If you are one of the millions of people who dream of owning a family business and you are planning to make that dream a reality, you have several difficult decisions ahead of you before your business can officially get off the ground. One of the most important of those decisions is the type of legal entity you choose for your business structure. If you are certain you wish to keep the business in the family, a Family Limited Partnership might be right for you. The Phoenix estate planning attorneys at Morris Hall PLLC explain a family limited partnership and help you decide if one is right for your business.
Types of Business Entities
Starting a small business requires you to make several very important decisions that will directly impact the success of your business. One of the first ddecisionsyou need to make involves choosing the right business entity for your new business. The type of entity you form will impact important aspects of your business, such as:
- Taxation. A corporation incurs “double taxation. It pays taxes separately and apart from any taxes owed by the shareholders for profits passed down to them – and then the shareholders pay taxes on profits they received whereas a partnership and sole proprietorship only pay “pass-through taxes on the profits passed through to the owners.
- Liability. The legal structure you pick will directly impact whether you are shielded from the debts and liabilities of the business.
- Management. The entity you choose will affect how the business is managed and your role in that management structure.
- Investment and growth. If you hope to grow the business in the future, you want to choose a structure that is the most attractive type of legal structure for investors.
Family Limited Partnership Basics
A Family Limited Partnership (FLP) is a specific type of limited partnership. A limited partnership is a partnership that has two different types of partners – general partners and limited partners. General partners control all management and investment decisions and bear all the liability for debts and other liabilities of the partnership. Limited partners cannot participate in the management of the limited partnership and have limited liability. Like all partnerships, the profits and losses of the business are passed through to the partners in proportion to their interest in the business. The partnership itself does not pay taxes. A family limited partnership is simply a limited partnership that is owned by family members. Typically, in an FLP the older members of the family contribute property, cash, or other assets to the business in exchange for a small general partner interest and a larger limited partner interest. Over time, they then gift their limited partner interest to the younger members of the family. Eventually, the entire business is passed down to the next generation of partners.
Protecting Your Assets with a Family Limited Partnership
When a family business owner fails to plan accordingly, it dramatically increases the likelihood that the business will fail to successfully transition to the next generation. One common cause of that failure is the imposition of federal gift and estate taxes. When the business owner dies, all the business assets are subject to taxation because they remain part of his/her estate. All too often, assets necessary to the survival of the business must be liquidated just to cover the tax bill. By establishing an FLP, the majority (if not all) of the business assets are transferred to the next generation long before the death of the patriarch/matriarch.
Contact Phoenix Estate Planning Attorneys
For more information, please join us for an upcoming live webinar. If you have additional questions or concerns about incorporating a family limited partnership into your estate plan, contact the experienced Phoenix estate planning attorneys at Morris Hall PLLC by calling 888-222-1328 to schedule your free consultation today.