An FLP, short for family
limited partnership, is a
business entity known as a
limited liability partnership
formed by family members
All limited liability partnerships, including
FLPs, have two types of partners:
(1) general partners who run the business and whose assets are exposed to business creditors, and
(2) limited partners who have no say in how the business is run but whose personal assets are generally shielded from business creditors
The general partners, even though they have
control, can own as little as 1% of the business,
while the limited partners can own as
much as 99%. Consequently, by organizing
their business as an FLP, family members can
transfer ownership to other family members
while retaining control, and/or generally protect
the personal assets of those family members
who become the limited partners. An
FLP can be particularly attractive to seniors
who want to keep control of the family
business until the younger generation gains
experience and becomes competent enough
to manage the business on their own.
An FLP can offer other advantages as well:
- You can shift business income and any
future appreciation of business assets to
other family members (who may be in a
lower tax bracket).
- You can minimize transfer taxes by transferring
FLP interests in increments that
are free from federal gift tax under the
annual gift tax exclusion ($12,000 per
transferee in 2006).
- Because limited partners have restricted
rights, gifts of FLP interests to limited
partners may qualify for discounts that
reduce their taxable value for federal gift
tax purposes by as much as 35%.
Note: Creating an FLP and taking discounts
invites close scrutiny by the IRS.