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Limited Partnership (Family)

Let's look at the advantages of the Limited Partnership.

  1. Partnerships have been in existence for longer than this country has been in existence. In fact formal partnerships can be traced back for almost 1,000 years.
  2. Any type of entity or person can be a partner in a partnership so long as there are two partners. Any two of the following qualify to be a partner: person, corporation, partnership, trust, limited liability company, non resident alien, international entity, charity, foundation, and an ESOP.
  3. A Limited Partnership can have as many partners as is manageable. Sub "S" Corporations are currently limited to 100 stockholders.
  4. Tax Neutral - Partnerships are a pass through or transparent transaction for tax purposes. At the end of each year a partnership files a 1065 form and each partner is given a K1 for their share of the partnership's loss or profit.
  5. Disproportionate Distributions -Partners in a partnership may receive a disproportional share i.e., a share that is a larger or smaller than their ownership share in the partnership's profit or loss.
  6. Gifting Program - A program can be established in a Family Limited Partnership in which partnership interest can be gifted to family members with the General Partner maintaining full control over the partnership business. In addition, the government allows for those interests gifted to be discounted in value. Through the gifting program income can be shifted from those in a high tax bracket to those in a low tax bracket.
  7. The Charging Order - Under the doctrine of the charging order, which is in place in all 50 states, a creditor can not seize Limited Partnership interest. If you're a shareholder in a corporation a creditor can seize your corporate stock. Not only is a creditor blocked from taking possessions of your partnership interest, but the creditor can not force a distribution from the partnership, yet you as a Limited Partner may receive benefits from the partnership rather than a distribution. And if all of this is not enough, there is one more advantage. Under the IRS Revenue Ruling 77-131 a creditor who makes a charging order claim against a Limited Partner interest may be responsible for that partner's taxes on that distribution even though no distribution ever occurred.

So our recommendation for a great basic asset protection plan is:

  1. Limited Partnership (Family),
  2. Limited Liability Company to act as General Partner,
  3. A trust as owner of the Limited Partnership interest in the LP and the non Managing Member membership interest in the LLC. For great asset protection make the trust an Ultra Trust and you now have a double wall of asset protection.

So for all of these reasons and more we feel that the vehicle for operating a business should be a Limited Partnership (Family). Now, however, comes the question who or what is going to be the General Partner. The real draw back to a Limited Partnership is there must be a General Partner. The General Partner in a Limited Partnership is the Manager of the partnership and has total liability for all of the actions and liabilities of the partnership. Therefore, we always recommend that another entity be the General Partner. That is why we use a Limited Liability Company as the General Partner.

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