The transfer of business assets can have significant tax and financial consequences. For some business owners, the best way to achieve the succession is through the use of a Family Limited Partnership, or FLP.

A limited partnership is a legal entity in which one partner, the general partner, operated the business and assumes all the liability for the partners.

This means that someone who the business owes money (a creditor) to would be able to collect from the general partner’s personal assets should the business not have enough money to pay. The limited partners, however, have limited liability, like the shareholders of a company. Their personal assets are normally not at risk, even if the business cannot pay all its debts.

Also, limited partnerships can serve asset protection purposes to make it more difficult for a creditor to achieve payment.

In a family limited partnership, the business owner will transfer the business assets into a limited partnership. Then he or she will assume the role of the general partner and be solely responsible for the management of the business. Other family members are gifted part of the company as limited partners. Though they now may own the majority of the company, they do not have a formal role in management of the company.

Of course, the general partner can involve the limited partners in the company if they choose, but the limited partners are not legally entitled to control the company in most cases.

The creation of an FLP can also have significant tax savings. In most cases, the majority of the company is transferred to other family members prior to the death of the business owner, decreasing the size of the estate for estate tax purposes and potentially eliminating the tax altogether.

Additionally, because the assets held by a limited partner are difficult to transfer and not under their direct control, the valuation of the business assets will actually be lower in the FLP than previously. This can help reduce the gift tax burden at the time of the transfer to the family.

All these benefits have subjected FLPs to increased scrutiny from the IRS over the past several years. An FLP, however, is still a valid tax avoidance strategy if it is also being used for legitimate business purposes, such as succession planning or asset protection.

In order to avoid penalties form the IRS, the business owner should ensure that no personal assets (i.e. personal home or cars) are transferred into the partnership. Additionally, a formal partnership agreement should be drawn up and followed so that partners make contributions and take distributions in an orderly fashion and not according to personal need.

Families who have failed to follow these rules have had their FLPs declared invalid by the IRS and have been subject to millions of dollars in back taxes, penalties and fines.

An FLP is not for everyone, but for many business owners, it can be the best way to plan for succession. It offers flexibility, asset protection and potentially sizable tax savings. Because of recent IRS scrutiny into this technique, it is highly recommended that expert legal advice is sought prior to attempting to create a Family Limited Partnership.

Todd E. Gallinger is an attorney with Gallinger Law, a law firm based in Irvine that provides legal services to businesses, nonprofits and their leaders. He can be reached at 949-680-5406 or
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This article is intended for general information purposes only, and should not be construed as legal advice. Anyone seeking individual legal advice must consult an attorney admitted in their jurisdiction.