Do you have a close family, want to protect your business from unnecessary taxes or pesky creditors, and want to control the destiny of your company? If so, a Family Limited Partnership (FLP) may fit your needs.
An FLP is a type of company that is designed to hold various assets (such as business interests, real estate, securities, etc.) for a legitimate purpose. FLPs are unique because you can exercise control similar to personal ownership while receiving many protections of a company.
FLP Companies have two kinds of owners: General Partners (GPs), and Limited Partners (LPs). The GPs are the leaders of the company who are responsible for the management and assets of the company. LPs do not have control over the company, but rather they receive economic benefits flowing from their portion of the business interest. In short, GPs are the controlling operators of the company, while LPs are the passive owners.
The two-tiered structure of the company provides various benefits. First, GPs may be able to lessen their liabilities that would normally fall on them in a different company structure. Another benefit is the ability to limit the transfer of an LPs interest. Instead of selling their share in the inheritance in an ill-advised deal, LPs may only be allowed to sell their interest to an immediate family member, for example).
Another benefit of an FLP is the ability to lessen the estate tax burden resulting from a business. First, the senior generation (who usually become GPs) transfer business assets to the FLP in exchange for GP and LP interests. Then, the GPs can gift LP interests to succeeding generations over time.
LP interests are usually sold at a discount (compared to their actual worth), since ownership in the LP does not confer any controlling interest. This discount is often at least 15%, and the discount can be north of 30%. If planned correctly, one could reasonably pass 130% of the lifetime exemption value to their heirs. In 2022, this means that an additional 3.5 million to 7.2 million dollars (for a married couple) could be shielded from estate taxes – resulting in (potentially) 1.4 to 2.8 million dollars in savings!
The savings benefits that FLPs can provide are self-evident. FLPs are even more beneficial to fast-growing assets, as there is no estate tax on the appreciation of an asset once the LP interest transfer is made. FLPs also provide a way for a parent to control a business while allowing the child to benefit economically from their hard work.
Another benefit of the FLP structure is that the senior generation controls the succession of control in the company. By designating who receives the GP interests, you can anoint one or multiple successors (a family member or even a third party advisor). Your plans can change over time – and so can your designated successors under an FLP.
Creditors are also limited in attacking FLP companies. While the creditor may have rights to the economic benefit of the debtor partner in the partnership, this does not extend to control over the underlying property in the partnership. This frustrating arrangement (for creditors) gives debtors the upper hand in negotiations.
Keep in mind that an FLP is a business. It’s a good idea to hold regular meetings with minutes and pay reasonable compensation to the General Partners. At the annual meeting, you may want to discuss income taxes and distribution policy. If you neglect the business aspects long enough – the IRS may classify the entire arrangement as a singular gift – defeating the purpose of the FLP.
Placing your assets in a Family Limited Partnership involves careful planning and consideration of the future. However, the economic and intangible are incredible – making this the right choice for many small business owners across America.