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Joint Investments and Family Businesses

By: Jennie Kermode - Updated: 5 Nov 2010 | comments*Discuss
Joint Investments Family Business

Many people's first experience of formally managing finances within the family comes from joint bank accounts. When you take out an account like this, it's common for you to receive advice cautioning you that you are placing all its finances in the hands of the other account holder(s), just as they're placing theirs in yours. This means that it's vital for you to be able to trust them.

Joint investments in a family business work similarly, which is one situation in which where family arrangements can have an advantage over other types of business, because that trust is already there. However things can still go wrong, so in order to protect your investment it's vital that you approach the process carefully.

Although taking out joint loans involves dealing with negative amounts of money, rather than the positive sums you may keep in your family bank account, it's still risky because the other account holder may abscond, leaving you responsible for the debt and potentially damaging your credit record, and because, depending on the type of account you have, they may extend the debt without your knowledge, placing you in a vulnerable position. Naturally, where a business is involved, that business can also be placed at risk.

Why Make Joint Investments?

If there are risks involved in making joint investments, why do it in the first place? The simple answer is that it's a good way to persuade family members to contribute larger amounts of finance to the business. When you start out, when you undertake new ventures, and when you expand, you're going to need all the funding you can get. Making joint investments enables individuals within the family to supply more of their money to the business without placing themselves at as much financial risk. When they know that you too stand to lose if the debt goes bad, they'll trust you to look after their money. Their banks and other creditors will also be less concerned about their investments.

Many personal investments in business, especially in its early stages, are based on loans, and in this case joint financing may be the only way you can raise sufficient funds for business ventures. Banks are often happier about lending money when there is more than one guarantor, as they have a better chance of being able to hold somebody to account if the debt is not paid off as agreed. Furthermore, when you take out joint loans, they're based on your combined income and credit records. You can often get better deals like this than you can by taking out two separate loans.

Making Your Business Your Investment Partner

If you're operating a limited company or limited liability partnership, your family business can itself act as a discrete person when it comes to investment. This means that you can effectively make it - rather than, say, a family member - your partner when it comes to making joint investments. This can enable you to make your own money and the business' money work together to fund specific projects. Forming an investment partnership with your business can improve the business' credit because its investments will be seen by banks as secured and easier to recover.

Joint Investments Between Businesses

Sometimes more than one business can come together to make joint investments. This is often the case when it comes to funding community projects. It can be a great way to get your family business involved with others and extend your network of contacts. However, in the absence of the kind of trust that exists within families, you'll need to do your research thoroughly to be sure you can trust the other people you're working with.

Joint investments between business can work particularly well when two or more of the businesses involved are owned by members of the same family. This can be an excellent way to bring family businesses together - even when they have disparate interests and trade in different areas - to their mutual benefit.

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