Family Limited Partnership (FLP) – An FLP is a limited partnership in which family members or family controlled entities own a majority or all of the limited partnership interests. These family members usually include a parent or parents, one or more children, and often include trusts created for children or descendants of children. The phrase “Family Limited Partnership” or “FLP” cannot be found in any statute on business entities. It is merely a term of art; an FLP is a limited partnership sanctioned under state law and is treated as a legal person. It is typically structured to give maximum authority to the general partner and minimal legal rights to the limited partners. Most FLPs are structured so that the general partner owns one percent (1%) or less of the partnership interest with ownership of the remaining interests held by the limited partners.

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Should Partners Have Meetings?

Since the FLP is a business, partners should know the business plan and general activities of the business. In a limited partnership the general partner transacts all business, so there is no requirement for approval of day-to-day decisions and affairs. An annual business meeting is a good idea in order to keep everyone informed of the business plan, investment plan, and to gain partner input. Partnership meetings are usually not necessary to take any action that is required by or consistent with the limited partnership agreement.

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How Does an FLP Provide Personal Asset Protection?

An FLP can protect assets from personal lawsuit creditors. When a judgment is entered against a partner individually, that individual partner’s personal creditor generally cannot seize any assets of the FLP. Creditors of an individual partner have at best only the rights of the partner, i.e. no right to manage the FLP or to demand that distributions be made from it. A creditor may even be an “assignee,” who would not have the right to vote the partnership interest. Partnership law generally provides a creditor with only one way to collect a judgment; this is what is referred to as a “charging order.” 2A charging order allows the creditor to seize partnership distributions actually made. But there is no way for the creditor to force the general partner to make a distribution. The creditor would be forced to wait until a distribution was actually made to the debtor-partner. An FLP permits the general partner to discontinue making any FLP distributions to partners and accumulate partnership revenues for the reasonable needs of the FLP. This would increase the partners’ capital accounts. Moreover, under IRS rules, even if a creditor didn’t receive payments from the withheld partnership share, the creditor would be required to pay all the income tax associated with that share. This leaves the creditor in the unenviable position of paying taxes on money not received.

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How Does the FLP Identify Itself?

The FLP must hold itself out to the public at all times as a limited partnership. All letterheads, billheads, advertising, business cards, and telephone listings should use the FLP’s registered name.

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How Does the FLP Conduct Business?

A limited partnership acts through its general partner, or through agents appointed by the general partner. Individuals may serve, but very often a trust, corporation, or LLC will serve as the general partner of an FLP. When action is taken to sign a letter, contract, or check for the FLP, or when the name of any person is printed on a business card, you should make certain that the capacity of the individual signing or named, is clearly indicated. In virtually every, case that person must be either the general partner or an authorized business agent, and not merely a limited partner.

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What About FLP Bank Accounts?

Establish a checking account for the FLP. That account, and any other accounts of the FLP, should be established in the FLP’s name. The appropriate responsible FLP officials in their official capacities and on behalf of the FLP should execute signature cards for the accounts. Always observe the distinction between general partner and individual signatures, even in cases where the individual involved is required to be a signatory (for example, where an individual will be a guarantor of the FLP’s obligations and will sign in his or her individual capacity).

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What About Property Transferred to the FLP?

It is extremely important that the FLP property be clearly understood to be that of the FLP and not that of any individual partner, manager, or officer. The FLP is not simply a separate pocket of its partners. It is a distinct legal entity. The failure of the partners, managers, and officers of a limited partnership to recognize that their FLP’s cash or other assets are not theirs could cause significant and unpleasant encounters with the IRS, and could invalidate asset protection features of the FLP. Any assets transferred to the FLP become the property of the FLP and must be treated as FLP property. Insurance policies for fidelity bonds, liability insurance coverage, and property coverage should be obtained in the name of the FLP. If there will be liability coverage for individuals as well as for the partnership, the individuals should be added as additional insureds.

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Does Transferring an Asset Into the FLP Create Tax Liability?

There is normally no tax owed when property is contributed to the FLP in return for a partnership interest. The transfer of assets to an FLP in exchange for a partnership interest is called a capital contribution. If someone sells property to the FLP, however, the seller must pay any taxes (such as capital gains tax) resulting from such sale.

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How Does the FLP Transact Business?

All important transactions of the FLP, such as major business agreements, loans, employment agreements, leases, and buy-sell agreements, must be considered and approved by formal action of the general partner. If there is a pattern of individual action without the necessary formalities, the partners involved risk a legal determination that they were acting and are liable as general partners and/or as individuals, despite their use of the FLP name. The end result could be a loss of tax benefits and asset protection.

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