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The Family Limited Partnership Part 1 – Legally Mine

One of the things that Legally Mine often discusses during their presentation, is the Family Limited Partnership (FLP).

I know that sometimes Dan McNeff can go pretty fast through some of that material, and so for those of you who would like a refresher on what the FLP is and how it works – I’ve copied this section from a book called the Asset Protection Bible, it does a pretty good job of summing it up.

Let me know in the comments below if you have any questions or if something isn’t clear.

– Matt, Legally Mine

Family Limited Partnerships

 

Overview

A Limited Partnership is a legal entity created entirely by statute and is of relatively recent origin. Limited Partnerships were first recognized in England with the Limited Partnerships Act (1907) and were adopted in the United States with the Uniform Limited Partnership Act (1916).  Family Limited Partnerships are no different in their essential structures or characteristics from a Limited Partnership, except that they have, as the name implies, family members as the partners and family property and businesses as the partnership assets.

As a statutory creation, Limited Partnerships are entirely dependent on and subject to the provisions of statures. It is important that you comply with the specific requirements of the Limited Partnership Act in the state in which your Family Limited Partnership is formed, and that you stay in compliance with these requirements. Otherwise, the Family Limited Partnership may be disregarded , and you and the other participants can be considered to be simply general partners-with no liability protection and unlimited exposure. However, with proper formation and maintenance, a Family Limited Partnership can serve as one of the most valuable tools in protecting your assets, in estate planning, and in structuring your family businesses.

In some ways, it may be easiest to think of a Limited Partnership as a hybrid between a corporation and a partnership: It has the tax advantages of a partnership and the control advantages of a corporation. In a Limited Partnership there are two classes of partners: general and limited.

  • The General Partner manages the Partnership. He or she is treated as if he were a partner in a general partnership; thus, he or she has management authority and is fully liable to partnership creditors. However, unlike in a general partnership, the Limited Partnership general partner is entitled to compensation because of his increased exposure to risks.
  • The Limited Partner, unlike the general partner, is an owner with almost no authority or liability. The only control he has over the operation of the business is the ability, in concert with the other limited partners, to vote to remove the general partner or to dissolve the partnership, and then, only if the limited partnership agreement permits these actions. Because the limited partner has no control, his liability for partnership debts extends only to his interest in the partnership.

Summary

 

Principle Purposes:

 

  • Asset protection
  • Spread income to lower tax brackets
  • Reduce the size of the estate for estate tax reasons

Players in a Family Limited Partnership:

 

General Partner

 

  • l00% control
  • Liability for actions of the partnership (For high liability assets, a Corporate or LLC General Parmer is generally recommended)
  • Compensation for management

Limited Partners

 

  • No right to management
  • No liability exposure beyond their financial interest in the partnership
  • Limited transfer rights
  • Right to share in profits
  • Right to return of capital upon dissolution
Your Work, Your Life, Your Money - Your Peace of Mind

Your Work, Your Life, Your Money – Your Peace of Mind

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