Choosing the Right Structure for Your Family Business

Setting up and structuring a family business involves several key important factors, including choosing the appropriate legal structure, addressing family governance, succession planning, and tax implications.

The options in terms of the legal structure of your family business are extensive and it is important to structure the business to suit your family business needs and depending upon the size and long-term goals of your family business and mitigate any potential risks.

Sole Trader

This option is fairly simple to set up and means that one person is in complete control of the operations and management.

This option would be more suited to smaller entities and may not be appropriate for a larger organisation. This option also means unlimited personal liability for the sole trader and so there is more exposure to risk for the person in control.

Partnership

A Partnership is fairly simple to set up and this ensures shared responsibility between partners with clearly defined objectives.

A well-structured partnership agreement is essential in this scenario and trust between partners is essential.  Partners can maximise their financial resources, skills, and expertise to ensure the smooth running of the Partnership with the workload, management responsibilities, and decision-making shared among partners.

The management and operations can be dealt with as the Partners see fit as partners can determine their own roles and responsibilities without adhering to a rigid corporate structure.

It is important to note that Partnerships are subject to Joint and several liability and so you could find yourself taking responsibility for the actions of another partner since the actions of one partner can bind the whole partnership. Partners are personally responsible for the business’s debts and obligations. This can put personal assets at risk.

It should also be considered that disagreements can arise among partners in relation to business decisions, which can lead to disputes and as a result can have a negative impact on the family business.

Succession planning is also an important consideration as a partnership may dissolve upon the death, withdrawal, or bankruptcy of any partner if the correct provisions are not in place.

Limited Liability Partnership (LLP)

This option is similar to a Partnership but the partners enjoy limited liability using this structure.  There is also a degree of flexibility in management.

LLP offers a mix of limited liability protection and management flexibility, which can be beneficial for certain types of businesses. However, the structure comes with increased regulatory burdens and public disclosure requirements that need to be carefully considered, e.g. the requirement to file accounts.

A LLP is also a separate legal entity, which offers certain benefits.

In terms of succession planning an LLP continues to exist even if the membership changes, providing continuity for the business.

An LLP offers a mix of limited liability protection and management flexibility, which can be beneficial for certain types of businesses. However, the structure comes with increased regulatory burdens and public disclosure requirements that need to be carefully considered.

Private Limited Company (Ltd)

Setting up a company is another option available and this option means that the company is a separate legal entity with limited liability and potentially making the business more attractive to investors and lenders.

With a company comes certain regulatory requirements and annual accounts and company returns must be filed with Companies House.

The private limited company structure in Scotland offers significant advantages, particularly in terms of liability protection, credibility, and potential tax benefits. However, it also involves greater administrative responsibilities, costs, and public disclosure requirements

The above is an overview of some of the options available when considering how to structure your family business, however, it is important to seek the correct Legal and Financial Advice as soon as possible to ensure the correct legal structure and to optimise tax efficiency and financial management with a view to ensuring long term success and sustainability.

To discuss your family business real estate, please contact Jennifer Davidson, by email jdavidson@gilsongray.co.uk or visit our service page.