Tax Strategies & Preparation Articles

Read Part 1

It’s important to take the time to consider which business entity best matches your particular business situation. Last week we talked about the importance of looking at limited liability entities when considering your liability, your creditors’ access to your assets, and your tax obligations. We looked specifically at C and S-Corporations and how they might benefit you and your business. This week we’ll look at limited partnerships (LP’s), family limited partnerships (FLP’s) and limited liability companies (LLC’s).

Limited Partnership (LP or FLP)

A partnership is a business organization in which two or more persons together own the assets of the organization and share in the organization’s profits. Maybe you and your brothers own the business, or perhaps you’ve decided to partner two or more good friends who also do accounting and bookkeeping. In a general partnership, all partners are equally and personally liable for all business debts and liabilities. In a limited partnership, however, limited partners are not liable for business debts. A limited partnership is a partnership comprised of at least one general partner and one or more limited partners.

A limited partnership with family members as partners is often called a “Family Limited Partnership” or FLP. The general partner is liable for all of the business debts. The general partner of a limited partnership generally owns a very small percentage (let’s say 1%) of the partnership assets, but has complete control of the activities of the limited partnership. As you can see, while a limited partnership provides limited liability for the limited partners, the general partner will always have unlimited personal liability.

Pros

• Limited liability for the limited partners.
• The partnership is not taxed; profits and losses “flow through” to the partners, and each must report their income on Form K-1.
• Flexible asset protection.

Cons

• Filing an FLP is more expensive than filing a general partnership.
• Limited partners are not allowed to participate in the management of the limited partnership.
• The general partner remains personally liable for the obligations of the limited partnership.

Limited Liability Company (LLC)

An LLC has some of the characteristics of a corporation (enjoying limited liability) and some of the characteristics of a partnership (pass-through taxation). One or more persons form and own the LLC, becoming its “members.” They can either manage the LLC themselves, or hire managers to oversee day-to-day operations. One person can create an LLC, although it will be taxed as a sole proprietorship. However, you can still enjoy the benefits of limited liability.

Pros

• Limited liability.
• Fewer formalities are required.
• The partnership is not taxed; profits and losses “flow through” to the partners, and each must report their income from Form K-1 on their IRS Form 1040.
• Depending on the state, an LLC can be formed by one member.

Cons

• Possible dissolution of company due to a partner’s death, retirement or bankruptcy
• It’s more expensive to file an LLC than a general partnership.

Any of these business entities are fairly easy to establish, but requirements vary state to state; visit your local state website to see what you need to do. The most important part of the process is determining which entity is best for you. After that, the rest is business as usual.

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