The limited partnership (LP) is a popular type of business entity for managing wealth among both family members and investment groups. The LP has a host of advantages, including tax reduction and the efficient transfer of wealth from one generation to the next. More recently, it has become an integral part of asset protection planning. In fact, it very often forms the core of a solid asset protection plan.
(Within the asset protection context, a LP is often referred to as a family limited partnership (FLP). The word “family” merely indicates its use among family members.)
What is a partnership?
In the simplest terms, a partnership is an arrangement where 2 or more parties agree to work together to do business. Members of the partnership can be individuals, organizations, or a mix. The partnership is treated as a separate entity from the partners themselves.
The basic type of partnership is also known as a general partnership (GP). Some of the default characteristics of a general partnership include the following:
- Each partner has equal responsibility for partnership management.
- Each partner is equally liable for partnership debts and judgments.
- Each partner is able to bind the partnership (and thus the other partners) for debts and liabilities.
- Profits and losses are shared equally.
Absent an agreement to the contrary (which is common), the above rules apply. The biggest disadvantage of the GP is liability. Each partner’s personal assets may be at risk for partnership liabilities (including those incurred by another partner).
Limited Partnership
A limited partnership (LP) is a bit different. What distinguishes a limited partnership from a general partnership is the two types of partner: general partner and limited partner. There must be at least one of each.
General partner: The general partner is responsible for managing all aspects of the partnership, including the timing of partnership distributions. Likewise, the general partner also bears the burden of partnership liability.
Limited partner: Limited partners are not responsible for, nor are they allowed to, participate in partnership management. This is true even if they have a 99% interest in the partnership. Unlike the general partner, they are not personally liable for partnership obligations.
As with GP’s, LP’s function as pass-through entities for tax purposes. Partners are taxed on their distributions as personal income.
Limited Partnerships and asset protection
LP’s are popular and effective because of their ownership flexibility and liability protections. A basic set up would be something like this: A husband and wife set up a (family) limited partnership, owning both general and limited partnership shares. Limited shares are then transferred to other family members (such as children) over time. The parents are able to retain as little as 1% as general partners while maintaining control of the LP. (Family members may decide to hold ownership interests through other business entities or title them in trusts.)
As with limited liability companies, LP’s often carry “charging order protection.” In many states, a “charging order” is the only remedy available to a judgment creditor. A charging order entitles the creditor to the partner’s distributive share, but grants no management or voting rights. The creditor must sit and wait for a distribution at the discretion of the general partner.
Because of the advantages outlined above, LP’s are used extensively in asset protection planning. When combined with the Bridge Trust™ and other entities, the limited partnership helps establish a solid wall of protection around your assets.
Sollertis can help with asset protection
The Sollertis Master Asset Protection Plan™ is the framework for protecting all of the individual assets that contribute to financial success. Based on an analysis of your needs, each plan is a customized blueprint outlining the types and mix of legal structures needed to best meet your specific goals and objectives.
Once a MAPP™ is designed, you have a plan in place to protect your assets and to guide business, personal and investment decisions. Unlike traditional asset protection plans that take a “one-size-fits-all” approach, a MAPP™ adapts to changing circumstances. Whether implemented all at once or over time, you will create greater financial freedom knowing you’ve legally protected the wealth you have earned.
Contact us today to learn more about the Sollertis MAPP™ and our unique approach to managing all of your legal needs.
This material has been prepared by Sollertis for informational purposes only and nothing herein is intended as legal advice for any particular or individual situation. You should not rely upon any information herein as a source of legal advice, and receipt of any such information does not create an attorney-client relationship between you and Sollertis. Viewers and readers should not act upon this information without seeking professional legal counsel. Prior results do not guarantee a similar outcome.
