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The pros and cons to family limited partnerships

| Jan 18, 2022 | Partnership Agreements And Disputes |

Texas residents may want to learn more about the family limited partnership and its advantages and disadvantages. It is a partnership that a family (or extended family) may form for the a business purpose. A family may use it to run a family business or for holding real estate, investments, cash or other assets.

According to professionals, it can be used to pool family resources. However, there are both pros and cons for this type of arrangement.

What is a family limited partnership?

A family limited partnership is comprised of at least one general partner and one or more limited partners. It is often used by partners to combine their resources so they can undertake projects they might not have the means to undertake alone. For example, they may want to undertake a new project, like building apartments for rentals.

A family limited partnership is also often used to hold a family business, and allow for the gradual transfer of ownership of the business from one generation to the next.

The general partner(s) are responsible for day-to-day operations. Limited partners contribute money or assets, but have no say in the day-to-day operations. Partnership agreements, whether family or not, should call for the right management in order to be successful.

Pros of the family limited partnership

In regards to an estate and taxes, the return of any asset remains in the family limited partnership. When the asset transfers into the family limited partnership, it remains at the original value, not the increased value.

Meanwhile, pooling your money will allow you to have involvement in projects that otherwise might not be possible. The combined capital may allow larger projects to be purchased or developed than any of the individual family members could undertake on their own.

Cons of the family limited partnership

There are limits on how much time has passed before you can sell partnership interests to third-parties (i.e. non-family members). If you sold early, they are subject to conditions set forth in the Federal Securities Act of 1933.

If you are a limited partner, you must trust the general partner, who has unrestricted access to the cash. As mentioned earlier, good management is essential.

Forming a limited family partnership has both advantages and disadvantages. A family may want to learn more about how a family limited partnership works and if it is the right vehicle for them.