separate legal entity.
Step 5: Open a Company Bank Account
Once the company has been registered, it is recommended to open a separate company bank account. While this step is not mandatory, there are several good reasons for doing so, including:
- Financial Organization: A separate bank account allows for clear and organized record-keeping of the company's financial transactions. This makes it easier to track income and expenses, as well as prepare financial statements for tax purposes.
- Legal Protection: Separating the finances of the holding company from personal finances provides a legal barrier that can help protect personal assets in the event of a lawsuit or other legal action.
- Improved Transparency: A separate bank account can provide greater transparency in the management of the holding company, making it easier for family members to see how funds are being used and making it easier to make decisions about future investments.
How Much Does a Family Holding Company Cost?
The cost of setting up a family holding company is highly dependent on where you decide to incorporate, the type of business structure you choose, and the services you require from your legal professional and other experts. The filing fee itself to incorporate a company in a corporate-friendly state like Delaware is no more than a few hundred dollars, but you can expect to pay a few thousand dollars in total including additional costs like legal fees, as well as ongoing maintenance costs.
When determining where to set up your family holding company, the first decision is whether to incorporate in your home country or in a tax-friendly offshore jurisdiction. There is no right or wrong approach here, as each option has its own advantages and will suit the needs of different families looking to set up a holding company.
Incorporating in your home country
For many families, setting up a holding company in their home country makes the most sense. This allows for easy access to the company's assets, as well as a level of familiarity with the legal and regulatory system. It is also generally more affordable to incorporate a company in your home country.
The downside is that it probably won’t give you access to the same kind of tax benefits and privacy that an offshore tax haven would. While the company will still provide limited liability protection, the degree of asset protection it offers is also likely to be inferior to that of an offshore jurisdiction. If you are a US resident, these issues can be mitigated by setting up the company in one of the more corporate- and tax- friendly states like Delaware, Nevada, or Wyoming. This effectively gives you the “best of both worlds” (the asset protection and tax advantages of an offshore tax haven with the simplicity and affordability of incorporating domestically).
Incorporating in a tax-friendly offshore jurisdiction
Many families, especially those with a higher asset value to protect and a greater need for tax efficiency and privacy, rather opt to incorporate their family holding company in a favourable offshore jurisdiction. There are several well-known offshore tax havens for company incorporation, which provide enhanced tax benefits, powerful asset protection, and additional layers of privacy. To name but a few options (in no particular order):
- British Virgin Islands
- Cayman Islands
- Hong Kong
- Isle of Man
This is by no means an exhaustive list, as there are many other jurisdictions which lend themselves well to an offshore family holding company structure. It is also difficult to determine the single “best” jurisdiction for incorporating a family holding company, as the ideal choice will depend on the specific needs and requirements of the family.
While offshore incorporation clearly offers many benefits, it comes with some downsides too. Firstly, incorporating in an unknown territory can be daunting and complicated. You will be less familiar with the regulatory environment and will need to rely more heavily on expert legal support. Secondly, it is likely to be more costly to incorporate and maintain the company, partly due to the higher legal fees for the level of expertise and assistance you will require.
Overall, deciding whether to incorporate a family holding company domestically or offshore, and in which specific jurisdiction in the case of the latter, comes down to personal preference and the needs and financial means of the family. If you are unsure which is best for your specific case, it is best to consult with a legal professional who can help guide you on the appropriate course to take.
Should You Set Up a Family Holding Company?
Whether a family holding company is right for you depends on factors such as the nature and value of your assets, your investment goals, and your family's financial situation. If you're looking for a way to manage and protect your family's wealth and want to work together to achieve common financial goals, a family holding company may be a good choice. However, it's important to carefully weigh the benefits against the costs, and consider all the implications of setting up a holding company before deciding to do so. It is also a good idea to look into other financial tools and vehicles which may be better suited to accomplish your objectives. Finally, it's always recommended to consult with an experienced financial advisor, attorney, or accountant to ensure that you make the right choice for your and your family's unique situation.
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