Family limited partnerships offer tax benefits, lawsuit protection, and financial control.
To gain a full understanding of a family limited partnership, let’s first consider the general partnership, which is a device used mainly for active business purposes rather than for private family asset protection. In the broadest sense, a general partnership is an association of two or more persons formed to conduct an active business for mutual profit. “Persons” in this case includes other legal entities. The concept of a general partnership is long established in English common law.
In a general partnership, each partner is a co-owner, jointly managing the business for profit. Each acts as an agent for the other, and each owes a fiduciary duty to the other. As a result, each partner is personally liable for the acts of the other, including partnership debts and liabilities.
Additionally, by common agreement, the partners may have equal or differing percentages of capital investment and may share profits and losses in either the same or varying proportions. The capital percentage of each partner usually corresponds to each person’s capital investment whether contributed or earned.
Under the Tax Act, a partnership doesn’t pay income tax, unlike a corporation or a trust. Rather, the partners in a partnership are taxed and owe annual income taxes on their share of partnership profits.
In order to create a valid partnership, valid consideration must be contributed. Each person must have legal capacity to enter into a contract, and there must be informed consent by all parties – a point to keep in mind when minors (in Alberta, individuals under the age of 18) are made partners. The essential distinguishing feature of a partnership is the core agreement to conduct a joint business for the mutual profit of the partners.
In contrast to limited partnerships, general partnerships carry the risk of personal asset vulnerability. Each general partner can be held liable for all joint partnership debts or liabilities resulting from other partners’ negligent or harmful acts.
When one partner retires or dies, a general partnership must be dissolved unless the partnership agreement anticipates such events with a continuation provision.
General partnerships are faced with the usual personal problems inherent in any joint ownership arrangement. These include sudden death, divorce, and inheritance of the partnership share by nonmembers who may be undesirable partners.
Considering all the uncontrollable variables of a general partnership, it isn’t usually recommended for personal asset protection or family wealth planning. In a series of future blogs, I will discuss the merits of alternatives to general partnerships.
Invitation for Discussion:
If you would like to discuss this article in greater detail, or any other business law matter, please do not hesitate to contact one of the lawyers in the Tax group at Nerland Lindsey LLP.
Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.