When you build a business from scratch, choosing the right business structure is key. After all, your business structure will affect legal liability, tax benefits, managerial decisions, and much more.
If you create a business with family members, however, you have access to a special business structure: the family limited partnership. At first glance, an FLP might seem similar to an LLC or limited liability company. Let’s break down the differences between family limited partnerships vs. LLCs in detail.
What is a Family Limited Partnership?
A family limited partnership is a business structure meant for several family members to pool their resources together to begin a new company.
Say that you have a stellar business idea, but you don’t have enough income to make it happen. Instead, you talk to your brother, your cousin, and a few other family members. If you all agree to the business idea, you can bring your money together to create a family limited partnership.
The family limited partnership requires you to name two different types of agents:
- General partners, who are responsible for making management decisions regarding the FLP. They have unlimited liability when it comes to FLP affairs and legal concerns. In essence, the general partners are the leaders of the company – they decide who gets what, what the business will do next, etc.
- Limited partners, who don’t have any say in management or investment decisions. Instead, they pool their income with the other members of the FLP, receive dividends, and enjoy limited liability for the company’s legal matters
Say you know that you have ahead for business, as does your brother. However, your cousin isn't known for very wise business decisions. If you all agree, you and your brother can become general partners and effectively run the business.
Your cousin, meanwhile, gives you some money to get the business off the ground, then receives dividends or profits as the business becomes a success. Your cousin doesn't make any management decisions, however.
What is an LLC?
A limited liability company is a business structure that’s perfect for small to midsize companies or even some larger organizations. As its name suggests, a limited liability company “limits” your personal liability (at least on paper). So, if your business is ever sued by a customer or someone else, your personal assets won’t (theoretically) be at risk.
With a limited liability company, you can outline:
- Managers and who is in charge of executive decisions
- Ownership stakes
- And more
An LLC is a good catchall business structure for many new entrepreneurial endeavors thanks to its flexibility and versatility.
But for all its benefits, note that an LLC is not truly protective when it comes to asset defense. There’s a lot of case precedent indicating that, if needed, a court will be more than willing to breach the "protection" of an LLC and can go after your personal assets to pay down debts or lawsuit damages if needed.
Indeed, it's normally a trivial matter for a skilled lawyer of the opposition to prove that – at some point – your business and personal expenses or funds are mixed to some degree. When they prove that, any other assets that you have could be vulnerable to seizure.
Biggest Differences Between an FLP and LLC
Both FLPs and LLCs are business structures for small to mid-sized companies, and they both allow you to decide on management structures, executive powers, and similar factors. However, there are also some big differences that can make one structure or the other ideal for your upcoming enterprise.
Power and Decision-Making
As we broke down above, an FLP allows you to distinguish between members who have executive power and members who do not. General partners for a family limited partnership make all of the executive and investment decisions for the company, while limited partners don’t have any such powers.
In some cases, this can cause friction between the members of the family limited partnership.
It’s not the same with an LLC. All of the members of a limited liability company participate in managerial decision-making. So, for example, if you start an LLC with yourself and two others, all three of you must be managers or have some executive power.
This isn’t to say that an LLC shares power equally between the members. One or two members might have more power than the third in the above example. Still, to be a member of an LLC, you must have some managerial muscles to flex.
Protections from Liability
There’s another big difference in terms of liability protection. With an FLP, only limited partners have their liability limited. If an FLP is sued, it’s possible for the general partners to find their personal assets vulnerable to seizure for legal damages, creditor claims, and so on.
With an LLC, all of the members are protected from liability, at least on paper. This isn’t actually true in the real world, but it's still an important difference when you consider the different business structures you can adopt and the steps you can take to safeguard your wealth now and in the future.
Then there are tax benefits and differences. With an FLP, many members can benefit from unique taxation exemptions if shares are gifted as inheritances.
For example, a senior member of an FLP can pass down money in the form of FLP membership (e.g., you want to pass on your business to your son or daughter, so you pass on your shares in the FLP. Your son or daughter gets that wealth and managerial power in the FLP).
In fact, one of the primary purposes of family liability partnerships is to enable the passing down of family businesses and wealth without involving probate and while ensuring that the right person gets to be in charge of the family company.
With an LLC, other tax benefits exist depending on the size of your company, your income, etc. These are usually deductions you can take on your personal tax form, though they can vary. In any case, you cannot pass down shares of your LLC to a family member for tax benefits the same way you can with a family limited partnership.
Purpose of Each Structure
The last big difference between FLPs and LLCs is the purpose of each business structure.
As we’ve already gone over, the purpose of a family limited partnership is to create a business with one or more family members and to make sure that management powers are distributed according to what’s best for the company.
It’s also a good business structure if you want to pass down ownership of your business to certain family members.
The purpose of an LLC is more generalized. You can start an LLC with a family member, but all the members share executive responsibilities and powers. An LLC is, therefore, usually started with other people you aren't related to. An LLC also limits every member's legal liability, not just the liability of certain members.
How to Know Which is Right for You
Given those differences, you should be able to determine which business structure is right for you by looking at your goals, your future business partners, and the kind of company you want to run.
Do you want to start a business with your family members specifically instead of other potential business partners? An FLP could be the perfect business structure, particularly if you and your future business partners already know that some of you will be executives and others will simply be along for the ride as financial investors.
On the other hand, an LLC could be far superior if you don’t want to do business with your family members (which some entrepreneurs will always recommend).
An LLC can still be a highly beneficial structure since it limits your legal liability in some circumstances and provides you with clear outlines regarding managerial decisions, executive powers, etc.
Do not rely on either an FLP or an LLC for true legal defenses, however. Either of these structures won’t really hold up against consistent legal attacks, like a creditor claim or lawsuit against your company.
Sooner or later, one of your opponents will find a chink in your armor and will be able to claim that your personal and business resources or finances mingled at some point, making your personal assets vulnerable to seizure.
Contact Dominion Today
While both family limited partnerships and limited liability companies are highly beneficial structures in the right circumstances, they aren’t the right choice for asset protection.
Neither of these business structures will truly protect you from creditors, plaintiffs, and other possible legal opponents who want to take your assets for themselves.
Instead, you’ll need an offshore asset protection strategy, and the best way to get started with that is to speak to Dominion right away. As knowledgeable experts in this field, we’re the best people to help you develop the ideal asset protection strategy for your unique needs and potential threats on the horizon.
Get in touch with one of our representatives today to learn more.