A family limited partnership (FLP) is a holding company owned by two or more family members, created to retain a family's business interests, real estate, publicly traded and privately held securities, or other assets contributed by its members.
Advantages of Family Limited Partnerships
Several families establish FLPs to pass wealth down to generations while securing some tax protections. Every year, individuals can gift FLP interests tax-free to other individuals up to the annual gift tax exclusion.
Pros of a Limited Partnership
The limited partners' liability for the activities of the partnership is limited to the amount of his or her investment in the partnership. ... The family members with ownership interests in the LLC are called “members.” Like shareholders in a corporation, members are not personally liable for the activities of the LLC.
Typically, with an FLP, parents or grandparents create the partnership and transfer personally owned assets into the same. ... Typically the FLP is funded with real estate, stock in a family owned corporation, publicly traded securities, or a combination of these assets.
Disadvantages of a Limited Partnership
Limited partnerships are generally used by hedge funds and investment partnerships as they offer the ability to raise capital without giving up control. Limited partners invest in an LP and have little to no control over the management of the entity, but their liability is limited to their personal investment.
As a limited partner, you will use the K1 issued by the business to populate your Schedule E. ... Guaranteed payments differ from a salary or wages in that the business does not withhold taxes on guaranteed payments. However, the guaranteed payments are an expense to the business that will lower its taxable income.
2020-01-08 The main tax advantage of a limited partnership is that it is a flow-through entity — all profits and losses flow directly to the individual limited partners. The business itself pays no taxes on its income. Limited partners receive income in the form of distributions.
Most limited partnerships have terms of 5 to 15 years.
Their structure enables the transfer of ownership from one generation to the next without giving up control of the underlying property, affords opportunity to reduce or avoid income and transfer taxes, ensures continuity of family ownership in a business and provides liability protection for the partners.
For gift tax purposes, the IRS uses Sec. 2511 to argue that transfers to an FLP are indirect gifts when a taxpayer creates, funds, and transfers interests in an FLP in a relatively short period of time (e.g., all on the same day).
Thus an LLC is the general partner, owned by the Husband and Wife, and the other family members, including the Husband and Wife, are limited partners. The general partners might own only a minimal 1 or 2 percent interest in the partnership. The remaining interests are in the form of limited partnership interests.
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