Many people decide to go into business with their family members. There is an arrangement called a family limited partnership where the members pool their financial resources for the business project. Each family member can purchase shares of the business and then collect profits based on their ownership.
There are two types of partners within the family limited partnership. General partners are responsible for the day-to-day operation of the business, including managing the business and making investments. Limited partners do not manage the business, but instead participate in the arrangement for dividends, interest and the profits generated.
There are estate and gift tax advantages with a family limited partnership and some families choose this structure specifically to pass wealth down to future generations. The business’s future returns are excluded from estate taxes, which means that the business partners’ children and grandchildren can also benefit from the business’s dividends, interest and profits.
Also, the general partners can also ensure that the assets are used appropriately by future generations by placing stipulations in the partnership agreement. These might include rules about how the assets must be managed, how old the recipients must be to receive the assets and guidelines for how gifts must be made.
Individuals are allowed to gift family limited partnership interests each year up to the annual gift tax exclusion. In 2021, the gift tax exclusion for individuals is $15,000 and will be raised to $16,000 in 2022.
If family members would like to create a family limited partnership, an experienced business law attorney can help.