FLP Vs. LLC

By William Pirraglia

FLPs, or family limited partnerships, are similar to LLCs, or limited liability companies. However, there are some differences that may make one option better than the other. If your organization is not a family business, you may prefer the LLC structure. However, even if your entity is a classic family enterprise, with its potentially important restrictions, you may or may not prefer the FLP structure.

FLPs, or family limited partnerships, are similar to LLCs, or limited liability companies. However, there are some differences that may make one option better than the other. If your organization is not a family business, you may prefer the LLC structure. However, even if your entity is a classic family enterprise, with its potentially important restrictions, you may or may not prefer the FLP structure.

FLPs

An FLP is controlled and managed by one family member. Like all limited partnerships, two types of partners are identified: general partners manage all business affairs and have direct liability; limited partners cannot be active in management, but enjoy limited liability that protects personal assets. In most states, FLPs are simple to set up and easy to maintain on an annual basis.

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LLCs

LLCs are also uncomplicated to create and provide limited liability for all owners, called members. Without necessity for family connections, LLCs offer similar advantages to FLPs. LLCs also have similar components to partnerships and some features of corporations, though without the same level of reporting and maintenance requirements. In perpetual LLCs, changing members is easier than with an FLP -- or any partnership.

FLP Benefits

Managing family money and minimizing inheritance tax consequences can be challenging and costly. An FLP eliminates many of these concerns, as FLPs can minimize many gift and estate tax consequences. Should the family own significant real estate assets, the effects of estate tax avoidance can involve major savings. Partners with significant assets or cash can contribute funds, or even have "partial" general partner interests and a percentage of limited partner interest to enjoy more profits while also having limited liability for losses or creditor threats.

LLC Advantages

LLCs have no family restrictions. You can have members from the United States or around the world without fear of legal challenge. LLCs can choose to be taxed as a partnership, with profits and losses distributed to owners as personal income or loss. Since FLPs require unanimous agreement to dissolve the company instead of a 51 percent majority with an LLC, an LLC offers important advantages should circumstances indicate a dissolution of the company. Additionally, an LLC is the better option should you desire to change your company to a corporation so that you can attract new shareholders or go "public" and have your stock available for purchase globally.

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The Legal Definition of LLC

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