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Family Limited Partnerships

A family limited partnership (FLP) can be a valuable estate planning tool. Family limited partnerships allow families to control and manage assets while limiting liability for most partners. Forming a family limited partnership can also help consolidate assets, lower income taxes, and make it easier to transfer assets. That said, there are complex legal issues related to family limited partnerships in Arizona, which is why you should seek help from an attorney to help you form such a partnership.

The Arizona estate planning lawyers at Pennington Law, PLLC can provide guidance and legal representation if you want to form a family limited partnership. Our attorneys have over 25 years of legal experience and received numerous honors for their work, including a “Litigator of the Year” award in 2021 for lead attorney and founder Andre L. Pennington.

We would be happy to explain a family limited partnership, how it works, your other legal options, and how to form such a partnership. We can handle all the necessary legal work and answer any questions. Call Pennington Law, PLLC today or visit our contact page for a free case review.

What Is a Family Limited Partnership?

Family members create a family limited partnership to manage and transfer assets, particularly for estate planning. In an FLP, family members contribute assets and become limited partners, while one or more family members act as general partners and manage the partnership.

The general partner or partners have full management rights and make critical decisions about the partnership’s assets. Limited partners own a percentage of the FLP’s income and assets but have no management rights or control over the FLP. The partners in an FLP can be family members or business entities they control.

What Are the Benefits of a Family Limited Partnership?

Family limited partnerships offer many potential benefits for estate planning and other purposes. These benefits include the following:

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Protecting Family Assets – Placing a business or other asset in a family limited partnership means the asset stays under the family’s control. You worked hard to build your business, and a family limited partnership can help you protect your assets from creditors and lawsuits.

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Consolidating Assets and Lowering Estate Taxes – Putting your family’s collective assets in a family limited partnership can help reduce the value of family members’ taxable estates, resulting in estate and gift tax savings.

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Lowering Income Taxes – You could receive income tax benefits depending on how you structure a family limited partnership.

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Centralizing Management of Assets – The FLP allows for centralized management of family assets, making managing and transferring them easier.

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Transferring Assets Smoothly – An FLP allows for the smooth transfer of assets from generation to generation without probate or other legal processes.

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Family Limited Partnership vs. Irrevocable Trust

Arizona Family Limited Partnership Infographic
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Clients sometimes ask us why they should form a family limited partnership when an irrevocable trust offers similar benefits. It’s a fair question, particularly because both can provide significant tax advantages and can help protect assets from creditors and lawsuits. However, there are notable differences between a family limited partnership and an irrevocable trust to keep in mind.

Family Limited Partnership (FLP)

  • A partnership created by family members for managing and transferring assets
  • The family members contribute assets to the partnership and become limited partners, while one or more family members act as general partners and manage the partnership
  • The limited partners have no control over the partnership, while the general partners have complete control
  • The FLP can provide significant tax advantages for estate planning purposes
  • An FLP can help protect the family’s assets from creditors and lawsuits
  • The FLP allows for centralized management of family assets

Irrevocable Trust

  • A legal arrangement in which a trustee holds and manages assets for the benefit of the trust’s beneficiaries
  • The grantor transfers assets to the trust and gives up control over those assets
  • The trustee controls the trust assets and manages them for the benefit of the beneficiaries
  • The trust can provide significant tax advantages for estate planning purposes
  • The trust can help protect assets from creditors and lawsuits
  • The trust can provide greater privacy than an FLP because the trust documents are generally not publicly available
  • The trust can include specific instructions for how the assets are to be managed and distributed to the beneficiaries
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How to Set Up a Family Limited Partnership

How to Set Up a Family Limited Partnership

Setting up a family partnership in Arizona is relatively straightforward, though we strongly advise hiring an attorney to help you avoid legal issues.
The basic steps in setting up a family partnership are as follows:

Choose a Name for the Partnership – The name of every business or partnership in Arizona must comply with state law and must not be the same as another existing partnership in the state. You can search the Arizona Secretary of State’s list of business names here.

Take Care of Your Taxes – You don’t want to have issues with state or federal tax authorities. You can find the IRS forms for obtaining an Employer Identification Number here and Arizona’s partnership tax forms here.

Draft a Partnership Agreement – A partnership agreement outlines the terms and conditions of the partnership, including the roles and responsibilities of the general and limited partners, the FLP’s management structure, and the procedures for decision-making and dispute resolution. Having an attorney draft a partnership agreement is always a good idea, as you want to ensure every partner fully understands the agreement.

File a Certificate of Limited Partnership with the Arizona Corporation Commission – This document must include the partnership’s name and address of the registered agent, the name and address of each general and limited partner, and the term of the partnership. You can find the required paperwork here.

Transfer Assets to the Partnership – The general partners must transfer assets to the partnership, which will be managed by the partnership for the benefit of the limited partners.

Comply with Ongoing Requirements – The partnership must comply with ongoing requirements, such as filing annual reports with the Arizona Corporation Commission and paying required taxes and fees.

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Who Controls a Family Limited Partnership?

Family limited partnerships are made up of general partners and limited partners. The general partner or partners control the partnership by managing the partnership’s assets and making decisions on the partnership’s behalf.

While limited partners in the FLP have no control over the partnership and do not participate in managing it, they do receive income and assets from the FLP. Remember that the terms of the partnership agreement can be tailored to meet the needs and goals of the family.

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Differences Between a Family Limited Partnership and a Family LLC

Family limited partnerships and family limited liability companies (LLCs) work similarly in Arizona, but there are some key distinctions you should know about. Although both FLPs and family LLCs are created by family members for managing and transferring assets, the two have significant differences. They include the following:

  • The family members contribute assets to the LLC and become members who have an ownership interest in the LLC. The LLC is managed by one or more members, who may be family members or outside managers. On the other hand, the FLP has limited partners, who have no control over the partnership, and a general partner (or partners), who has total control.
  • The LLC provides limited liability protection to its members, which can help protect their personal assets from business debts and lawsuits.
  • The LLC is taxed as a pass-through entity, meaning the income and losses are passed through to the members and reported on their individual tax returns.
  • An LLC can be more flexible than an FLP regarding ownership structure and management arrangements.
  • The LLC can provide a more formal and transparent structure for managing family assets.
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How to Get Out of a Family Limited Partnership

You might be able to get out of a family limited partnership, though you will most likely have to abide by the terms of your partnership agreement. Here are some general steps to consider:

  • Review the Partnership Agreement – The partnership agreement should outline the procedures for withdrawing from the partnership. It may also specify any withdrawal restrictions or limitations, such as requiring approval from the other partners or providing notice within a specific timeframe.
  • Transfer or Sell Your Partnership Interest – If the partnership agreement allows for it, you may be able to sell or transfer your partnership interest to another party, such as a family member or a third-party buyer.
  • Obtain a Court Order – If you and your partners cannot resolve your differences or your partnership agreement does not contain terms for dissolving the partnership, you might need to take your case to court.

Contact a West Valley Arizona Family Limited Partnership Lawyer Today

Family partnerships offer many benefits and can be invaluable in estate planning and asset protection. But you don’t want to form one without discussing the advantages and requirements with a lawyer. If you want to know more about family partnerships in Arizona, call Pennington Law, PLLC today or visit our contact page for a free consultation with a family limited partnership attorney.

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