• Home»
  • Blog»
  • Family LLC vs Family Limited Partnership: Which Is Right for You?

Family LLC vs Family Limited Partnership: Which Is Right for You?

Share to:

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. 

October 31, 2006
Author: Derek Rowley

Start Your Business with a Nevada LLC

The ONLY 5-Star Rated Business Formation Company Excellent

People looking at a laptop

For years, promoters have touted Family Limited Partnerships (FLP) as a way to own and protect assets and provide a mechanism for passing them on to the next generation. The FLP has been used so frequently that one might assume it is a separate entity.

However, this 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

Choosing the right legal structure is key to starting a family business. Family LLCs and FLPs, in particular, have some key differences that should be considered before deciding. 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.

Asset Protection

Both Family LLCs and FLPs offer liability protection through different mechanisms.

Family LLCs provide limited liability protection to the personal assets of its members, which also extends to the individual members’ ownership interests. This ensures that their personal assets remain secured from liabilities arising within the business.

Limited partners in FLPs also benefit from liability protection by separating ownership from management and limiting the liability of limited partners to their capital contributions. However, general partners in an FLP are subject to unlimited liability, exposing them to potential risks.

Taxation

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.

Cost and Administrative Requirements

The fees of establishing a Family LLC can vary depending on the state but generally range from $100 to $800 or more. Additionally, legal expenses may be incurred for drafting the operating agreement and other organizational documents, which can range from $1,000 to $3,000 or higher, depending on the complexity of the arrangement and the involvement of legal counsel.

In contrast, FLPs may have lower initial setup costs than a Family LLC. Still, they could incur higher ongoing administrative expenses, particularly if professional management or legal counsel is required to ensure compliance with partnership laws.

Start your Nevada LLC in
24 hours guaranteed

You don’t need to live in Nevada to enjoy the best asset protection
and audit defense a Nevada LLC can provide.

Estate Planning

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.

Transferability of Assets

Family LLCs often grant members the flexibility to transfer their membership interests to other family members or third parties, subject to certain restrictions outlined in the operating agreement. This feature facilitates succession planning and allows for the seamless ownership transition among family members.

Limited partners in FLPs may find their ability to transfer ownership interests limited by the partnership agreement, which commonly includes provisions requiring approval from general partners or imposing restrictions on transfers to non-family members. Such limitations aim to preserve the integrity of the partnership and maintain family control over its affairs.

How Does State Law Impact All of This?

While Family LLCs and FLPs are governed by general principles of corporate and partnership law, specific regulations and requirements can vary significantly from one state to another. 

For Family LLCs, state laws dictate the requirements for formation, including the necessary documentation, filing procedures, and ongoing compliance obligations such as annual reports and taxation. Additionally, state laws may restrict the transferability of membership interests, outline the fiduciary duties of members and managers, and establish default rules without specific provisions in the operating agreement.

Similarly, state laws govern the formation and operation of FLPs. These specify the procedures for creating the partnership agreement, identify the roles and responsibilities of general and limited partners, and outline the distribution of profits and losses. States may also impose regulations regarding the management and dissolution of FLPs and rules governing the liability of partners and the treatment of partnership assets.

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.

The Bottomline

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 info@nchinc.com to schedule a consultation!

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.

Share to:

Book Your FREE 1:1 Business Checkup

In only 15-30 minutes, our business formation experts will meet with you and:

  • Evaluate your current business structure and identify areas of improvement
  • Find potential problems before they become major issues
  • Develop a game plan for improving asset protection and minimizing tax liability
  • Reduce your exposure in the event of a business accident

Time slots are limited and fill quickly, so secure your spot now!

FREE CONSULTATION

Speak With a Business Expert


Please fill out the necessary information:

By submitting this form, you agree to the Terms and Privacy policy, and that my contact information, including email address, may be shared with the sponsor.