Evolving Structure and Governance for Today’s Family Office
- Family offices vary widely in size and scope, but all benefit from strong governance that clarifies decision-making and aligns with the family’s values and goals.
- As families and their needs grow more complex, family offices must evolve in kind — requiring greater clarity, coordination, and accountability across functions.
- In this article, we explore how family offices can build and refine their structure and governance to stay effective over time. We share best practices for decision-making, working with external providers, and clarifying roles, and offer a framework to address common pain points and support ongoing improvement.
What makes a family office effective for the family it serves? Investment strategy and operational excellence are clearly important, but structure and governance provide a critical foundation. Clear roles, thoughtful decision-making, and alignment with the family’s values and goals can mean the difference between an office that supports a family across generations and one that falls behind.
These principles apply across the spectrum, whether the office is newly formed or long-established, lean or full-service.
Yet too often, structure and governance receive less attention than they warrant — developed informally at first, then reexamined only when the family grows more complex or challenges emerge. As family offices expand in scope or complexity, a thoughtful, adaptable governance framework becomes especially important to ensuring clarity, cohesion, and continuity.
Foundations of Effective Governance
At its core, governance defines how decisions are made, who makes them, and how information is communicated and acted upon. In a family office context, this includes everything from defining decision-making authority and oversight protocols to creating mechanisms for communication and conflict resolution.
Strong governance aligns the office’s work with the family’s values, supports multigenerational engagement, and enables the office to operate with accountability and transparency. While governance frameworks vary based on the size and complexity of the office, the following elements are broadly applicable:
- Clearly defined roles and responsibilities. A clear delineation of responsibilities — across family members, office staff, and external advisors — helps prevent confusion, promote accountability, and ensure that decisions are made efficiently.
- Alignment with family values. Governance structures should reflect and reinforce the family’s shared purpose, goals, and values, which may evolve over time and should be periodically revisited.
- Decision-making processes. Structured but flexible processes enable family offices to respond to changing circumstances while maintaining continuity. Offices should consider generational perspectives, voting procedures, and decision rights.
- Regular review and evolution. As the family’s circumstances shift — through changes in complexity, generational transitions, or major liquidity events — governance structures should be reviewed and adjusted to remain effective.
Integrating Outsourced Services
Many family offices operate with a lean internal team, relying on external providers to deliver essential services. These may include investment management, tax and accounting, financial reporting, payroll and bill pay, human resources, and technology — as well as estate planning, philanthropy, and risk management. While this model offers efficiency and flexibility, it requires thoughtful coordination and oversight to ensure that outsourced functions are working in concert and aligned with the family’s goals. Best practices for integrating external providers into the governance framework include:
- Clear contractual arrangements. Formalize the relationships by utilizing written engagement agreements that define scope, deliverables, timelines, data access, and escalation procedures. Preserve confidentiality by requiring robust NDAs and data protection clauses in all contracts.
- Centralized oversight. Assign clear responsibility for managing and coordinating third-party providers across functions.
- Information flow and communication. Ensure that all relevant stakeholders — internal and external — have access to the right information at the right time. This might include shared reporting platforms, regular check-ins, or documented escalation protocols.
- Scalability. Design governance practices that scale with the family’s needs so that, as services become more complex or layered, oversight and accountability remain intact.
Optimizing Structure for Tax and Operational Efficiency
The structural and operational choices a family office makes can have far-reaching implications. One of the most important considerations is the type of entity the office uses, which can affect not only taxation but also how services are formalized, how expenses are treated, and how responsibilities are organized.
Family offices are often structured as either flow-through entities (such as partnerships or LLCs) or C corporations. Each approach has advantages and tradeoffs.
C corporations, for example, are taxed at a flat rate but may be subject to double taxation if dividends are paid. They may also support a stronger claim that the office operates as an active business enterprise, potentially increasing deductibility of certain expenses.
Flow-through structures avoid entity-level tax, but individuals may face higher tax rates and limitations on expense deductibility. Whether a C Corporation or a flow-through entity provides more after-tax income depends on the existing rates for corporate income, dividends and flow-though income as well as the amount of income to be distributed.
Given the complexity and evolving nature of tax law, families should periodically revisit their structure with qualified advisors to ensure alignment with their goals, especially in light of recent legislation and court decisions.
Lessons From Recent Court Decisions
Court cases have helped clarify when a family office may qualify as a trade or business for tax purposes.
In Lender Management, LLC v. Commissioner (2017), the court permitted expense deductions under Section 162 of the Internal Revenue Code. The ruling emphasized several key facts: The office operated professionally, served multiple family members (who could choose whether to participate), and was effectively owned by a family member with only a small ownership stake in the underlying assets. Compensation came in the form of a profits interest, not traditional management fees.
However, this ruling is narrow in scope. Many family offices have significant overlap between ownership of the entity and the assets it manages. In such cases, the reasoning in Lender may not apply. This concern was reinforced subsequently by the Hellman v. Commissioner case, which raised doubts about broader applicability, though the case ultimately settled.
Bottom line: While Lender opened a door, it’s a narrow one. Families should approach tax planning in this area with caution and legal guidance.
