The Limited Partnership has been around in the United States for over 100 years. They became very popular in the 1980’s when many real estate professionals started using them. A Limited Partnership has two classes of partners…the General Partners and the Limited Partners. The General Partners are the managers and have unlimited liability. The Limited Partners are the investors and they have limited liability. The Limited Partners are not allowed to get involved in the management or day-to-day operations of the partnership.
The word “family” in front of the name is just an adjective to define the fact that the partnership is owned mostly by family members.
If a Family Limited Partnership (FLP) is drawn up in an asset protection state that is regarded as a sole remedy state, the charging order is the only recourse a creditor has against the assets of the partnership. With a charging order, a judgment creditor may get a lien but if the partnership agreement is properly drafted he will never be able to force a distribution of partnership assets.
Why does the charging order matter to you?
Simple: It will force the creditor to come back to the table and negotiate with you. A charging order that nets the creditor no money and maybe even a tax liability is of no value to him. But if you can get the creditor to accept far less than he otherwise would accept, then the asset protection plan, and specifically the Family Limited Partnership, will have worked for you.
The Family Limited Partnership is one of the powerful tools we use to protect you. However, in and of itself it may not be enough. It may very well be that you need multiple FLP’s and Limited Liability Companies combined with other more sophisticated techniques to keep your creditors at bay.
Unlike a Limited Liability Company, a Family Limited Partnership requires two members. However, that can be arranged by using a Limited Liability Company as a member, the family trust, another family member, etc. There are multiple ways to achieve the two-member minimum.
Some people prefer the FLP because the partnership agreement normally requires unanimous consent for dissolution as opposed to majority in interest (51%) as with an LLC. However, with proper drafting this can be overcome.
Also, in some states the Family Limited Partnership laws are stronger than the Limited Liability Company laws, and in those states an FLP may be the way to go.