What is a Family Limited Partnership?
You may not be familiar with the term, but you’ve likely heard of someone who has one. A family limited partnership is a legal entity that acts as a single business entity and is designed to hold assets in an estate plan. It’s typically composed of at least two partners: one or more general partners and one or more limited partners. And while this type of entity has many benefits, it also comes with some drawbacks. Read on to learn more about what they are, how they work, and whether they might be right for you.
What is a family-limited partnership?
A family limited partnership is a legal entity created by two or more people as a way to handle their estate planning as well as their business. As a type of legal entity, it can hold assets and can function much like a corporation. It’s typically composed of general partners who have the power to make decisions for the company and limited partners who can only take an active role in the company with the consent of the general partner(s).
How do they work?
A family-limited partnership is an entity that can be formed in order to hold assets. This entity is composed of two types of partners: general partners and limited partners. General partners are the ones who make decisions for the company, while limited partners are typically not involved in day-to-day operations. A partner may be either a general partner or a limited partner, but not both. Partners control their percentage ownership interest in the partnership through units of participation. The existence of these units means that partnerships don’t need to keep detailed records of ownership.
Benefits of a family limited partnership
A family-limited partnership offers a number of benefits that may make them an ideal vehicle for estate planning.
– They can help a family with a closely held business avoid high capital gains taxes on the sale of the company by limiting the sale to those in the family.
– Family-limited partnerships can help families manage assets more efficiently and with less personal involvement.
– In some cases, it can be advantageous to have all members of a family as limited partners as they are not liable for any debts incurred by the partnership.
Drawbacks of a family limited partnership
One potential drawback of a family-limited partnership is the added complexity. This type of entity is typically used in estate planning, which means it’s more complex than sole proprietorship or partnership. They are often drafted by attorneys and can cost anywhere from $1,000 to $5,000 to draft the documents.
A second drawback is that they are not legally recognized in all states. Every state has its own laws for what constitutes an LLC or corporation, but not every state recognizes a family-limited partnership. This may not be a problem for some people, but it could be if you’re looking to do business in more than one state.
A third disadvantage is that they have limitations on transferring shares or assigning an interest in the partnership. This is because of the lack of flexibility in general partnerships when it comes to transferring interests among partners who are not family members.
Finally, one last drawback is that there are tax implications when it comes to transfers between partners who are related by blood or marriage under certain circumstances.
A family limited partnership is a legal entity that provides a way for family members to invest and operate a business together. The best part of the family limited partnership is that it offers a level of protection from liability and taxation. This type of legal entity offers many benefits and drawbacks, so it’s important to understand what you’re getting into before you start.
The term “family limited partnership” is often abbreviated as FLP. An FLP can be set up as a corporation, an LLC, or a Trust. When the FLP is set up as a corporation, it’s treated as a separate taxable entity from the partners. In this case, the shareholders of the corporation are the partners of the family limited partnership, and they must file a separate tax return for this entity.