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Are there issues with family-limited partnerships?

On Behalf of | Dec 7, 2022 | Business Entities

There are many advantages to going into business alongside family members. With a family-limited partnership, it is even possible for these family members to pool their resources to support the business together.

But of course, along with the many benefits of these partnerships, there are also potential downsides to consider.

Friction between family members

Chron takes a look at some of the problems with family-limited partnerships. First, there are some structural problems. Many people opt for this arrangement with the idea that it will help keep the wealth of a business within the family.

Unfortunately, family-limited partnerships do not often have clauses that help reduce friction between children after the death of a parent. In other words, a business owner may die, and the remaining relatives might have different ideas about what to do with the business that could eventually tear it apart.

Taxation

Taxation is also a potential issue. Family-limited partnerships are a relatively new addition, so the IRS tends to pay particularly close attention to them. The burden for proof of any tax discounts of course falls on the business owner, and the owner must also understand the functions of a family limited partnership.

Issues with formation and maintenance

Then, there is the maintenance and formation. These partnerships can take a lot of time and money to set up properly. For example, assets slated for transfer need separate appraisals. On top of that, there are annual fees for operation, and failure to make payments could result in the dissolution of the partnership.

These are just some of the potential drawbacks or complications to consider before opting for this partnership.