How Does a Family Limited Partnership Work?

A family limited partnership is a type of entity that a family can enter into in order to take advantage of certain tax benefits. This type of arrangement is commonly used in order to convey a business interest to other family members. Here are the basics of the family limited partnership and how it works.

Family Limited Partnership

With a family limited partnership, there will be general and limited partners. The general partner is the individual that is going to have the management responsibilities associated with the business. This individual has unlimited liability when it comes to the company. The limited partners are going to have ownership rights in the company but they are not going to have any management responsibilities. Many times, parents that own a company are going to be the general partners in this arrangement and their children are going to be limited partners.

What Can Be Included

Any business or investment assets can be included in a family limited partnership. If a company owns a business such as a store or a farm, they can include the whole thing in a family limited partnership. A family could also include investment assets such as stocks, bonds, or mutual fund shares in a family limited partnership. 

Advantages

This type of structure comes with several advantages for those that implement it. One big advantage of this structure is that you can separate the ownership of the company without separating the management of the company. For example, you can give partial ownership to several members of your family but retain the right to make business decisions for the company as the general partner.

This type of arrangement is also going to make it easier to transfer portions of business ownership to family members. You can set it up to transfer a specific portion of business ownership to your children every year. By doing this, you can get around paying gift taxes as long as you stay under the annual limit.

Another reason that this type of partnership can be beneficial is that you can value the assets of the company at a discount to market value. You do not necessarily have to price everything at its full market value and this can save you money on transfer taxes.

Disadvantages

Even though the family limited partnership can be very beneficial, there are a few drawbacks that you should understand as well. One of the disadvantages is that it costs money to set up this type of business. You are going to have to pay legal fees in order to get started.

Another disadvantage is that you are going to have to continue to maintain the family limited partnership throughout the life of it. You have to treat it as a separate business which means more accounting and more work for you.

With this type of set up, you are also going to be under extra scrutiny with the IRS. They will make sure that everything is perfect in your tax returns.

blog comments powered by Disqus
Scottrade