It was once said, “Why work to make someone else successful when you can work to make yourself successful?” For many people, being their own boss is a dream come true. If you have managed to achieve this dream, you undoubtedly have taken measures to protect your business while you’re here. However, what about after you’re gone? You wouldn’t want all of your hard work and sacrifice to fall apart as a result of your retirement, incapacity, or death. Including business succession planning in your comprehensive estate plan may be crucial to keep this from happening. Furthermore, a family limited partnership, or FLP, can be a great tool to help create a legacy that far exceeds you.
Do you intend to pass your interest in the business down to the next generation? If so, you will need to plan for this transition ahead of time. One way to facilitate the transfer of a family run business to the next generation is to create a FLP. An estate planning attorney can help you decide if an FLP is right for you and your business. However, in the meantime, understanding how an FLP works may help you decide if it is an option that warrants further consideration.
The Importance of Business Succession Planning for a Family Run Business
There was once a time when family run businesses were the heartbeat of America. Many children grew up being expected to be part of the family business. Some even anticipated one day taking over for the family patriarch or matriarch. Sadly, around the middle of the 20th century, big businesses started to overrun mom and pop operations all across the country. The majority of family run businesses faded from existence as a result. Interestingly, the tide seems to have turned. Family run businesses are once again on the rise again in the U.S. Perhaps, consumers are beginning to realize that smaller, family run businesses often offer benefits that cannot be found in big chain stores.
If you are an entrepreneur in a family business, this could mean exciting times for you! However, it is imperative that you plan ahead to ensure that your business survives the transition to the next generation. Especially when you consider that almost 80 percent of small businesses do not successfully make that transition.
What Is a Family Limited Partnership?
The Different Types of Partners
Like other limited partnerships, an FLP is a partnership made up of both general and limited partnership interests. The general partners control the management of the business, make investment decisions, and handle the day to day running of the business. In addition, the general partners share all of the liability of the business. The limited partners also have an ownership interest in the business. Yet, they have no say so in regard to management, investments, or the running of the business. Furthermore, they do not share in the liability of the business.
How an Family Limited Partnership Works
So, how does an FLP work? You, as the current owner, will contribute assets to the business. This is done in exchange for a small general partner interest and a large limited partner interest. You may then gift your limited partner interest to children, grandchildren, or other family members who are part of the next generation. Your can gift your limited interest all at once or over a period of time. One advantage to gifting your interest over time is that those gifts may qualify for the annual gift tax exclusion. This essentially means they will be tax-free gifts. The value of limited partnership shares may also qualify for discount valuation when gifted to a family member. Furthermore, the interest may be gifted directly or transferred into a trust for younger family members.
There are a number of other benefits to structuring your family business as a Family Limited Partnership. A properly drafted FLP can also provide a certain degree of asset protection. For example, protections can be put in place in the event of the divorce of a shareholder. An FLP agreement can require shares to be sold back to the partnership if a shareholder no longer qualifies as member of the family.
An FLP allows you to transfer your family run business to the next generation slowly. This provides the time that is necessary for the next generation to truly understand how to run the business properly. Moreover, by transferring ownership of the business a little bit at a time, you may be able to dramatically limit the tax implications of the transfer, further benefiting the business’s bottom line.
For additional information regarding business succession planning in or Family Limited Partnerships specifically, contact the experienced Texas estate planning attorneys at The Mendel Law Firm, L.P. by calling 281-759-3213 to schedule your appointment today.
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