Starting A Family Office: Key Considerations

As wealth grows, so too grows the need for effective wealth management. Often amassed during a lifetime of diligent and savvy work, those who achieve significant wealth seek to share the benefits of financial security with family while also ensuring that their wealth will be protected, will grow, and will serve generations to come. 

In addition to wealth management, family offices can be used for tax planning (including gift and estate planning), educating family members about their wealth, and initiating philanthropic initiatives in the most tax-efficient manner possible. For some families with complexly organized and sustainable wealth, a family office might be a useful tool to ensure wealth is managed and leveraged efficiently, effectively, and compliantly. 

Family offices often (but not exclusively) originate following a liquidity event or when asset diversification needs arise. When a family or person sells an interest in their business, thus creating a need to structure and manage the reinvestment of those proceeds in a formal manner, a liquidity event has occurred. Similarly, when profits from a family-owned business that are marked for reinvestment in portfolios outside the business are realized, a need for asset diversification arises. 

Types of Family Offices

Family offices take on various structures, depending on the needs and resources of a given family. In general, they can be placed into three buckets:

• A Single-Family Office (SFO) provides investment, tax, and legal services to one family.

• A Multi-Family Office (MFO), while similar to an SFO, provides services to multiple families to create economies of scale. MFOs offer less autonomy and control than SFOs, but their cost efficiency is an attractive upside to many families with wealth to manage.

• A Virtual Family Office (VFO) is an online-only structure with no physical footprint. Often, these VFOs will be connected through a common platform or intranet. VFOs are popular among families that require compliance and accounting services but do not need the entire slate of services provided by a full family office. 

Keep in mind that most family offices are cost centers, which means that family office–related expenses have a degree of deductibility that may be attractive to those considering founding a family office.

Governance

The founders of a family office tend to be the same individuals whose actions generated initial wealth for the family. Ultimately, most family offices employ a mix of highly skilled employees and third-party service providers to conduct the affairs of the family office. Throughout the operation of the family office, the founding family members will be highly involved, which only makes sense given that the office operates as an extension of their personal and closely held business assets. 

For ultra-wealthy families, it can be beneficial to form a board of directors and bringing on senior leadership. A board of directors could insulate family wealth from misuse, abuse, or incompetence of a single individual, and serve as a check against activity that might jeopardize the very wealth that makes a family office necessary. 

One of the main purposes of starting a family office is to ensure future generations of the family can inherit the wealth earned by the previous and current generations. A family office provides a means by which the younger generations may slowly learn about wealth management from highly qualified professionals who can groom younger family members for future caretaking of family assets.

Charging for Services

There is no best approach on how a family office should charge for its services. Family offices could charge an hourly rate, collect a management fee based on a fixed percentage of assets under management, or institute a fixed rate. However, some family offices establish a fee arrangement which resembles that of private equity structures that leverages carried interest. This is a lucrative method, as it closely aligns the interests of the family (higher rate of return) with the compensation paid to the family office.

Whichever method is used, documenting the service agreement is prudent to ensure complete transparency between various family members.

Entity Selection: LLC vs C Corporation

The most common entity selection for family offices is a limited liability company (LLC). LLCs offer high flexibility compared with other entity types and allow operating losses to be passed through to the owners’ personal tax returns. 

C Corporations have become more attractive options for family offices following the enactment of the 2017 Tax Cuts and Jobs Act (TCJA) and the 2025 One Big Beautiful Bill Act (OBBBA). The provisions of these two laws permanently disallowed deduction for miscellaneous itemized deductions under Section 212 of the IRC. Fees paid in connection with investment advisory fall under this category. C Corporations are excluded from the provisions of IRC Section 212, allowing the full expenses associated with a family office to be deducted.

Furthermore, the reduced 21% corporate tax rate applied to C Corporations following enactment of these two laws is likely the most favorable rate for family offices. Even in situations where long term capital gains are recognized inside the corporation, the statutory rate applied to C Corporations is still lower than the highest rate applied to individual earners (which could reach 23.8%).

There are notable drawbacks to C Corporations, however: income is subject to double taxation, and a corporate structure requires additional administrative and compliance costs that LLCs and partnerships aren’t subject to.

Simply selecting an entity type in and of itself does not guarantee the activities within the entity meet the definition of a trade or business. For that, it’s imperative to prove there is profit-seeking motive. Establishing a profit motive (and therefore meeting the definition of a trade or business) allows family office expenses to be deducted under Section 162. These expenses can offset gross ordinary income, and excess losses can be carried forward as net operating losses. Failure to meet the status of a trade or business means the expenses are otherwise deducted under Section 212, thereby only benefitting corporate partners.

Getting Started

If you think a family office is an effective option to manage your wealth, speak with a qualified tax professional at Evolved so that they can assess your specific situation, educate you on which structures are most advantageous given your circumstances, and build a family office that professionally manages, protects, and grows your family’s wealth for generations to come.