For years promoters have touted the use of Family Limited Partnerships (FLP) as a tool for owning and protecting assets and providing a mechanism for passing them on to the next generation.
The FLP has been used so frequently that it could lead one to the impression that the FLP is a separate kind of entity. However, it isn’t always the case.
An FLP is a Limited Partnership used for family purposes. Similarly, the LLC is becoming used for family purposes, which has coined the usage of the Family LLC. While both structures offer a lot of similarities, they have differences that affect how the business is managed and taxed.
Differences between Family LLC and FLP
When it comes to starting a family business, choosing the right legal structure is key to its success. Family LLCs and FLPs, in particular, have some key differences that should be considered before making a decision. Here are some of the notable ones:\
Ownership and Management
There are two types of partners in an FLP: general partners and limited partners. The general partners have full control over the management and decision-making of the business but have unlimited personal liability for the business’s debts and obligations. Meanwhile, limited partners have no control over the management of the business but have limited liability protection.
In a family LLC, all members have equal ownership and management rights, regardless of their financial contributions to the business. This means that the management structure can be more flexible and less hierarchical than an FLP. Additionally, all members of an LLC have limited liability protection, so there is no need to differentiate between general and limited partners.
For FLPs, the general partner is solely responsible for paying taxes on the profits of the business, regardless of whether they are distributed to the partners. This can result in a higher tax burden for the general partner. Limited partners only pay taxes on their share of the profits if they are distributed to them.
All members of a Family LLC are taxed on their share of the profits, regardless of whether they are distributed to them. However, LLCs offer more flexibility in how they are taxed. They can choose to be taxed as a sole proprietorship, partnership, S corporation, or C corporation, depending on their specific needs and goals.
An FLP can be a powerful estate planning tool. Because limited partners have no control over the management of the business, their ownership interests are considered “non-controlling” and, therefore, may be valued at a discount for estate tax purposes. This can reduce the overall value of the estate and lower the amount of estate taxes owed upon the owner’s death.
LLCs do not offer the same estate planning benefits. However, they can still be useful for estate planning purposes, particularly if the business is being passed down to future generations.
Which Structure Is Right for You?
The answer will vary depending on several factors, including your goals, management structure, and tax situation. If you want more flexibility in management and tax options, then a family LLC may be the best choice. If you want to take advantage of estate planning benefits and are comfortable with a more hierarchical management structure, then an FLP may be a better fit.
In any case, it’s important to consult a business expert to determine the best structure for your family business. They can help you navigate the legal and tax implications and create a structure that meets your unique needs and goals.
Starting and running a family business can be a complex and rewarding venture. Choosing the right legal structure is key to ensuring its success. Both family LLCs and FLPs offer advantages and disadvantages, so take time to weigh your options carefully. By understanding the key differences between the two structures and consulting with professionals, you can make an informed decision that will help your family business thrive for generations to come.
Get Help from Business Formation Experts
At NCH, we understand the intricacies of setting up and maintaining a successful family business. Our team of experienced professionals is dedicated to helping you make the right decisions for your business and providing ongoing support as your company grows. Whether you choose an LLC or FLP, we can help you establish a strong foundation for your family enterprise, allowing you to focus on building a successful and lasting legacy.
Call 1-800-508-1729 or email us at email@example.com to schedule a consultation!