Beware of the Limited Partnership

Friday, February 10, 2017

Prior to the advent of the Limited Liability Company in Michigan, a common planning technique involved the Michigan Limited Partnership. The Limited Partnership allows for a General Partner who has control of the entity (and usually, liability for it, also). Other investors, known as Limited Partners, are equity-only owners. They do not participate in management (other than voting on major issues) and their liability is generally limited to the amount of their investment in the partnership. In the family business context, mom and dad would set up as the General Partners and would convey limited partnership interests to their children. This allowed them to retain essentially all control of the entity, while transferring equity ownership to their children, often over a period of time. Additionally, because of the limited nature of these interests, they could apply discounts to the transfer of these interests. For a number of years, the Family Limited Partnership (or FLP) was the only way to accomplish this.
However, there are some significant negatives to the Limited Partnership form of business. Often, clients (and sometimes lawyers who didn't do their homework) were unaware, for example of the detailed formal requirements for these partnerships. Unlike a general partnership, a Limited Partnership requires a formal filing in Lansing. The statute requires a detailed form of Articles of Partnership be filed. But more importantly, every time there is any change (even 1%) in ownership, the statute requires that these formal Articles of Partnership be re-filed. I am personally aware of several instances where partnership interests were purportedly transferred, but this re-filing was never done. The statute makes clear that any attempted transfer of a partnership interest without this re-filing is void!

 every time there is any change (even 1%) in ownership, the statute requires that these formal Articles of Partnership be re-filed

Another problem with this form of business is that the General Partner has no liability protection. In many cases, in order to protect the interests of the persons acting as General Partner, a corporation would be set up as the General Partner, adding yet another layer of complexity to these already formal and complex partnerships.
When the Limited Liability Company came along, it became a much better alternative for this type of planning. LLC's are perhaps the most flexible business organization available and it is possible to structure the ownership and management of an LLC so that it is essentially identical to a FLP. And, it can be done with all the flexibility of structure that is the hallmark of the LLC form of business. The filing required to establish an LLC in Michigan is much less formal and detailed than the Limited Partnership. There is no re-filing requirement on a transfer of ownership of any amount.

clients (and sometimes lawyer who didn't do their homework) were unaware of the detailed formal requirements for these partnerships

Within the LLC statute is a little-known provision for conversion from a Michigan Limited Partnership to an LLC. We have done a number of such conversions in the past couple years. As long as the Limited Partnership is in good standing, it is very simple to convert from the complex and problem-prone Limited Partnership form of business to the flexible LLC. It is something every current FLP owner should at least consider.



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