Starting a small business is a dream come true for many people. If you are hoping to realize the American dream of becoming an entrepreneur, planning ahead is the key to the long-term success of your business. This is especially true if you plan to pass the business down to the next generation. In fact, the lack of planning is one of the leading reasons why so many family businesses fail to make a successful transition from one generation to the next. There are a number of strategies you can use to transfer your business to the next generation, including a Family Limited Partnership. A Family Limited Partnership, or FLP, is a legal structure that is specifically designed for small, family-owned businesses. The business succession planning attorneys at Frank & Kraft explain how a Family Limited Partnership might work for your business.
Choosing the Right Structure for Your Business
Long before you open the doors to the public, you will need to make a number of very important decisions that will directly impact the business. Among the most important of those is choosing a business entity for your new business. The type of entity you form will impact important aspects of your business, such as:
- Taxation – a corporation actually pays taxes separate and apart from any taxes owed by the shareholders for profits passed down to them whereas a partnership and sole proprietorship only past “pass-through” taxes on the profits passed through to the owners.
- Liability – only a corporation shields owners from the debts and liabilities of the business.
- Management – the entity you chose will affect how the business is managed and your role in that management structure.
Traditionally, a business owner had three basic business entities from which to choose when forming a business – a sole proprietorship, a partnership, or a corporation. A sole proprietorship is the default structure when a single individual is operating a business and has done nothing to form any other type of entity. A partnership exists when two or more people operate a business and share in the profits of that business. You are not required to execute any legal documents to form a partnership; however, many partnerships do operate under a Partnership Agreement. Finally, a corporation requires the owners to file Articles of Incorporation and a number of other legal documents. A corporation is actually run by a Board of Directors and the “owners” are the shareholders. From these basic three structures, a number of sub-categories and hybrids have also evolved, including the family limited partnership.
How Does a Family Limited Partnership Work?
An FLP is a specific type of limited partnership. A limited partnership is a partnership that has two different types of partners – general partners and limited partners. General partners control all management and investment decisions and bear all of the liability for debts and other liabilities of the partnership. Limited partners cannot participate in the management of the limited partnership and have limited liability. Like all partnerships, the profits and losses of the business are passed through to the partners in proportion to their interest in the business. The partnership itself does not pay taxes. A family limited partnership is simply a limited partnership that is owned by family members. Typically, in an FLP the older members of the family contribute property, cash, or other assets to the business in exchange for a small general partner interest and a large limited partner interest. Over time, they then gift their limited partner interest to the younger members of the family. Eventually, the entire business is passed down to the next generation of partners.
Although a Family Limited Partnership isn’t the right choice for all family-owned businesses, it is often the right choice. The best way to decide what type of legal structure is most advantageous for you and your business is to consult with an experienced attorney early on in the business formation process.
Contact Indianapolis Business Succession Planning Lawyers
For more information, please download our FREE estate planning worksheet. If you have additional questions or concerns about a Family Limited Partnership specifically, or business succession planning in general, contact the experienced Indianapolis business succession planning lawyers at Frank & Kraft by calling (317) 684-1100 to schedule an appointment.