Family offices often manage a wide array of assets and have to ensure enough liquidity within the business to meet the needs of the family while managing the company’s accounting well enough to avoid tax run-ins with the IRS. They also need to ensure wealth within the business for generations to come.
Like any other industry, family offices have their own unique business challenges to be aware of.
1. Increased accounting and reporting complexity
Family offices are arguably among the most competitive businesses. It is very common for owners of family businesses to explore a variety of income-generating streams to encourage ample liquidity within the business to serve the purchasing needs of the family while ensuring generational wealth for future successors. This typically means that family offices invest in a number of income-generating ventures such as private equity funds, hedge funds, direct investments in businesses, property ventures, and global markets. This can become a complex mesh to account for, as each investment type may be subject to different tax rules. Add to this, multi-state taxes for family offices that operate across states, and you could be faced with an accounting conundrum. The challenge becomes greater when you consider that most family offices make use of manual accounting methods, which simply leaves too much room for error, given the intricacies that might be involved in accounting for various income streams. It is highly advisable for family offices to make use of accounting software like Netsuite to help keep precise records of transactions, to make the tax-filing process smoother.
2. Data security
Large family businesses often control an enormous amount of wealth, and for this reason, are at risk of hacking. While it is imperative to protect personal privacy, family businesses also have to protect clients’ assets. Because of the great risk of a data breach within this business structure, family business owners have to employ only the best means of cloud data protection to allay any anxieties of their clients and ensure continuous partnership with investors.
3. Generational change
Due to the fact that the age groups within the management team of a family business, may be vast; it is not uncommon for family businesses to experience decision and business-direction-related challenges, at some point in the business life cycle. Older family members may prefer investment methods that have worked for many years, while younger generations may have a greater appetite to expand the business through newer investment methods. It is important that family offices be equipped to manage the range of demands and expectations from different generational groups within the organization. A successful way in which to navigate this is through creating business intelligent graphs and reports to make predictions on the outcomes of certain financial ventures.
4. Staying abreast of technology
While technology offers solutions to a number of challenges faced by a family business, it doesn’t mean that once a business has been set up with different software solutions the business can let its guard down. If we consider how fast technology advances, and how often new and improved functionality is offered within the tech space, it is imperative that family office businesses constantly review their systems to ensure that they don’t fall behind or miss out on features that can better serve their business.
5. Scaling staff resources
Family businesses, like any other business, must ensure that they always have an updated list of skills their business requires. This is not only to avoid unnecessary expenditure in the form of hiring friends and family in need of work but also to ensure that the business is remaining true to its goals and mission. Family businesses often need to employ the expertise of third parties such as tax and accounting professionals, business analysts, and more. Keeping the staff head-count to only those required to perform a family business’s core mission, means the business will save in costs for unnecessary employees, but also have an available budget to partner with third parties when they require professional experts whose capabilities complement the strengths of the in-house team.
At Fusion, our CPAs are trained to set up accounting software to best serve the needs of your family business, while also offering sound business advisory services that ensure manageable growth and business longevity. Our aim is to keep your books clean for a smoother tax filing process and to stimulate business growth.
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This blog article is not intended to be the rendering of legal, accounting, tax advice or other professional services. Articles are based on current or proposed tax rules at the time they are written and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.