A limited partnership, if used properly, can be an excellent asset protection tool that operates in a manner somewhat similar to that of an LLC. An LP consists of one or more general partners and one or more limited partners. The general partners have management power in the partnership, with no liability protection. The limited partners have no management power in the partnership (only capital invested), but they do have liability protection. A typical limited partnership will have a general partner with a 1% membership interest in the company, and all the other partners will usually be limited partners, who collectively hold the other 99% interest in the company. The general partner is often an LLC, trust, or other limited liability entity, to give the general partner the liability protection that it does not automatically have.
A family limited partnership (FLP) is basically an LP with family members as the partners. The children are usually the limited partners, and a parent, a trust, or other business entity is usually the general partner. FLP’s are almost always used for estate planning and asset protection. In an FLP, assets are typically gifted, at the rate of up to $11,000 per year per limited partner (or $22,000 per year if the general partners are a married couple), from the general partner to the limited partners. Once the assets have been gifted to the limited partners, in theory they should have all the asset protection that an LP provides limited partners. However, gifting may make an asset protection program more vulnerable to a fraudulent transfer ruling, although this is less of an issue if the assets are placed in the FLP long before a creditor threat arises. In many ways, a limited partnership works like an LLC. Limited partnerships benefit from pass-through taxation, and limited partnerships are typically COPEs, meaning that in most states creditors are only entitled to distributions from the partnership, and cannot seize the partnership’s assets or gain a partnership or management interest in the LP, without all the other partners’ consent. However, limited partnerships have the following drawbacks:
They need at least 2 members; most LLC’s can have 1 member.
- Therefore, all LLP’s are expected to file a K-1065 return, and each partner individually is expected to file a K-1 return. Single member LLC’s do not have this requirement.
- As was previously noted, the general partner does not have liability protection.
Therefore, an LLC is usually the best way to go for an optimal combination of privacy and asset protection. However, if someone is using a domestic LLC to run a business, or a foreign LLC in a manner that requires it to be registered with the members’ home state, the LLC may be subject to a franchise tax that a limited partnership would not be subject to. This is the case in Texas, California, Florida, and may be the case in a few other states as well.