When you run a family business, asking employees to help you out with the occasional personal matter would appear to be a perfectly reasonable thing to do. Maybe you’re crunched for time and ask an assistant who manages your business travel to book the flights for your upcoming family holiday. Or you ask the CFO if they could do your taxes or your HR person to look at life insurance for family members.

Taken individually, such requests might seem like no big deal. But they often have a way of snowballing, so that over time your employees may be handling a number of your family responsibilities: organizing events, making personal bill payments, arranging intrafamily bank loans, working with your personal lawyers, even providing investment advice — all duties usually associated with a dedicated family office.

This common arrangement has a name: the embedded family office. “Often an embedded family office arises on an ad hoc basis,” says Jonathan Hommer, Wealth Strategies Advisor, Head of Family Office Planning at Bank of America Private Bank. “There are services the family needs, and somebody at the business starts providing them.” This is something quite different from the traditional family office, which can be either set up by the business as a separate entity or outsourced to a third party. Either way, it exists to serve the family’s personal needs, and in addition to investments, can include managing real estate holdings, trusts and more.

Embedding your family office within your business can sometimes work well — for a while, at least. “But ultimately, as the business grows and the family’s needs evolve, it’s not good for the business, and it’s not good for the family,” Hommer says. While conducting your business in this manner may develop organically and seem efficient, it can potentially expose the business and the family to financial, regulatory and legal risk, among other problems. Here’s how you can determine when a separate family office is called for and what solutions might best fit your situation.

The downside of mixing family matters with your business

These are the most prominent issues associated with having your employees manage your personal matters:

• Lack of expertise. Having someone from your company handle personal matters may require a different set of qualifications and experience, notes Charles Simonds, Family Office Consultant at Bank of America Private Bank. “Someone with strong accounting skills when it comes to a business may not be aware of the accounting and tax considerations of family wealth.” 
• Audit risk. With the IRS giving greater scrutiny to the returns of many high-net-worth families, it’s important to establish clear lines between business and personal expenses. For example, using the company jet for personal travel can jeopardize the tax benefits available to the business. Keeping these functions separate requires careful accounting by someone with a specialized background.
• Continuity after a sale. Say the sale of your business is pending. “If you’re running personal services through the business, that will affect the deal and need to be negotiated,” Hommer says. “The acquirer may expect that key employees will continue with the company, but they may also be providing important services to the family.”
• Exposure to legal liability. “Suppose a business employee organizes an event at your vacation home and a guest is injured,” Hommer says. “An attorney might include the business as an organizer of the event in a lawsuit. Even if the business is eventually dismissed as a defendant, it can be drawn into a long and expensive legal process.” 
• Staff management. There’s a matter of fairness to company employees who take on this personal work as well as to business partners who may not be able to utilize the staff for help, notes Joshua Rief, Family Office Strategist at Bank of America Private Bank. “If you own the company, an employee may certainly see their primary obligation as working toward your benefit as the owner, making it easy to ask them to take on additional tasks or responsibilities for your family as an extension of what is already done for the company,” he says. “That may not be a sustainable position if there are other stakeholders or if their work for the company suffers as a result.”

Having completed your review and assessment, the next step is to evaluate which tasks need to be kept in-house and which can be outsourced. If some services continue to be provided by your business’s employees, you may want to create a formal contractual arrangement between the business and a new, formal family office entity.

Alternatives to keeping the family office in-house

Depending on what your review finds, you might want to talk to your advisor about whether to outsource some professional, technical and administrative roles and tasks — or whether to establish and maintain your own dedicated family office. Keep in mind that establishing and maintaining a full family office is expensive, notes Simonds. “The average cost is $3 million to $5 million a year,” he says. In addition, there are tax considerations for structuring a family office as a separate business. It generally makes more sense for larger family offices.

For many small and medium-sized family-owned businesses, a better option may be to outsource just a portion of the services your family needs. With this hybrid approach, you might bring in an outside firm to handle asset management and tax and estate planning while continuing to have your staff help with bill pay and travel arrangements. Hiring a trusted outside firm can provide you with greater privacy and security for certain tasks as well as continuity for the family in the event the business is sold.

A third possibility is to join a multifamily office. These increasingly popular arrangements provide the same full range of services as a dedicated family office, from wealth planning and property management to philanthropy and estate planning, but because multifamily offices oversee the personal affairs of a number of families, costs are lower.

There’s no single accepted definition of what a new arrangement should look like. “Each family office is unique in how it is structured and what services it provides,” says Rief. “It’s best to take the deliberate approach of thinking about the specific functions you want your family office to handle, whether they are better provided in-house or should be outsourced, and how those functions and their fulfillment may need to change and flex in the future. That way, you’re more likely to find solutions that fit both your business and your family.”