When it comes to ensuring the survival of a family business for future generations and preserving (or creating) generational wealth, the use of a family limited partnership (FLP) can offer some unique advantages.
A family limited partnership is a business entity that’s specifically created to help with both asset protection and estate planning within a family enterprise. Here are some key benefits of this approach:
Senior members can retain control while transferring ownership
One of the biggest worries that many family business founders have is how to transfer ownership of their company to the next generation without losing control over what they’ve built. With an FLP, senior family members can gradually shift shares of the company to their heirs (as limited partners) while retaining authority over the management of the business as its general partners. That allows them to continue to guide the business in the direction they want until they decide to fully step back.
The gradual transfer of shares can reduce the estate tax burden
Estate taxes can take a big chunk out of the wealth that business owners hope to pass on to their progeny. By transferring their assets to an FLP, owners can reduce the taxable value of their states – and limited partnership interests are typically allowed valuation discounts due to their lack of marketability.
The use of a business entity helps protect against creditors
Since the partnership becomes the owner of the business assets, those assets can be carefully shielded against the financial liabilities incurred by individual family members. If a family member has creditors hounding them or goes through a bad divorce, for example, the business won’t be an easy target for creditors.
Succession planning is challenging for any family business. Both emotional and financial issues have to be addressed. An FLP offers a lot of flexibility and can minimize conflicts by providing a clear structure for how the business will be managed once the senior generation leaves. Discussing this option in earnest can help you decide if an FLP is right for your needs.