LLC vs. Family Partnership: Best Asset Protection Tool

Family partnerships and limited liability companies have similar asset protection benefits for the owner who is, respectively, a partner or member. Florida statutes limit the creditor’s remedy to a charging lien against the debtor’s ownership interest. I am often asked which entity provides better asset protection. Sometimes people asks to compare a family limited partnership to an offshore LLC.

The best entity for asset protection depends on several factors that vary case by case. For an example, an individual business owner cannot transfer his business to a partnership unless he brings another owner into his business; a partnership requires at least two owners. If two businessmen own a business and one is in poor health a partnership may not be appropriate because if the ill owner dies there will only be one partner remaining . The partnership will dissolve unless the decedent’s shares pass to his heirs, but the other original owners may not want to be partners with heirs. The LLC offers flexibility to the extent it allows for one-person ownership.

On the other hand, partnerships have for a long time been used in estate planning to reduce estate taxation. Limited partnerships offer significant estate tax and income tax opportunities. For this reason, they may provide better protection against fraudulent conveyance allegations. If a debtor is asked why he transferred assets to a limited partnership, he could use estate tax advantages as a credible explanation rather than creditor protection. Estate planning motivation is harder to explain for transfers to limited liability companies, especially single member LLCs.

There are other contrasts between these asset protection tools. What is best for one person may not be the right choice for the next person.

posted by Jonathan Alper, asset protection and bankruptcy lawyer, Orlando, Florida