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When several members of a family work in the same business, just being family does not provide enough structure to handle succession planning or asset protection from creditors and taxes. A family limited partnership can also help avoid family contention. After all, disagreements over who is the favorite son, daughter, nephew, or niece are very common and can impact long-term relationships.
Families who share family businesses, real estate, publicly traded and privately held securities or other assets can use a limited partnership (LP) or limited liability company (LLC) to manage the business relationships among family members. When these assets are rapidly growing in value, families also use family limited partnerships for tax planning, creditor protection planning, and succession planning.
A family limited partnership (FLP) is a holding company owned by two or more family members and has two classes of owners – general partners (GPs) and limited partners (LPs). The assets held in an FLP may be owned by different members of the family currently, and the FLP can be structured with pro rata shares of the FLP which can help with succession planning. The GPs, often parents, manage and control the FLP and its assets and may be the primary or only current owners of the business. However, an FLP can also be structured to redistribute the ownership over time and define future GPs. The LPs are often the adult children or grandchildren of the GPs and are passive owners of the FLP. They have an economic interest and benefit from the FLP’s income, but do not manage or control the FLP. The LPs receive a pro rata share of the FLP’s income and are liable only to the extent of their investment in the FLP. This limitation of liability can be very valuable if the LPs’ personal assets differ a lot in size.
Obviously, a family limited partnership requires a good bit of thought and discussion with your family and your experienced estate and business planning attorney. Consider it as a New Year’s resolution to check into the possibilities for your family situation.
Partner at Holliman & Holliman, PLLC
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