Family Limited Partnership: Is This Right For Your Business?

If you own a family business that you hope to one day pass down to the next generation, the key to a successful transition is planning. Sadly, many family businesses do not successfully make that transition from one generation to the next because the matriarch or patriarch failed to think ahead and plan accordingly. There are several strategies you can use to transfer your business down to the next generation, including a Family Limited Partnership.

A Family Limited Partnership, or FLP, is a type of entity you can choose for your business that is designed to help small, family-owned businesses operate and remain in the family. While you should always work closely with an experienced attorney when making important decisions regarding your business, it is also beneficial to learn as much as you can on your own. With that in mind, the Knoxville estate planning attorney at Stivers Law explains how a Family Limited Partnership might be able to help your family business.

Choosing the Right Legal Structure for Your Business

Starting a small business requires you to make several very important decisions that will directly impact the success of your business. One of the first decisions you need to make involves choosing the right business entities for your new business. Traditionally, there were three basic entities from which a business owner could choose – sole proprietorship, partnership, or corporation. A sole proprietorship is the default structure when a single individual is operating a business and has done nothing to form any other type of entity. A partnership exists when two or more people operate a business and share in the profits of that business. You are not required to execute any legal documents to form a partnership; however, many partnerships do operate under a Partnership Agreement. Finally, a corporation requires the owners to file Articles of Incorporation and several other legal documents. A corporation is run by a Board of Directors and the “owners” are the shareholders.

The type of entity you form will impact important aspects of your business, such as:

• Taxation. Do you want your business to pay taxes separately or have profits passed down to the owners?
• Liability. How important is it to make sure you are shielded from the debts and liabilities of the business?
• Management. How do you want your business to be managed and what role do you want to play in that management structure?
• Growth. Do you want your business to have the option to grow through outside investment?

What Is a Family Limited Partnership?

From the traditional three types of business entities, numerous sub-categories and hybrids evolved. One of those is the Family Limited Partnership, or FLP. An FLP is a specific type of limited partnership. A limited partnership is a partnership that has two different types of partners – general partners and limited partners. General partners control all management and investment decisions and bear all the liability for debts and other liabilities of the partnership. Limited partners cannot participate in the management of the limited partnership and have limited liability. Like all partnerships, the profits and losses of the business are passed through to the partners in proportion to their interest in the business. The partnership itself does not pay taxes. A family limited partnership is simply a limited partnership that is owned by family members. Typically, in an FLP the older members of the family contribute property, cash, or other assets to the business in exchange for a small general partner interest and a large, limited partner interest. Over time, they then gift their limited partner interest to the younger members of the family. Eventually, the entire business is passed down to the next generation of partners.

Contact Our Knoxville Estate Planning Attorney

For more information, please join us for an upcoming FREE webinar. If you have additional questions or concerns about incorporating a Family Limited Partnership into your estate plan, contact our experienced Knoxville estate planning attorney at Stivers Law by calling (305) 456-3255 to schedule an appointment.

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