Family Investments

By Author: John
Total Articles: 18
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What is Family Investment? Family Investment, Family First, Family wealth, or FIC are all terms referring to what family businesses are. A Family Investment Company (FICO) is a privately held company (sometimes unlimited), which is run and supervised by its board of directors (generally the parents).

The primary advantage of using a family business to create wealth is that the profits are treated as regular income by the company's policy. This has the benefit of making taxation easier for the business owner because the proceeds from the company's business assets are not taxable until they are distributed to the shareholders. The company may also provide a tax benefit to the shareholder if the business sells some of its assets and uses the proceeds to buy additional shares from the investors.

Family businesses have various advantages over other forms of investment. Most companies take into account the present and future economic well-being of the company when making investment decisions. This means that if the corporation's stock rises in the value of the dividends the directors will receive are subject to income ...
... tax at a higher rate than those received from dividends received from non-family members.

In addition, since most directors of family businesses are also owners of other companies, they have access to funds that other directors may not have. The ability to use cash reserves and short-term borrowing gives them an edge over other potential shareholders. These same factors also prevent them from becoming broke and leaving their creditors holding the bag.

The disadvantages of Family Investments includes the risks of dilution. If a large number of shareholders choose to sell their dividends before the company receives any cash, the overall value of the business may be reduced. Likewise, if too many shareholders sell their dividends before the company receives any income, the company can become inefficient because it has too few shareholders to draw on for capitalization.

Family Investments does not offer any flexibility regarding the ownership structure of the equity in the business. Once all shareholders of a company have sold their shares of the capital gain on those shares of capital becomes taxable.
If the company is still controlled by the original shareholder(s) there is no limit as to how many shares can be owned and no limit as to how much cash can be accumulated. These issues limit the ability of Family Investments to yield substantial gains and limit their attractiveness to small businesses that lack access to required funds.

The ability of a business to increase its assets is often based on the total number of assets owned by a business at one time. The number of family members who are shareholders increases the ability of the business to increase its assets. The more wealth a business has, the more it can borrow to expand its operations. The ability of the business to borrow is also limited by the amount of equity capital available to the family members.

The use of an initial transfer is very common in Family Investments. The initial transfer occurs when one or more of the family members makes a deposit in the company's checking account. The deposits are usually used for working capital purposes, for purchasing property, or for paying debts.
It is also possible to arrange an initial transfer where the entire savings are placed in a special savings account. This saves the trouble of having to produce income tax payments each month until the money is used.

Many Family Investments are structured to provide opportunities to diversify the portfolio. Investments in marketable securities like common stocks and marketable securities like bonds are the most commonly used tools for diversification. Investments in illiquid private equity and illiquid real estate can diversify the portfolio even further.

Investments in marketable securities include U.S.D.A. CDs, money market accounts, certificate of deposit (CD), bank overdrafts (CDs), some marketable securities like government bonds guaranteed by FHA, preferred stock (synthetic equity), and bank-owned property.

The basic structure of an Investment Partnership consists of five key players: The Family, the sponsor (the custodian of the partnership's investments), the Family member(s) who act as the representatives of the Family, and the Individual investors who act as the representatives of the Individual. The Individual investors can be family or friends who contribute to the partnership's investments or they can be other professionally qualified individuals.

Funds from the individual investors are held in pooled funds account while the Family's funds are invested in various marketable securities. A tax benefit is usually available if the funds in the pooled funds account are used for qualified higher-risk investments that are included in the sponsor's Individual Retirement Account.