About Limited Liability Companies (LLCs), Limited Partnerships (LPs) and Family Limited Partnerships (FLPs) for Asset Protection, Estate, and Tax Planning
Limited Liability Companies and Limited Partnerships are business entities that insulate assets. Although often used to protect an ongoing business, they can also be used to protect almost any asset. The common factor between them is that they are both governed by a contract between the owners of the entity. For an LLC, this is usually called an Operating Agreement; for an LP, this is usually called a Partnership Agreement. For informational purposes, we'll refer to them as the Governing Agreement. The term Family Limited Partnership does not appear in the law—it is simply a designation used to indicate the general characteristics within the Governing Agreements of a Limited Partnership meant to protect assets within a family. Within this to avoid confusion, we only use the term to refer to characteristics usually associated with the Family Limited Partnership, and when we do we refer to them as "Family LPs."
How can Governing Agreements offer or support an Asset Protection Plan?
Generally, the Governing Agreement is a contract and can include a wide range of clauses. These can and should be tailored to your asset protection needs. This personalization is an important difference between what an asset protection attorney can offer and what financial planners can offer. In short, asset protection lawyers know what can and can't be used in a Governing Agreement.
Generally, we recommend making another limited liability entity the general partner of the LP—the general partner assumes liability for creditors to the LP, and in turn provides another level of security. For more elaborate asset protection plans, we further recommend making another limited liability entity the limited partner of the LP as well, and having family members own interests in this limited liability entity.
We recommend that the following features be considered, and many of them used, when using these entities in Asset Protection Plans:
- A provision to make the owner's interests unable to be assigned without the consent of all other owners, to prevent creditors from taking the interest;
- A provision removing the power, included by default in most state's laws, to demand dissolution or a distribution from the LLC or LP to cash-out an owner's interest as well as other derivative rights (that is, rights of the owners individually) such as the right to request distributions, the right to request receivership, or the right to inspect the books;
- A provision stating that owners are not obliged to disclose the entity or the entity's assets to anyone, and that the LLC or LP is also not obliged to disclose assets, to provide privacy;
- A provision whereby the manager can halt distributions to a member or partner being pursued by creditors, and can make distributions on a basis other than share of ownership, so that assets may be retained within the entity and not taken or may be given to members who are not the target of creditors; and
- A provision allocating income and losses of the LLC or LP to provide the most advantageous reductions to tax liability across the members of the LLC or LP; and, for Family LPs only
- An escape clause whereby a family member can be bought out if certain events occur (such as bankruptcy) by the Family LP for a small payment, again, to save substantially all of the assets of the Family LP from creditors.
The Importance of Considering State Law "Charging Orders" in an Asset Protection Plan
Unlike other business entities, LLCs, LPs and Family LPs can require a creditor to get a "charging order" in order to pursue their debtor's ownership interest in the business entity. To learn more about how to defend against these, click here.
But my business is a corporation. Can it be asset protected?
Yes. The stock you own of that company is an asset that is able to be protected using other means available to us. Additionally, the assets owned by the corporation can be protected using asset protection strategies and techniques.