Which are better to use for Asset Protection -- Limited Partnerships or Limited Liability Companies?

LLCs are becoming more popular and are fast replacing LPs. We almost always use LLCs to title non-residential real estate and to operate businesses but we still prefer LPs to title 'safe' liquid assets, particularly when their owners have a taxable estate. The LP has a long track record for protection and, in some states, provides superior protection over the LLC. But there are many tax, financial planning, regulatory and other considerations when choosing an entity. So a comprehensive plan for a client may include a number of different entities – S and C corporations, LPs, LLCs, trusts, and so forth.

Many practitioners prefer to use an FLP instead of an LLC for estate tax reduction. This is because FLPs are 'tried and true' and have a plethora of case law to support their efficacy. However, it is possible to structure an LLC like an FLP for the purposes of estate tax reduction. There is no case or statutory law that would prohibit this. At the same time, LLCs have not been as battle-proven in court as has the FLP.

To make certain an LLC is taxed like an FLP, it should be structured like an FLP. Namely, the company should have limited members (a 'member' is the LLC's equivalent to a partner) and managing members, and it should be taxed as a partnership. It should also have all the characteristics of an FLP.

With the more battle-tested track record of the FLP, one might ask: Why would anyone wish to form an LLC instead of an FLP? An LLC has some other benefits that an FLP does not. We can mention three: First, the LLC may exist perpetually (LPs typically may only exist for 30 years). Secondly, the LLC enjoys limited liability for managing members as well as limited members. Remember, the general partner (manager) of an LP has unlimited liability. Thirdly, after the death of the partner, an LLC may elect to be taxed as a C or S corporation. An LP must use partnership taxation without exception.