A single family office (an “SFO”) is an entity created by a family to manage its investments and financial affairs. As a management entity, the SFO doesn’t itself own family assets. Instead, its job is to administer and manage investment and financial matters for the family and its investment entities, trusts, foundations and other wealth holding vehicles. An SFO typically employs a staff of skilled individuals and may also contract with outside firms to provide necessary services, such as investment advisory, asset management, tax and accounting, legal, risk management, compliance and other wealth-management services. 

Structure
An SFO is typically structured as a separate, stand-alone entity, such as a limited liability company (“LLC”), to limit its legal liability and protect the family’s privacy. For tax purposes, the SFO generally is structured as a pass-through to avoid two levels of taxation on any profits generated and distributed by the SFO. (Note that most SFOs, being service-providing entities, are not designed to make a profit, though there are exceptions to this rule.) Many SFOs are structured similarly to hedge funds, with a single management company serving a number of different family investment holding vehicles. 

Delaware is a favored jurisdiction for forming domestic SFO entities, because of its well-established body of corporate law and its minimal disclosure requirements. 

Ownership
Ownership of the SFO entity depends on the family’s objectives. In many cases, the SFO is owned by one or more of the family investment entities or individuals whose assets it manages. In other cases, the entity may be owned by a family or non-family executive of the SFO, who typically is deeply involved in management of the family’s financial assets and may receive a fee or carried interest as part of the total compensation package.

Fees
An SFO typically is compensated for its services via a flat fee or payments based on assets under management, and/or a carried interest. As noted above, an SFO is not usually a profit-making venture; the fee income earned by the SFO typically is calculated to cover its costs. Care should be taken in capitalizing the SFO and establishing the amount and timing of fees and payments to the SFO, particularly during start-up, to ensure that the SFO has adequate cash to cover its operating costs. Fees and payments to the SFO made by the client investment entities may not be deductible for income tax purposes by the payor, and so a family setting up an SFO should consult with their tax advisor to discuss options for minimizing the tax “drag” of the structure.

RIA Registration
If the SFO provides investment advice to the family and its entities (rather than outsourcing this responsibility to an investment advisory or investment management firm), it may be required to register as investment adviser or make other disclosures or filings with the Securities and Exchange Commission (the “SEC”). However, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which was signed by President Obama in July 2010, with rules set to become effective in July 2011, eliminates an exemption on which many SFOs have relied to avoid registration with and regulation by the SEC as an investment adviser.  Even so, some SFOs may not be required to register with the SEC due to a new “family office” exclusion in the Dodd-Frank Act.  Although the SEC has issued a proposed definition of family office, whether this exclusion will be applicable to a particular SFO will not be known until the SEC finalizes the definition, which will not occur until spring 2011 at the earliest.  New and existing SFOs should discuss the current state of registration requirements with qualified counsel on a regular basis.  

Services
Services provided by SFOs vary widely, and the structure and staffing of the SFO should reflect its specific roles and functions. Almost all SFOs provide investment oversight and reporting services; many also provide accounting and tax advisory, risk management, trust administration, compliance and reporting services to family members and entities. Some SFOs pay bills and manage residential properties and staff for their families. As the family grows and members set up households of their own, the array of services provided by the SFO can become quite extensive and expensive, raising questions about how the cost of such services should be allocated among family members.