A family limited partnership (FLP) is a business partnership between family members. Each family member puts in money to run a business project. Typically, every family member who wishes to participate buys units or shares and can profit from the business. Details of a family limited partnership are outlined in a partnership operating agreement that each family member signs.
Family limited partnerships are often created to retain a family’s business interest, securities, real estate, or other assets. A family limited partnership protects assets from creditors and reduces estate and gift taxes. Many families prefer an FLP to a trust because they can maintain control over the management and distribution of assets. However, it’s crucial to weigh the pros and cons of a family limited partnership before creating one yourself. If you are considering entering a family limited partnership or would like more information, our team of attorneys can help you. Contact us today by calling 510-901-5375 for a free consultation.
How Does a Family Limited Partnership (FLP) Work?
There are two kinds of partners in a family limited partnership. General partners typically own a large share of the business and are responsible for day-to-day management. This includes overseeing cash deposits and investment transactions to keep the business running. A general partner might also take a management fee from the company’s profits if stipulated in the partnership agreement. Limited partners own a smaller share of the business and have no management duties. A limited partner receives interest, profits, and dividends from the family limited partnership.
Limited partners usually cannot sell their interest in the family limited partnership unless they sell to an immediate family member. Limited partners also cannot influence the operation of the family partnership in any way. They are typically the children and grandchildren of parents who own the business. In most cases, general partners operate the business, while limited partners benefit from the business without influencing it.
A family limited partnership is essentially a limited partnership agreement. However, it’s important to note the differences between an FLP, a trust, and an LLC. A trust holds property to benefit named beneficiaries. On the other hand, a family limited partnership is a business from which family members profit. Every family member receives a different profit percentage depending on how many shares they have. A limited liability company, or LLC, is still a business, but it does not provide estate planning advantages as an FLP does. Family limited partnerships are structured to take advantage of the gift tax exclusion to reduce tax liability. An LLC does not have the same advantages.
What Are the Advantages of a Family Limited Partnership?
Many families opt for a family limited partnership to reap the benefits of this arrangement. While your specific benefits may depend on your unique estate, there are some advantages that most people benefit from.
Below are the main benefits of a family limited partnership:
Reduced Tax Liability
Family limited partnerships are structured to take advantage of the annual gift tax exemption. Similarly, any profit generated from a business in an FLP does not count toward the parent’s estate. This reduces the estate’s overall value, leading to a lower estate tax liability.
Limited Partnership Agreement
The nature of a family limited partnership keeps the general partners in control while the limited partners receive monetary benefits. If parents own a business and would like their children or grandchildren to benefit from it, they do not have to relinquish their power over the business to provide for their family members.
Protection from Creditors
Limited partners cannot have their shares taken away by creditors seeking payment. General partners must give consent for creditors to use business shares as payment. Creditors also cannot force an FLP to make cash distributions.
What Are the Disadvantages of a Family Limited Partnership?
While a family limited partnership has many advantages, there are some drawbacks that you should be aware of. In some cases, these disadvantages may make an FLP a bad idea for your estate.
The major disadvantages of a family limited partnership include:
General Partner Liability
Because general partners are essentially in charge of the business, the FLP is exposed to claims by creditors against general partners. Similarly, if general partners are not good business owners, limited partners could suffer.
Family limited partnerships are complicated and require knowledge from a professional estate planning attorney. It is essential to consult an experienced team of lawyers before setting up an FLP to ensure it is right for you and your business.
Restriction of Assets
Unlike a trust, which can hold any kind of personal assets, an FLP is restricted to business assets only. Personal assets cannot be transferred into an FLP without endangering the gift tax exclusion. An FLP is only in your best interest if you have investment properties or securities to transfer into it.
Should I Consult an Estate Planning Attorney?
Family limited partnerships may be advantageous for you and your business. However, they are complex and can be costly to start up. It is essential to consult with an estate planning attorney before creating a family limited partnership. Our team at The Singh Law Firm can review your estate plan and your financial goals to make a recommendation based on your unique circumstances. If you decide that a family limited partnership is right for you, we will walk you through the process and help you set one up to reap the benefits for your family.
If you have goals for your business or you’d like to review your estate planning options, don’t hesitate to reach out. Call our office today at 510-901-5375 to learn more about how we can help you.