For many people, starting a small business is a dream come true. If you are one of those people, and you hope to one day pass down your business to the next generation, careful planning is the key. There are several strategies you can use to transfer your business down to the next generation, including a Family Limited Partnership. A North Andover business succession planning attorney at DeBruyckere Law Offices discusses why a Family Limited Partnership might be right for your business.
Choosing the Right Business Structure
Starting a small business requires you to make several very important decisions that will directly impact the success of your business. One of the first decision you need to make involves choosing the right business entity for your new business. The type of entity you form will impact important aspects of your business, such as taxation, liability, management, and the ability to pass down the business to the next generation.
Traditionally, there were three basic entities from which a business owner could choose – sole proprietorship, partnership, or corporation. A sole proprietorship is the default structure when a single individual is operating a business and has done nothing to form any other type of entity. A partnership exists when two or more people operate a business and share in the profits of that business. You are not required to execute any legal documents to form a partnership; however, many partnerships do operate under a Partnership Agreement. Finally, a corporation requires the owners to file Articles of Incorporation and several other legal documents. A corporation is run by a Board of Directors and the “owners” are the shareholders. Because not all businesses fit neatly into one of the three original structures, several sub-categories and hybrids evolved over the years, including the Family Limited Partnership.
How Does a Family Limited Partnership Work?
A FLP is a specific type of limited partnership. A limited partnership is a partnership that has two different types of partners – general partners and limited partners. General partners control all management and investment decisions and bear all of the liability for debts and other liabilities of the partnership. Limited partners cannot participate in the management of the limited partnership and have limited liability. Like all partnerships, the profits and losses of the business are passed through to the partners in proportion to their interest in the business. The partnership itself does not pay taxes. A family limited partnership is simply a limited partnership that is owned by family members. Typically, in an FLP the older members of the family contribute property, cash, or other assets to the business in exchange for a small general partner interest and a larger limited partner interest. Over time, they then gift their limited partner interest to the younger members of the family. Eventually, the entire business is passed down to the next generation of partners.
How a Family Limited Partnership Helps Protect Assets
When a family business owner fails to plan, it dramatically increases the likelihood that the business will fail to successfully transition to the next generation. One common cause of that failure is federal gift and estate taxes. When the business owner dies, all the business assets are subject to taxation because they remain part of his/her estate. All too often, assets necessary to the survival of the business must be liquidated just to cover the tax bill. By establishing a FLP, the majority (if not all) of the business assets are transferred to the next generation long before the death of the patriarch/matriarch.
Contact a North Andover Business Succession Planning Attorney
If you have additional questions or concerns, please contact a North Andover business succession planning attorney at DeBruyckere Law Offices by calling our New Hampshire office at (603) 894-4141 or our Massachusetts office (978) 969-0331 to make an appointment.