Wyoming Family Limited Partnership
A family limited partnership (FLP) is an entity in which there are multiple incidences of
ownership owned by family members, usually in the form of family limited partnership units.
The typical FLP has multiple limited partners and one general partner. The general partner
controls and manages the FLP for the benefit of all of the partners. The limited partners, on
the other hand, hold family limited partnership units but lack control or management
authority over the FLP.
A family limited partnership is created when persons join together their money, goods, labor,
or skill for the purpose of carrying on a trade, profession, or business and when there is a
community of interest in the profits and losses. Generally, each partner contributes one or
both of the ingredients of income - - capital or services.
There are many reasons for forming a family limited partnership. There are certain
business advantages, tax advantages and non-tax advantages, including the following:
- The family limited partnership will increase the wealth of the partners and their
families. Pooled assets will result in several advantages for the partners. There will
be fewer commissions and charges on assets purchased or sold because there is
only one account. There will be fewer administrative fees for one large block of
assets compared with the same amount of assets in two or more smaller unit sizes.
There will be economics of scale that will keep multiple partners from paying for the
same thing on their individual shares. ¬
- The family limited partnership provides flexibility in business planning not available
through trusts, corporations or other business entities. Other entities do not allow
family members or partners who are most capable of managing assets to manage
assets that they do not own without subjecting assets to potential tax problem. Tax
problems include, but are not limited to, two layers of taxation, one at a corporate
level and one at the individual level, or compressed tax rates. Consequently, a
corporation may be subject to two layers of taxation to which the family limited
partnership is not subject. The family limited partnership already has or may acquire
assets that a S Corporation is incapable of holding.
- Dissolving a family limited partnership has less onerous tax consequences than
dissolving a corporation. Family limited partnerships are not subject to the Wyoming
State franchise tax, unlike corporations and limited liability companies.
- Income tax may be reduced because income distributed to limited partners is not
subject to self employment tax. Distributions to a partner of a general family limited
partnership, corporation, trust, or limited liability company are subject to self
employment tax.
- The family limited partnership is a business. That business may help the family
qualify for the additional estate tax benefits provided in the Taxpayer Relief Act of
1997 to a family business. A family limited partnership made up primarily of family
investment assets is more likely to meet the stringent rules for qualifying for the
exclusion than a typical family business.
- The family limited partnership consolidates fractional interests in the assets held by
the various partners into one block of assets. The fractionalized interests in assets
will not be as valuable as the unfractionalized assets. A unified voting block of assets
is stronger than several smaller parts. This will increase wealth, make for more
efficient management of assets for the partners, create a better negotiating position
for partners resulting in greater production for the partners, reduce or eliminate
disputes among the partners, and prevent diminution of family wealth caused by
division and separate ownership of assets.
- The assets are worth more collectively than the sum of the individual parts. To take
advantage of this in the market place, it is necessary to consolidate the assets under
one management team instead of the same assets being split up into individual parts
held by several individuals.
- The family limited partnership consolidates the management of the family limited
partnership assets. The family limited partnership provides easier and more prudent
management of the assets.
- In negotiations with third parties regarding family limited partnership assets, a united
front by all partners gives the partners a much better negotiating position. The
resulting leverage will increase the production of family limited partnership assets.
- It is easier to make one deal with a third party than several deals. This makes
business dealing more efficient and provides greater production for the family limited
partnership. It also makes planning by third parties easier since third parties deal with
only one entity with a large block of assets instead of several individuals with much
smaller blocks of the same assets.
- By providing a clear means of resolving disputes among partners, the family limited
partnership encourages partners to resolve disputes by negotiation. Since the
dispute resolution system is risky for any partner, disputes may be resolved without
resorting to mediation or arbitration.
- The family limited partnership can manage and develop, or either one, real estate
owned or acquired by the family limited partnership. One entity with one management
team can make the process of acquiring real estate, managing real estate, developing
real estate, and selling real estate much easier. The benefits of pooled resources
make putting together the capital for real estate interests less costly than for
individuals. The greater collection of assets may also make it easier to negotiate
better interest rates on loans.
- The family limited partnership establishes and maintains an order of succession and
control of family assets. Lack of coordination in estate planning between family limited
partnership members make it much more likely that the family limited partnership
assets will fall under the control of non-partners whom the partners do not want to
have control of the family limited partnership assets.
- The family limited partnership is more flexible that other business planning tools that
might be available. Owners in family limited partnerships are not required to
recognize gain or loss in connection with the liquidation, except to the extent that any
cash received or deemed received exceeds the adjusted basis of a partner’s interest,
in the family limited partnership immediately before the distribution.
- The family limited partnership is more flexible than a trust because:
- it can be amended or terminated without adverse tax consequences, whereas a
trust becomes irrevocable at a certain point in time requiring judicial reformation;
- it provides better income tax rates since it is a flow through entity, whereas a
trust has compressed income tax levels which reach higher income tax levels at
relatively low income levels; and
- the business judgment rule applies to family limited partnerships, whereas a
higher fiduciary standard applies to the trustees of a trust.
- The family limited partnership is more flexible than a “C” Corporation because:
- a “C” corporation is subject to two separate layers of taxation. The first layer of
taxation occurs at the corporate level and the second layer occurs at the
individual level when dividends are paid, whereas a family limited partnership
only raises income taxation concerns when dividends are paid to the partners;
- the “C” corporation has unrestricted transferability allowing anyone to own an
interest in the “C” corporation, whereas a family limited partnership can restrict
transfers of interests;
- the family limited partnership has a limited time of existence, whereas the “C”
corporation has unrestricted continuity of life;
- the “C” corporation has disadvantageous tax consequences upon formation,
whereas the family limited partnership does not; and
- there may be adverse tax consequences on the dissolution of a “C” corporation
whereas there are no disadvantageous tax consequences on the dissolution of
a family limited partnership
- The family limited partnership is more flexible than an “S” Corporation because:
- an “S” corporation cannot hold certain types of assets than can be held by the
family limited partnership; and
- the “S” corporation has considerably less flexibility due to ownership eligibility
restrictions imposed on “S” corporations.
Please contact our office or review the additional articles on this page to learn more about
Family Limited Partnerships.
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