Bulletproof" Your Wealth with Family Limited Partnerships and LLC's A limited partnership is a partnership that has at least one limited partner and one general partner. Most states require
filing of a certificate with state in order to be recognized as a limited partnership.
The limited partners generally have no liability beyond their contribution to partnership. If limited partnership business fails, creditor cannot go after limited partners for debts (there are a few minor exceptions to this rule that are not difficult to avoid). Furthermore, limited partners are not personally liable for wrongful acts committed by other partners. In exchange for this limited liability, limited partners give up their right to participate in control and management of partnership.
The general partners run management of partnership. The general partners control cash distributions to partners. The general partners also have unlimited liability, as in a general partnership. Creditors of partnership can look to general partners' personal assets if limited partnership's assets are insufficient. Furthermore, general partners are liable to third parties for wrongful conduct within partnership business (e.g., a "slip and fall lawsuit"). Thus, a corporation is usually better for pure liability protection for its owners.
The limited partnership does not pay taxes as an "entity." It files an informational tax return to IRS. It issues a form K-1 to partners who include partnership income or loss on their personal tax returns. The partners must pay income tax on all gains whether or not profit is distributed.
Creditors of individual partners cannot take a partner's place in partnership. A creditor may garnish partner's share of income (called a "charging order"), but has no right to participate in management or utilize partnership property. Thus, if a limited partner's income is garnished by a creditor, general partner (who should be under limited partner's control) can frustrate creditor by not distributing income to partners. Since a partner is required to pay taxes on his share of income whether or not income is distributed, guess who gets tax bill? You guessed it, creditor! If your assets are held in a limited partnership, they are virtually judgment-proof!
The Family Limited Partnership
Let's look at a variation known as a "family" limited partnership. Suppose that you and your spouse create a limited partnership to hold your family's liquid assets. Your limited partnership contributions are all of your stocks, cash, CD's and mutual funds totaling $300,000. Your partnership agreement could state that your spouse will act as general partner with a 2% share (the size of general partnership share does not affect general partner's power to manage partnership's affairs). You agree in writing that your contributions constitute a 98% limited partnership interest.
