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Family Limited Partnership (FLP): Definition, Pros & Cons

File Photo: Family Limited Partnership (FLP): Definition, Pros & Cons
File Photo: Family Limited Partnership (FLP): Definition, Pros & Cons File Photo: Family Limited Partnership (FLP): Definition, Pros & Cons

What is the definition of a family limited partnership (FLP)?

Family members fund a business endeavor via a family limited partnership (FLP). The partnership operating agreement states that family members acquire firm shares and earn proportionally.

A Family Limited Partnership’s (FLP) Meaning

There are two kinds of partners in family-limited partnerships. General partners, who are in charge of managing all cash deposits and investment activities as well as daily operations, frequently own the majority of a company’s shares. Should it be specified in the partnership agreement, the general partner may also deduct a management fee from earnings. Limited partners are not in charge of management. Instead, they purchase company stock in return for any dividends, interest, and gains the FLP may make.

Depending on the type of business, FLPs differ. Let’s say someone wants to launch a business selling opulent apartments. Before taxes and interest on mortgage payments, they anticipate the project will cost $1 million, including working capital, and generate around $200,000 in cash flow annually. They estimate a down payment of at least 50%, or $500,000. They then contact a few family members and agree to form a limited partnership (FLP) that will issue 5,000 shares at $100 per share for $500,000. According to the little partnership agreement, the FLP will provide dividends equal to 70% of cash revenues and prohibit units from being sold for at least six years.

The initial caller contributes $50,000 to the FLP, acting as a general partner, and purchases 500 shares. Family members buy the leftover stock. Each family member now has a $500,000 investment in an FLP. To begin construction on the $1 million luxury house project, the general partner may get a first mortgage loan for the remaining $500,000.

After leasing these units to renters, the FLP starts collecting rent. Each family member gets richer when the mortgage is paid off and earnings and dividends are disbursed.

Benefits of Limited Partnerships for Families

A family-limited partnership has some advantages over the estate and gift taxes. Many families use FLPs to transfer money between generations and to receive certain tax benefits.

Up to the yearly gift tax exclusion, people can give FLP interests to others tax-free each year. The gift exclusion for 2022 is $16,000 for single people and $32,000 for married couples. For the calendar year 2023, this rises to $17,000 (or $34,000 for a married pair).
Let’s say a couple saved five million dollars. Nine grandchildren and three children make up their family. The pair chooses to deposit the total sum into the FLP they created. Every year, they give each of their twelve children or grandchildren $34,000 worth of FLP holdings. Assuming the gift tax exception stays the same, the couple may transfer $408,000 in the cost of FLP interest per year without incurring any gift tax.

Family Limited Partnerships’ Drawbacks

The process of writing an FLP has drawbacks. First, due to its complexity, it may be costly to set up and maintain. A tax specialist and an estate planning attorney are typically needed to set up an FLP; you might also need to contact additional experts who support FLPs. Furthermore, suppose any family member mismanages the FLP in any manner. In that case, it may expose you or other family members to liabilities and obligations since it must be operated as a company for tax reasons. Additionally, it might be difficult to transfer ownership interest to minors, and there might be a capital gains obligation.


  • Benefits of gift and estate taxes
  • There are two kinds of collaboration options.
  • Aids in generating future wealth for families


  • It might be costly to install and keep up
  • Transferring to minors might be challenging.
  • Members run the danger of getting into debt and hurting other people.

Particular Points to Remember

Furthermore, from an IRS perspective, these assets essentially leave the couple’s estates, meaning that any further returns would not be subject to estate taxes. Any income, dividends, or profits from the FLP would benefit the couple’s children and grandchildren, conserving money for future generations.

The pair, in their capacity as general partners, may include provisions in the partnership agreement to guard against misappropriation or waste of these gifts. For instance, they may create a regulation prohibiting gift-sharing from being sold or transferred until the recipients reach a specific age. The shares may be transmitted via a Uniform Transfers to Minors Act (UTMA) account if any recipients are minors.

Family limited partnerships: what are they?

A family limited partnership is an agreement where family members pool resources to manage a business, such as a real estate endeavor.

Is maintaining a family-limited partnership expensive?

Sure. A family limited partnership has many moving components, so setting it up and maintaining it may be costly. If your company is sophisticated, you might need to hire estate attorneys and tax specialists.

To establish a Family Limited Partnership, how many people are required?

Like a holding company or firm, a family-limited partnership needs to have a minimum of two members.


  • A holding corporation or firm that two or more family members hold is a family-limited partnership (FLP).
  • The act of founding an FLP has benefits and drawbacks.
  • Every family member can purchase shares in the business for a possible profit under a family-limited partnership (FLP).
  • General and limited partners are the two categories of partners in an FLP.
  • FLPs, which provide tax-free transfers of assets, real estate, and other wealth, are frequently created to protect a family’s generational fortune.



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