The Many Uses of a Family Limited Partnership - Part II
Two Types of Interests
Two types of interests, or units, make up the partnership.
- General partnership interest
- Limited partnership interest
Typically, the General Partner interest comprises 2% of the partnership, and the Limited Partner interest is the remaining 98%. Initially, the parents split the partnership in half. Each parent will have 1% interest as a General Partner and 49% interest as a Limited Partner.
General Partnership interest entitles the general partners to all the management responsibilities and unlimited liability. General partners may make provisions in the FLP to receive an income for managing the partnership.
Limited Partnership interest entitles the limited partners to no management responsibilities and limited liability. The only thing a limited partner stands to lose is his or her initial investment. Limited partners cannot demand that the general partners make cash distributions from the partnership's income each year. However, the limited partners must pay taxes on the income whether or not they receive distributions.
Limited Partners vs. General Partners
Limited Partners
- Initially, the parents typically split the limited interest in half. (The parents may choose to give away some of this interest to children and family members.)
- Limited partners have little or no control over the FLP. (They are allowed to vote in certain situations; for example, when a family member wants to give his or her limited interest to a non-family member. All partners must vote unanimously in favor of the gift before it can happen.)
- Limited partners have limited liability. They only stand to lose their initial investment.
- Limited partners have no right to underlying partnership assets, they just own a partnership interest. The partnership, as an entity, has all the rights to the assets.
- Limited partners usually cannot sell or give their interest to anyone outside of the family unless all partners, general and limited, unanimously consent.
- Limited partners usually cannot withdraw or liquidate their interest before the FLP's scheduled termination.
- Only general partners, not limited partners, control cash distributions from the partnership.
- Limited partners, like all partners, must pay taxes on the income even if they do not receive any cash distributions.
General Partners
- The parents (partners) typically split the general partnership interest in half.
- General partners have all the management responsibilities for the Family Limited Partnership.
- General partners have almost all the control over the FLP.
- General partners have unlimited liability. The partners (parents) have not picked up any liability; they just haven't gotten rid of any. This is the same liability that they would have had if they had kept the assets instead of transferring them into the partnership. Each partner is 100% liable for the partnership.
- General partners may receive management fees for managing the partnership if they make provisions to do so in the FLP.
When a general partner dies, the general partnership interest is taxed in his or her estate. - General partners, like all partners, must pay taxes on the income even if they do not receive any cash distributions.
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