In this article, we will answer the question “what is the difference between a Family Limited Partnership and an LLC?” by defining “what is a family limited partnership?” and “what is an LLC?” LLCs and Family Limited Partnerships are similar, but they provide different benefits based on your business goals.
A Family Limited Partnership, often called an FLP, is a business ownership arrangement made between family members who would like to own or run a business together. This is often done when families want to assure the stability of their business’s future and is also a strong way to make sure your family owned business operates professionally and efficiently while still being family owned and minimizing the use of outsiders. In a FLP, there are two types of partners: general partners and limited partners. General partners are the most powerful and control 100% of the managerial and investment decisions of the company. Limited partners have financial investment and benefit from the success of the business, but they are not directly involved in managerial decision making. Typically, the “senior” family members such as grandparents or parents will be general partners in their FLP and will leave their partnerships as inheritance to younger family members. This can continue through the generations to keep the business within the family.
For more detail on Family Limited Partnerships, you can read our article or watch our video titled “illinois Family Limited Partnerships Explained”.
An LLC (Limited Liability Company) is the simplest way of structuring your business. In an LLC, owners are referred to as “members” and can be anyone. Sometimes, this is only one or two members, but the list can grow indefinitely and include partners, groups, or even other LLCs. LLCs are also unique with taxes in that they can be taxed as partnerships, meaning the company’s income will be spread to each individual member’s taxes rather than taxing the company as a whole.
For more discussion on LLCs, you can read our article “What is a Series LLC?”
The primary difference is in membership qualifications. FLPs require that members be part of the family where LLCs do not. However there are several other key differences between FLPs and LLCs:
These are just some of the significant differences between FLPs and LLCs. For more detail on the specifics of the distinctions and how they apply to you and your business, you should consult with a business attorney.
Now that you know the basic definitions and differences between FLPs and LLCs, the natural next question is “which is better?” This is a question that is very much determined by your individual business and the goals you have for it. If you are focused on a family-owned business and would like to use the business as means of passing ownership and money between generations, an FLP may be the right course for you. However, if you would like more freedom for who to choose as members and have control more evenly split among all members, your best option could be an LLC. Because of the wide variety of options, LLCs are often preferred for new or growing business who are looking for the more simplistic and malleable option for their business. We would highly recommend seeking advice from a business attorney who will be able to weigh your options prior to making your decision. If you would like a consultation for your Illinois business, feel free to call us at 630-324-666 or email at firstname.lastname@example.org.
For more helpful information on structuring your business, you can read our article “What is the Difference between an LLC and an S-Corp?”