Business owners in New Jersey may choose to organize their businesses as one of several different types of legal entities. Family limited partnerships are one of the options families who want to start a business together can choose.
What is a family limited partnership?
Family limited partnership
FLP is a type of legal entity that families can use for starting a business or estate planning. FLPs have general partners who run the business and limited liability partners who participate financially but are not involved in business operations. This structure allows specific members of a family to operate a business while others receive a share of the profits.
Uses for family limited partnerships
Family members may use an FLP as a means to pool family funds to start a business. They may also use this structure as a way to give shares of the business to other family members in a way that has tax benefits because each family member may use the annual tax exclusion to avoid paying the gift tax on shares. Some people prefer this method of transferring business shares to family members over establishing a trust because it allows the gifting family members to retain control of the business.
Disadvantages of FLPs
The downside of FLPs is that both general and limited partners may have liability for the debts of the business in some cases. Additionally, owners can not gift personal assets to FLPs without losing the structure, which limits its use to real estate and investment assets.
Because all business structures have advantages and disadvantages and varying rules and regulations for their use, business owners need to research each option before starting a business.