Family-run businesses can face challenges transitioning ownership and day-to-day operations to the next generation. A family limited partnership (FLP) can be an effective succession planning tool for family businesses in Mississippi. FLPs help families preserve generational wealth by protecting family businesses.
FLPs are legal agreements that enable business owners and their successors to address estate planning, business succession, and tax planning needs in one comprehensive document. The experienced attorneys at Palmer & Slay, PLLC, are well-prepared to guide you through the process of creating an FLP, ensuring the protection of your business and a smooth transition to the next generation of owners and operators.
What Is a Family Limited Partnership?
A family limited partnership (FLP) is a legal structure in which family members pool money together for an existing or new startup business. An FLP can be used to pass wealth to younger generations while securing tax protections. By pooling resources, an FLP provides the company with more cash flow. As with a typical business partnership, each individual owns a percentage of the business. As the business makes a profit, each share will earn the owner money, making each family member who owns shares more wealthy.
The Difference Between General and Limited Partners
In family limited partnerships, there are two types of partners: general and limited. General partners are usually the biggest shareholders and invest the most money. Consequently, general partners usually have the most to gain or lose. They generally assume management tasks are heavily involved in the business’s day-to-day operations and have decision-making authority.
On the other hand, limited partners generally do not have management responsibilities. They purchase or are gifted their shares and profits accordingly. Limited partners may pay a management fee to the general partner or partners for running the day-to-day business operations. In most family-limited partnerships, the children and grandchildren of the business founders or owners are limited partners.
Creating a Partnership Agreement in a Family Limited Partnership
Each Family Limited Partnership (FLP) needs a partnership agreement. It is essential to work with an experienced attorney to create this agreement, which needs to include clauses addressing all of the FLP’s important aspects, including the rights and responsibilities of members.
Each partnership agreement is unique and should address the family and business’s specific needs and goals. According to the agreement, each partner should be able to enjoy the legal and financial protection of an official business entity and clearly understand their role in the business and how they will earn potential profits.
FLPs Help Families Preserve Generational Wealth
One of the main benefits of creating an FLP is to preserve a family’s wealth. By creating an FLP, the owner of a family business won’t need to sell the business to outside shareholders when they retire or pass away. The children and grandchildren interested in being part of the business can purchase shares or receive shares as a gift, ensuring the business stays within the family.
The type and quantity of shares they receive can be determined based on how involved they want to be in the business. Some may want to assume day-to-day management responsibilities, while others may want to take a more passive role while continuing to own their shares and share in the business’s profits. Unlike other assets, ownership shares in a family-limited partnership come with fewer regulations. Only family members can own shares. Outside lenders or investors who aren’t personally invested in the family business can’t make decisions about the business, allowing your family to maintain influence and control over the business.
FLPS Can Decrease Tax Liability
Gift and estate taxes are one of the biggest obstacles to families preserving generational wealth. For example, large estates over the federal threshold can be subject to an estate tax rate of up to 40 percent. A family limited partnership (FLP) can help a business owner decrease their tax burden. For example, individuals can gift FLP interests to other individuals tax-free every year up to the annual gift tax exclusion amount.
Family Limited Partnerships are structured to use gift tax exclusions, allowing business owners to gift up to $16,000 of their business assets to a single individual tax-free. If you have multiple children and grandchildren, you can transfer membership shares gradually, up to the gift tax limit while alive.
Assets owned by a family-limited partnership are usually taxed at a lower-than-market-value amount, reducing your total estate’s value and decreasing the amount of taxes you’ll owe. Future returns will likely be excluded from your total estate and are not taxable. Consequently, your heirs may only be taxed on a small percentage of their inheritance through the FLP.
Family Limited Partnerships Can Provide Legal Protections
Family limited partnerships are legal business entities and enjoy corresponding legal protections. Personal finances are kept separate from business finances. If the business suffers financial difficulties, your shares may decrease in value, but your personal finances will still be protected.
For example, if your business incurs debts, the creditors likely would not be able to recover the debts from you personally. Additionally, the business’s assets will be protected if your heirs make poor financial decisions, such as going into debt, losing assets in a divorce, or due to a lawsuit.
Alternatives to Family Limited Partnerships
Family-limited partnerships do have some disadvantages. For example, general partners shoulder the liability of claims and judgments against the partnership, taxes can be complicated, and all of the partners must be at least 18 years old. Palmer & Slay, PLLC can help you decide which type of business succession strategy is right for you.
Some family businesses may form a regular Limited Liability Company (LLC) or a partnership agreement. Others create a corporation to access extensive personal liability protection. Ownership restrictions regarding various entities can help keep the business owned by family members. However, each of these alternatives comes with its own set of advantages and disadvantages, and it’s important to consult with a professional to determine which type of business succession strategy is right for you.
Contact Our Family Limited Partnership Attorney in Mississippi
If you’re interested in creating a family limited partnership (FLP) in Mississippi, Palmer & Slay, PLLC is here to help. Don’t hesitate to contact our estate planning attorneys to learn more about how we can help you develop a comprehensive estate and succession plan.
Palmer & Slay, PLLC, assists clients within Mississippi, including Scott County, Rankin County, Brandon, Flowood, East Jackson, and beyond.