What Is a Family Limited Partnership (FLP)?

A family limited partnership (FLP) is an arrangement by which family members po🐠ol money to run a business venture. Each family member buys units or shares of the business.

Profits are shared in proportion to the number of shares each member owns, which is outlined in the partnership operating agreement.

FLP general partners hav💫e unlimited li🎃ability relating to the operation of the business. Limited partners have limited liability.

Understanding an FLP

Types of Partners

FLPs have two types of partners:

• 澳洲幸运5官方开奖结果体彩网:General partners usually own the largest share of the business and are responsible for day-to-day management tasks such as overseeing all cash deposits and investment transactions. The general partner may also take a management fee from profits if that is provided for in the 澳洲幸运5官方开奖结果体彩网:partnership agreement. 
• 澳洲幸运5官方开奖结果体彩网:Limited partners have no management responsibilities or say in investment decisions. They simply buy shares of the business in exchange for dividends, interest, and a share of profits that the FLP may generate.

Setting It Up

FLPs vary depending on the nature of the business. For example, suppose an individual wants to startꦫ a luxury apartment venture.

They expect the project to cost $1 million, including working capital, and take in about $200,000 in cash each yea🔥r before interest on mort🃏gage payments and taxes. 

They calculate that they'll need at least a 50% down payment of $500,000. And they decide to work with family members to fund the business.

Family members agree to establish an FLP that will issue 5,000 澳洲幸运5官方开奖结果体彩网:limited partnership shares at $100 each for a total of $500,000. T𝓰he limited partnership agreement states that units cannot be sold for at least six years. In addition, th🌺e FLP will pay 70% of cash earnings in the form of dividends.

The general🔴 partner (the individual with the original idea and strategy) buys 500 shares by contributing $50,000 to the FLP.

Family membꦑers buy the remaining shares. Now, each family member ow♏ns a stake in the FLP and the business has $500,000 available to begin operations.

The general partner gets a first mortgage loan with the $500,000 to start the $1 💝million luxury housing project. Infrastructure and units get built.

The FLP then leases these apartments to𝄹 tenants and begins building revenue through rent payments. As the mortga🦂ge is paid off, profits and dividends are distributed, and each family member profits.

Advantages of FLPs

There are some estate and gift tax advantages of an FLP. For example, families that form an FLP can more easily 澳洲幸运5官方开奖结果体彩网:pass the wealth they areꩲ building on to their children and grandchildren, thereby increasing their family's generatio♛nal wealth.

Gift Tax

Individuals can gift FLP interests tax free to other individuals every year, up to the 澳洲幸运5官方开奖结果体彩网:annual gift tax exclusion.

For tax year 2025, the annual gift tax exclusion for individuals is $19,000, up $1,000 from $18,000 in 2024. The amount for married couples is $38,000.

Example

Suppose a couple amass🌳ed savings worth $5 million. They have three children and nine grandch♐ildren.

The couple decides to transfer the entire $5 million amount to the FLP they established. If the gift tax exclusion remains at 2025 level🐻s, the couple can gift $38,000 to each of their 12 kids or grandkids each year.

This means the cou🍨ple can transfer $456,000 worth of FLP interests every year without having to pay gift taxes.

Since the gift tax exclusion is generally adjusted annu🦋alꦯly for inflation, the value of interests they can gift will likely increase each year.

Estate Tax

Assets transferred to an FLP effectively leave the partners' estates, as far as the IRS is concerned. This means that any future returns would be exempt from 澳洲幸运5官方开奖结果体彩网:estate taxes.

The couple's children and grandchildren would benefit from any interest, 澳洲幸运5官方开奖结果体彩网:dividends, or profits generated from the FLP. This further preserves wealth for fu✨ture generations. 

Partners can set stipulations in the partnerಞship agreement to protect these gifts from being squandered or mismanaged.

For example, they can stipulate that gifted shares can't be transferred or sold until the beneficiaries reach a certain age.

If any beneficiaries are minors, the shares can be transferred through a 澳洲幸运5官方开奖结果体彩网:Uniform Tr🐭ansfers to Minors Act (UTMA) account.

Disadvantages of FLPs

There ar👍e downsides to creating an FLP. First, it can be expensive to set up and maintain because of its complexity.

Most often, setting up an FLP will require the professional assistance of a tax specialist𓆏 and estate planning attorney. In addition꧂, you may need to call on other professionals who can help to support an FLP.

For tax purposes, an FLP runs as a business. This can expose🐈 the partners to liabilities and debts if the business is mishandled by the general partners.

Other drawbacks include capital gains liabilities and the potential difficulty involved in transferring partnership interests should the general partners have too much control.

The Bottom Line

A faꦓmily limited partnership is a limited partnership entity🅠 in which two or more family members buy buy shares.

FLPs can provide gift and estate tax advantages to partners. These advantages allow members to more easily pass profits from the business to their heirs, increasing the family's generational wealth.

However, the ruleಌs concernin♍g FLPs can be complicated and have to be followed carefully to protect the tax advantages offered.

Furthermore, as with any business, there is a chance of the venture failing. Partners could lose their investments and even incur debt if the business doesn't succeed or is poorly managed.