Last August, I wrote a short blog post exploring the differences between corporations and limited liability companies (LLCs) for California estate planning purposes. These days, most business owners who choose to establish a legal entity for their business will choose between those two types of entities.

However, when it comes to estate planning, we really should consider a third type of entity that isn’t as widely used for general business purposes: the limited partnership (LP). Traditionally, sophisticated estate planning with business entities involved creating what’s colloquially known as a “family limited partnership” (or FLP)—an LP whose partners are all members of a family. Today, however, the FLP has lost ground to the somewhat-similar family LLC.

Still, limited partnerships have their own unique attributes, so it makes sense to take a closer look at them as a distinct estate planning tool.

Limited Partnership Basics

An LP is a type of partnership with two types of partners. One or more of the partners are general partners, and one or more others are limited partners. General partners control the business and affairs of the LP, but limited partners do not. On the other hand, general partners are fully liable for the LP’s legal obligations, but limited partners are not.

In other words, general partners are like the directors of a corporation (but with personal liability for the entity’s obligations), and limited partners are like passive investors in the corporation. Because of general partners’ liability exposure, normally that role is fulfilled by a second business entity, like a corporation or LLC.

As with corporations and LLCs, the law considers LPs to exist separately from the general and limited partners. That means that the business assets are legally owned by the LP; the partners own partnership interests in the partnership. As a result, interests in an LP—particularly limited partners’ interests—can benefit from the kinds of discounts in valuation I’ve discussed before, making them well-suited to lifetime-gift planning.

LPs vs. LLCs

Generally speaking, LPs and LLCs have the same advantages and disadvantages over corporations, which is why many discussions of family limited partnerships implicitly or explicitly also deal with family limited liability companies. In fact, LPs even feature a similar “transferable interest” concept as is found in LLCs—the right to receive monetary distributions from the LP can be transferred, but the right to participate as a limited partner normally cannot be.

So, if LPs and LLCs are so similar, and if LPs typically include a second entity to serve as general partner, does it ever make sense to form an LP rather than an LLC? As always, the answer depends on each person’s particular facts and circumstances. One advantage that LPs have over LLCs is that LPs have been around a lot longer. So, the case law involving LPs is better developed—including gift and estate tax cases. That may seem like an esoteric distinction, but it could make a real difference in any given case.

Corporations, LPs, and LLCs: Which is Right for You?

Choosing a business entity for your business always involves tradeoffs—and those tradeoffs extend well beyond the estate planning realm. Which entity you choose affects your personal liability, income tax treatment, and even practical concerns such as ease of finding investors or obtaining a loan and marketing considerations.

As such, it’s impossible to pretend that there’s one “best” answer, or even a good rule of thumb. Each person’s needs should be considered on their own, in light of that person’s business, tax, and estate planning goals. As always, for more information about how your business fits into your estate plan, contact an experienced California estate planning lawyer today.