Business owning families face the simultaneous challenges of running a business while planning for the future of the family and the management of family capital. While successful businesses benefit from disciplined operations and strategic planning, the management of family wealth is often eclipsed by the needs of the business and delegated to trusted business executives. Knowing when to separate these functions and how to make a smooth transition can increase the chances of long-term financial success and reduce unnecessary exposure to legal and privacy risks.

As the family business grows, most business-owning family leaders look to their trusted business executives to take on unofficial roles managing the family’s financial needs. The family probably doesn’t think of themselves as wealthy initially, but as liquid wealth increases beyond what is required for the business, the trusted executives begin to function like a family office inside the family business. Families take different approaches to managing their personal assets within the operating business. In some cases, the family asks their company CFO or Treasurer for limited help with estate and income tax issues or investment advice. In other situations, there is a defined internal department within the business that functions as a shareholder relations office.

Some families even physically separate that department from the main business yet still manage it as a division of the operating company. Regardless of how a family initially manages their assets, there are standards that apply to all business-owning families seeking to preserve wealth across multiple generations:

1. Intentionally organizing and integrating all personal financial affairs so that tax strategies, investment policies, and estate plans are not developed in a vacuum with unintended costs and risks is critical.
    
2. Organizing this information within a discrete department to protect the privacy of individuals and restrict confidential information to a limited number of people is a best practice.
    
3. Selecting or establishing an entity that is separate from the family business is a fundamental risk management strategy. While factors of cost and convenience often make it seem efficient to manage personal financial affairs inside the business, this can cause unnecessary exposure to many risks.

This blog post is excerpted from the new FOX white paper, Managing Family Capital Generated by the Family Business, which looks at the advantages of separating a family's wealth management from their operating business.