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In the UK, the private company structure is mostly associated with people who wish to set up a trading business that will then go on to make a profit. However, here we’re going to explore family investment companies, a subset of companies where trading activity takes a backseat to protecting and growing family wealth through investment (in assets such as property).
As the name suggests, family investment companies are generally set up by and for families, with the directors and shareholders all being members of the same family.
A family investment company facilitates the passing on of wealth to different members of a family (such as children and grandchildren) via shares in the company.
It is a type of business that invests, not one that takes part in any actual trading activity. Rather than trading, the company will often hold investments, properties (residential and commercial), and cash.
A family investment company is not a specific entity of a limited company, like a private company limited by shares, private company limited by guarantee, limited liability partnership, or private unlimited company.
Instead, they are typically a private company limited by shares or a private unlimited company that has been set up for the purpose of being a family investment company.
This means that, whilst they are registered with Companies House (the UK’s registrar of companies), the only way to truly know if a company is a family investment company would be to ascertain that everyone involved in the company was related and investigate the articles of association (this being the document that outlines how the company is going to be run).
Family investment companies are commonly seen as an alternative to family trusts.
What is the purpose of a family investment company?
By setting up a family investment company, a parent, parents, or other heads of a family are able to manage family assets in a way that is tax efficient and allows succession planning.
It has a number of benefits, including:
- The structure is flexible, meaning that it can be tailored depending on a family’s requirements
- It offers various tax advantages relating to capital gains tax, income tax savings and inheritance tax
- It allows a family to retain full control over investments and how assets are distributed
- It enables the preservation of assets for a family’s future generations
There are, however, some downsides to family investment companies. These include:
- Complications in instances of divorce, death, adding new family members, and adding minors
- The setup process can be complex if the family has particularly nuanced requirements, meaning that professional assistance may be required
- Tax efficiency can be lost if income is distributed regularly. Because of this, it is a model primarily suited to people/families with large amounts of money who can allow investments to grow
How do you set up a family investment company?
As mentioned, family investment companies are often formed using the private company limited by shares or private unlimited company structures, so the process for forming a family investment company is the same as the process for forming these.
However, what sets a family investment company apart from a ‘regular’ company formed using these structures is:
Not a term commonly associated with limited companies, the founder(s) in a family investment company is the person setting up the company, such as a parent (or other head of the family). The founder would normally transfer cash or assets into the company via a loan. Other family members are then brought on board as shareholders.
Founders are the only directors in the company and will also be shareholders. During the formation process, you will not see the term ‘founder’. This role is specified through the fact they are being appointed as a director and through the type of shares they are allocated (see below).
The articles of association
Rather than use the Model articles of association, if forming a family investment company, you should use a bespoke set of articles of association. This is required to define decision-making powers, how profits are treated, how shares are to be transferred, and other internal company matters.
Drafting bespoke articles of association is a complex process; therefore, we recommend seeking professional assistance in doing this.
Different share classes
A family investment company will normally allot at least two different classes of shares with different rights attached to these classes. For example:
The founders’ shares could carry voting rights; however, they would not typically have rights to any capital growth.
The other family members could then receive shares that give a right to capital, but demonstrate no control in the company.
Whilst a shareholders’ agreement is not a legal requirement in a limited company, a family investment company should put one in place to clarify what the shareholders (family members) can and can’t do.
Like the articles of association, drafting a shareholders’ agreement can be complex, so we again recommend seeking out professional assistance to do this.
What else is required to form this type of company?
Other than these outliers, the formation process is the same as for a regular company limited by shares, or an unlimited company. This means, to register the company, you must provide:
- A unique company name
- At least one SIC code (you can choose up to four)
- A registered office address (this must be located in the UK)
- Director information, including name, service address, residential address, date of birth, occupation, and nationality (the company must have at least one director, and every person named as the director will be considered a founder)
- Shareholder information, including name, address, and information related to the shares that they will hold, including the class and nominal value
- Person with significant control information, including name, service address, residential address, date of birth, occupation, nationality, and the nature of their control
- The memorandum and articles of association
So there you have it
A family investment company is a company where, generally, all directors and shareholders are members of the same family, and rather than partake in trading activity, the company invests. This model can be a tax efficient way to safeguard and grow family wealth.
We hope you have found this post helpful. Please leave a comment if you have any questions.