There are many things to consider when making the decision to start up a family company, but one of the deciding factors is usually the financial benefits.
In family companies, directors and shareholders are usually the same people, and as such they can benefit from the company in various ways, for example the payment of remuneration, the provision of benefits or the distribution of profits through dividends.
There are three different stages at which the family can benefit financially:
During the years of trading
As the company is controlled by the family members, they have a certain amount of freedom in considering to what extent, and in what form, to withdraw profits. In order to make the most beneficial decisions the directors need to be aware of the comparative tax and national insurance cost of paying remuneration and dividends at different profit levels.
It is often beneficial to pay a small salary to the directors/shareholders with profits being extracted by dividends, and detailed advice should be sought from a qualified advisor before making a decision on the method of extraction to be used.
It is often of benefit for parents to employ their children in the family business, but they should be careful not to fall into the trap of paying less than the national minimum wage – it doesn’t matter if the employees are your children, the law must be complied with!
When the parents reach retirement age
Other financial benefits of having a family business can be realized when it comes to the time for either a sale of the business or for the older members of the family to move into retirement.
On retirement, the parents can make a gift of their shares to their children without incurring any capital gains tax. In most cases the company will have increased in value from the date at which it was set up, so there can be a substantial benefit to be had here.
The capital gains tax will fall then on the children when they eventually sell the business unless they too gift their shares on within their own family. However, this can be seen as a major cash flow advantage for many families, deferring any tax payable until some time into the future.
The government has made it very advantageous from a tax point of view to hold and then sell shares in a family business by way of entrepreneurs’ relief. The effect of the relief is to reduce the effective rate of capital gains tax from 18% or 28% to 10%. This now applies to gains of up to £10 million, so it really is a great advantage and not to be underestimated.
Death of a family member
One of the reliefs available to family businesses to reduce the amount of inheritance tax due when a family member dies is business property relief.
There are various conditions that have to be satisfied relating to length of ownership of shares and the type of business, but provided that these conditions are met, then business property relief can be given at 100% of the value of the shares transferred.
As many people now own a home which will take them over the inheritance tax threshold (and don’t forget that inheritance tax is a straight 40%!) this can be vital to the continuation of the family business after a family member dies.
So, as you can see, there are definite financial advantages to running a family business. There is also the satisfaction of striving together to run a business which supports the family and in which everyone is motivated towards the success of the business. This is a strong combination of positive reasons to go into business with your family.
If you’re convinced and you would like to go ahead with your own family business, I would strongly recommend that you get some good sound advice from a trusted advisor to make sure that you get the help you need to make your business a financial success for you.