Why Should You Place Your Liquid Assets Into a Family Limited Partnership or Trust? Part II

     Last week, we began a series explaining why an individual should place his trading and/or investment account into some type of entity.  Trusts and family limited partnerships (herein called “FLPs”) are the most often used entities.  This post will provide a very general definition of a limited liability partnership.

     Texas law (and most other jurisdictions) defines a partnership as, “an association of two or more persons to carry on a business for profit as owners.”  This definition contains several key words:

1. An association is, “an organization of people with a common purpose and having a formal structure.” 
2. “Person” is a term of art in the partnership code; it includes actual people as well as all juridical entities such as corporations, trusts, LLCs, etc…
3. The code defines a business as “a “trade, occupation, profession or other commercial activity.”
4. Profit is, “pecuniary gain resulting from the employment of capital in any transaction.” 
5. The code defines an owner as a partner

Putting the above information into more general terms, we get the following definition: a partnership is a formal organization of individuals and/or juridical entities whose primary purpose is to earn a profit from some type of trade, occupation, profession or commercial activity. 

     General partners (GPs) run the day to day partnership operations while limited partners (LPs) simply benefit from the GP’s management.  Perhaps the best way to think about this structure is GPs act as company executives while LPs are stockholders.   There is also one more key difference: GPs are jointly and severally liable for partnership debts while LPs aren’t (unless they are also GPs). Here is the relevant statutory language:

Sec.152.304. NATURE OF PARTNER ’S LIABILITY. (a) Except as provided by Subsection (b) or Section 152.801(a), all partners are jointly and severally liable for all obligations of the partnership unless otherwise:
     (1) Agreed by the claimant; or
     (2) As provided by law.

In contrast, this is the language for limited partners:

Sec. 153.102.LIABILITY TO THIRD PARTIES. (a) A limited partner is not liable for the obligations of a limited partnership unless:
     (1)The limited partner is also a general partner; or
     (2)In addition to the exercise of the limited partner’s rights and powers as a limited partner, the limited a partner participates in the control of the business.
 
     This structure provides several key benefits:

1. A partnership is not taxed at the entity level, but instead passes the income and deductions through to the GPs and LPs
2. A partnership can use “disproportionate allocations;” this means (very generally) that they can carve internal cash flows among themselves
3. LP partnership interests can be discounted for a number of reasons such as lack of marketability and lack of control.
4. The parent is the GP, allowing him/her to maintain complete control

Next, we'll look at trusts