Entity Flexibility and Tax Considerations
When choosing an entity structure, families should consider the types of owners, their cash flow needs, and the tax treatment of income and distributions. Rules vary by entity type:
Entity Types at a Glance
| Entity Type | Ownership Restrictions | Taxation | Distributions |
|---|---|---|---|
| C Corporation | Few restrictions | Flat rate; possible double tax | Flexible |
| S Corporation | Limited (e.g., no foreign) | No entity-level tax; taxed to owners | Must be pro rata |
| LLC/Partnership | Flexible | No entity-level tax; taxed to members | Flexible |
Case Study: Professionalizing the Family Office After a Business Sale
When their long-standing family business was sold, a family found itself facing a new kind of complexity. For years, many family office functions related to tax, bill pay, benefits, philanthropy, and even some investment oversight had been handled within the business infrastructure or informally by long-serving family members. With the company no longer in place, those inherited systems quickly began to fray.
Compounding the issue, the family had no clear next-generation leader ready to step in. While several family members remained actively involved in investment and wealth planning-related matters, no one had the capacity or appetite to take on full operational oversight.
Decision-making slowed, communication gaps emerged, and tensions mounted as responsibilities became muddled.
Bessemer helped the family navigate a full transition to a professionally managed family office. Together, we clarified the office’s mandate and structure, introduced reporting and coordination protocols, and helped the family hire a non-family executive with deep operational experience. This individual brought technical expertise and the ability to manage across generations while maintaining professional objectivity and distance from family dynamics.
By formalizing the family office and shifting from family-led to professionally led management, the family gained clarity, continuity, and confidence in its long-term planning. The transition created space for rising-generation family members to engage thoughtfully and without the pressure to take the reins before they were ready.
Addressing Pain Points
Over time, even well-structured family offices can encounter friction points that make it harder to function effectively. Recognizing and addressing these challenges is a key aspect of sound governance.
Catalysts for re-evaluation may include:
- Rapid growth or expansion into new areas
- Increasing operational or investment complexity
- Generational transitions or succession planning
- Rising costs or new technology demands
Common pain points include:
- Unclear authority or overlapping responsibilities
- An entity structure that no longer supports the family’s operational or tax needs
- Siloed functions or insufficient coordination between providers
- Outdated systems or manual processes
- Gaps in risk management, compliance, or controls
- Family dynamics or unclear boundaries between family and office
- Challenges with recruiting or retaining talent
A periodic diagnostic can help surface these issues and initiate improvements — whether that means revising roles, implementing new technology, rethinking provider relationships, or introducing new governance mechanisms.
Case Study: Expanding Governance for a Growing, Multigenerational Family
A third-generation family approached Bessemer during a period of increasing complexity. The operating business was still active and profitable, but the family itself had grown significantly. While governance of the business was centralized in a seasoned second-generation board, the broader family — especially the third generation — felt disconnected from decision-making and out of step with the family’s values and vision.
The family recognized that they needed to build infrastructure not just for the business, but for themselves. They wanted to improve communication, engage the rising generation, and make space for conversations beyond the company — about family history, shared assets, philanthropy, and long-term goals.
Working together, we helped the family assess their existing structures and design a new framework for family governance. This included drafting a family charter, launching a family council, and creating guidelines for participation, leadership, and communication. The council was structured to complement the business board, and became the home for decisions and discussions related to family matters: education, estate planning, succession readiness, and shared values.
The changes created an on-ramp for the next generation, improved alignment across branches of the family, and strengthened connections around more than just financial matters. By taking a strategic and inclusive approach to governance, the family positioned itself for continuity, cohesion, and multigenerational resilience.
The Path Forward
An effective family office governance model is not static. It should evolve alongside the family it serves, adapting to new goals, structures, and dynamics over time.
A few best practices to support that evolution:
- Annual reviews. Use a structured framework to evaluate what’s working and what’s not, with input from family members, office staff, and external advisors.
- Inclusive participation. Be thoughtful about who is at the table for key governance discussions. Including a diverse set of voices — across roles, generations, and perspectives — can help create alignment and foster engagement.
- Documentation and clarity. Codify decision rights, roles, and policies in a way that can be easily understood, revisited, and passed down. Clarity reduces the risk of misalignment as leadership and responsibilities shift.
- Support for continuity. View governance not just as a control function but as a strategic enabler of the family’s long-term goals. Strong governance helps a family office deliver on its purpose through change and across generations.
By adopting a proactive and principles-based approach, families can build governance structures that serve them well today — and evolve as they do.
How Bessemer Can Help
We work closely with families to develop governance frameworks that reflect their values, support effective decision-making, and evolve alongside changing needs.
Whether you’re establishing a new family office or refining an existing one, we bring deep experience in aligning structure and governance with long term family goals. We also advise on topics such as entity structure, role definition, and integration of internal and external resources. And for families who choose to outsource certain responsibilities, we offer access to comprehensive family office services that support a more sustainable and strategic operating model.
In all cases, our focus is the same: helping families create effective, resilient structures that promote clarity, continuity, and cohesion across generations.
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