If you own a business or commercial real estate in California, you should consider what will become of these assets when you are ready to retire. If you are looking to transfer your business or real property to your children or other family members, then a California family limited partnership (FLP) may be the best way to do it. But there are a number of potential legal and tax risks involved if you do not handle things correctly. The experienced Silicon Valley partnership lawyers at Structure Law Group’s San Jose office can help steer you and your family in the right direction on these issues.
What is a California Family Limited Partnership?
A business partnership occurs when two or more people agree to own property or operate a business together. In a general partnership, the partners share in the profits and losses of the businesses. This means that a creditor can go after the personal assets of any of the general partners.
To mitigate against such risks, many business entities are structured as limited partnerships instead. In a limited partnership there are still “general partners” who typically operate the business. But there are also “limited partners” who do not exercise direct control over the business and whose liability is limited to their investment in the partnership itself.
A family limited partnership (FLP) is essentially a limited partnership model where all of the partners are members of the same family. A typical FLP situation involves a married couple who wishes to pass on certain business assets to their children. The parents transfer the assets to the FLP, which acts as a holding company. In exchange, the parents receive a small “general partner” interest in the FLP, usually just 1 or 2 percent, while the remaining ownership interest is classified as a “limited partnership interest.” This limited interest is then transferred to the couple’s children or an estate planning trust established to hold the limited partnership interest for their benefit.
If done correctly, an FLP can accomplish a number of things. First, since the FLP is a separate legal entity, its assets are the property of the partnership and not the individual family members. The FLP assets are also not considered part of the parents’ estates for probate purposes. An FLP is also considered a “pass-through” entity for income tax purposes, meaning any gains and losses are passed on to the individual partners based on their ownership interest. This can significantly reduce the overall income tax paid by individual family members on FLP assets.
Get Advice on Forming a Partnership from Our Silicon Valley Business Attorneys
Family limited partnerships also carry some potential disadvantages. They are fairly complex legal structures that require careful attention during the creation process to avoid potential issues with the Internal Revenue Service and California authorities. So if you are interested in learning more about FLPs and whether they might be right for your family, contact the experienced San Jose partnership lawyers at SLG today to schedule a consultation.