A Limited Partnership (“LP”) is typically used for asset protection purposes or for family estate planning and gifting purposes. An LP provides asset protection similar to an LLC or Corporation in that the Limited Partners (owners of an LP) are not personally responsible for the LP’s debts or obligations. Additionally, an LP is an excellent entity to protect assets from potential creditors that may pursue an owner of the LP in their personal name and may seek to satisfy that judgment from the LP’s assets (e.g. doctors, contractors, developers, and others who have liability in their personal name). An LP has excellent protections and will prevent a creditor of an owner from being able to force the sale of the LP’s assets or from foreclosing on the interest and taking over the LP. This protection is often called “charging order” protection. Many states offer this same protection to LLC’s as well.
A Limited Partnership or Family Limited Partnership is also commonly used for estate planning in large estates where the family would like to gift assets over time to avoid estate tax. Under IRS tax rules, assets in a Family Limited Partnership (“FLP”) can be gifted at a discounted value which enables a family to gift more assets over time than they may otherwise be able to gift outside of a FLP.
Drawbacks to a LP are that the limited partners will have a difficult time in taking passive losses. Additionally, every LP requires a general partner who should be different than the Limited Partners and who has to assume liability for the LP’s activities. We typically recommend a “shell” company be used to serve as the general partner of a Limited Partnership. The creation of a shell company adds some complexity and adds some additional costs but the asset protection benefits and tax advantages can outweigh those costs for many clients.