How the Family Limited Partnership is Used for Asset Protection
A family limited partnership (FLP) is a limited partnership (LP) owned
by family members, or family controlled entities (trusts, etc.). They
work the same as any limited partnership. The FLP is commonly used for
protection because it can protect a wide range of assets, maximize your
creditor protection, and give you or your family continuing control over
your assets.
For many years, the limited partnership has been a staple of asset protection
planning. Although in many instances the limited liability company (LLC)
is now preferable to the LP, limited partnerships are still popular, and
are sometimes still the entity of choice.
Limited partnerships are a variation of the general partnership. General
partnerships (commonly referred to as ‘partnerships’) have
existed for thousands of years. They are typically small businesses wherein
each partner may manage, act for, and bind the company. Although a general
partnership is technically not a distinct artificial entity, as it is
not created by the government, each partner usually contributes property
to a general pool of partnership assets as necessary for it to conduct
business, and it is often treated as a distinct entity.
As commercial law developed, general partnerships gradually began to demonstrate
some glaring shortcomings. That brought about the limited partnership.
Among these shortcomings is the fact that one partner can make a decision
that could financially harm not only the partnership as a whole, but the
personal wealth of the other partners. Like a sole proprietorship, general
partnerships have no limited liability. Therefore, if one partner obligates
the partnership to debts it cannot pay, the personal wealth of all partners
is at risk of being forfeited to the partnership’s creditors. The
same is true with debts arising from lawsuits: if one partner is dishonest
or commits a tort while working for the partnership, then a creditor could
obtain a judgment against the wrongdoer, the partnership as a whole, as
well as each individual partner.
The limited partnership’s chief difference from the general partnership
is that it has two classes of partners: General partners and limited partners.
A general partner manages the company. However, the general partner has
unlimited personal liability. Consequently, if the company is unable to
pay its debts, its creditors can look only to the property of a general
partner to satisfy those debts.
Limited partners do not have this same vulnerability. A creditor can only
pursue a limited partner’s assets to the extent those assets have
been contributed to the partnership. This makes their liability similar
to a corporate stockholder. This idea has been codified in the ULPA and
its successors. At the same time, a limited partner is forbidden from
managing or otherwise running the company. If a limited partner does manage
the company then he will likely lose his limited liability.
Because general partners – even in a limited partnership –
have unlimited liability, an LLC or corporation is often used as the general
partner of an LP. This effectively gives the general partner limited liability.
Although the LLC or corporation has unlimited liability for the debts
of the LP, those debts do not generally extend to the owners or managers
of the LLC or corporation. This arrangement is especially useful if multiple
individuals manage the partnership. Instead of each person acting as a
general partner where their actions could expose the other general partners
to liability, they can each be a manager of a single LLC, a corporate
officer, or board member of a single corporation. This would limit their
exposure to the wrongful acts of the other managers, and allow everyone
to participate in managing the LP.
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YES, YOU CAN LOSE EVERYTHING!
You may think that your wealth is safe and that you don't need protection.
But don't delude yourself and accept reality — for every 60
minutes you spend making money, spend 60 seconds thinking about how to
protect it!