If you have or intend to create a family business, it is a good idea to consider forming a limited partnership in Utah as one of your options. A limited partnership is a great way to secure a family's business or real estate portfolio. It can also be important when planning for taxes, seeking protection from creditors, and planning for business succession.
At Anderson I Hinkins, our estate planning attorney based in South Jordan, Salt Lake County helps families with family-owned businesses or considerable real estate establish a family limited partnership as a way to manage and protect their assets. Contact us at 801.930.0290 to schedule a Free 30-minute consultation and to learn more about family limited partnerships and how this organizational structure can benefit you.
What Is a Family Limited Partnership?
A family limited partnership (FLP) is a business structure involving two or more partners who are family members holding an interest (i.e., shares) in a business.
The establishment and operation of an FLP are governed by relevant state laws and the partnership agreement.
There are two types of partners in an FLP: general and limited.
General Partners
General partners are the operators of the partnership who have a controlling interest in an FLP and who are responsible for its day-to-day management. Typically, the senior family members or general partners (who are most often senior family members) hold the largest proportion of shares.
They also have unlimited liability, meaning they can be held personally liable for the partnership's debts.
Limited Partners
Limited partners are passive owners and, as such, have no managing interest or responsibilities in an FLP. Rather, they are passive owners and receive profits from the partnership. Dividends are an example of how profits are allocated.
Limited partners are often the children or younger generation of the family. Unlike general partners, their liability is usually limited to their investment in the partnership.
When Is a Family Limited Partnership Used?
Due to their tax status, FLPs are often used in estate planning to protect generational wealth.
Similarly, they can also be used to implement the succession plan of a family-owned business, ensuring it remains in the family upon the retirement, incapacitation, or death of an owner.
FLPs can also be used for investment purposes, where a family member is seeking an injection of cash to fund a business or to pool resources to invest in joint real estate or property development.
Regardless of the reasons for setting up an FLP, it must operate as a proper limited partnership, serving a valid business purpose. While the structure offers some tax advantages, it cannot be used for tax avoidance.
Benefits of Family Limited Partnerships in Utah
FLPs offer several benefits that families can use to manage, protect, and grow their business and their assets.
Potential Tax Advantages
The tax rules that apply to FLPs can make them an attractive option for families looking to gradually transfer generational wealth. Federal gift tax exclusions and favorable valuation discounts reduce the overall tax burden of an FLP.
In addition to this, FLPs do not pay federal income tax. Instead, partners include their FLP income on their personal returns and are then taxed according to their individual tax rates. This may be a lower tax bracket for limited partner children or grandchildren.
The returns on an FLP's assets are also excluded from estate taxes, as they do not form part of the general partners' estates.
Preserving Control
An FLP enables the general partners to manage and retain control over the FLP's assets and limited partners' interests. The general partners can set rules around the transfer of interests, like preventing a limited partner from selling their shares for some time or deciding what will occur to a limited partner's interests in the event of divorce.
Asset Protection
When assets are transferred to an FLP, they are no longer the assets of the partners. This may offer some additional level of protection against the limited partners' creditors.
Succession Planning
An FLP can be a way to educate younger generations and prepare them to manage the family wealth as part of a broader succession plan.
Alternatives to Utah Family Limited Partnership
An FLP may not be suitable in every situation. There are downsides to them. For starters, they can be quite expensive and complex to set up and maintain. FLP can also expose general partners to unlimited liability. Plus, there is a real risk that members will incur debt, and this debt can detrimentally impact others of the FLP.
In some situations, you may want to explore alternative structures to an FLP, which include a limited liability company or a trust.
Limited Liability Company
A limited liability company (LLC) is a simple company structure where a business is owned by one or more members, who can be individuals, partnerships, groups, or other LLCs.
Unlike an FLP, all members have a managing interest in an LLC. Each member also has limited liability, compared to an FLP, which only limits the limited partners' liability.
Trust
A trust is an alternative way to protect generational wealth. It holds assets for its beneficiaries, protecting them from events such as divorce, estate tax, and creditors.
Trusts are often used where a family wants to make charitable gifts, as well as a division of assets between family members. A trust can be used independently from or in conjunction with an FLP.
To help you choose the best structure for your circumstances, you should seek professional legal and accounting advice.
Contact an Estate Planning Lawyer in South Jordan, Salt Lake County Today
Family limited partnerships are a strategic estate planning tool for small business owners or family business owners. The structure allows for the transfer of ownership from one generation to the next without having to give up control while offering other protection and financial benefits.
At Anderson I Hinkins, our estate planning attorney in South Jordan, Salt Lake County will help you understand what an FLP can do for you and your business and help you make sure it is your best choice. Contact us today by filling out the online form or calling us at 801.930.0290 to schedule a Free 30-minute consultation.