Advantages & Disadvantages of a Family Limited Partnership

Family limited partnerships are an attractive option for family-owned and operated businesses, as this type of business organization allows parents to provide monetary gifts to children at a significant discount. This type of company organization is common in businesses such as large family farms. There are several advantages and disadvantages to organizing your business as a family limited partnership.

Significance

The organization of a family business is essential in ensuring that the business outlives the first generation of founders. The failure of many family-owned businesses is largely due to deficient management-succession planning. Additionally, the high rate of death taxes may lead to the inability of the next generation to maintain the business after the original generation passes on. The limited family partnership protects the assets of the business and provides a significant estate tax savings advantage. The main purpose of the family limited partnership is to ensure the family business can be successfully passed on from one generation to the next.

Advantages

While one of the main advantages of organizing the business as a family limited partnership is the ability to discount the value of any company assets transferred to family members, there are several other advantages as well. For example, the general partners maintain control and may also restrict limited partners from selling off their interest in the family business. The general partners may also choose to reinvest dividends into the company rather than making distributions to limited partners.

Disadvantages

When determining whether to form a family limited partnership, also consider the disadvantages associated with this form of business organization. First of all, the family limited partnership can be expensive to set up. Additionally, according to the University of Illinois Farm Doc website, “capital must be a material income-producing factor for the partnership, and the donee-partner must be the real owner of an interest in that capital.” If these requirements are not met, the donee will be taxed for partnership income.

Considerations

Weigh the tax consequences and costs associated with setting up the family limited partnership against the benefits of doing so. Obtain input from all family members who have an interest in the organization of the family business. Have the funds available to fund and maintain the family limited partnership once it is set up. Finally, follow through with the formalities required when maintaining a family limited partnership. When these formalities are not followed, the courts will likely throw out the family limited partnership agreements and make decisions on family dispute cases as though the agreement never existed.

References

About the Author

Amanda L. Webster has a Master of Science in business management and a Master of Arts in English with a concentration in professional writing. She teaches a variety of business and communication courses within the Wisconsin Technical College System and works as a writer specializing in online business communications and social media marketing.