FLP vs LLC – What’s the difference?

Compared to the FLP, the LLC is the relative newcomer to the field. LLC’s began in the 1970’s in Wyoming and Florida. They create a corporate structure, and give the benefits of a corporation without the downside of double taxation. Prior to the LLC this was accomplished by using an S-Corporation; however, S-Corps have significant restrictions and are therefore difficult to use. With the introduction of the LLC came a true hybrid with essentially all of the benefits of the Corporation and none of the S-Corp restrictions or double taxation downside.

The LLC has the exact same tax options as the FLP. The LLC does not use the term shareholders, but rather “members.” In the standard LLC structure there is only one class of member. This was meant to mirror the corporate stock ownership and creates a majority rule type of management. While this can be changed through careful drafting, it is this distinction that becomes important when comparing it to the Limited Partnership for use in Asset Protection Planning.

There is much confusion today about which structure is most desirable when it comes to the area of Asset Protection. While both are useful, their differences should not be overlooked. In particular, there is a distinct advantage to the Limited Partnership structure when it comes to designing a truly effective Asset Protection Plan. For example under the laws of Arizona, a model state and considered one of the very best jurisdictions for the purpose of Asset Protection, there are the following critical differences between an FLP and an LLC:

1. An FLP requires “unanimous consent” for dissolution as opposed to a majority in interest (51%) for an LLC. This restriction is advantageous in both a creditor situation and a discount valuation scenario.
2. It is much easier to obtain “Administrative Dissolution” in an LLC. This is a significant disadvantage with respect to Asset Protection. Among the grounds for administrative dissolution in an LLC are:
   1. Failure to make required amendments to the articles of organization,
   2. Failure to make required publication,
   3. No statutory agent or registered office for a period of 60 days and
   4. Failure to notify the corporation commission of a change in statutory agent or registered office within 60 days.

While these seem minor, they are often overlooked and may be used by a judge to justify dissolving an LLC. There is no corresponding statute for an FLP, which is much more likely to remain intact in a creditor crisis.

3. A majority of LLC members can require a distribution in an LLC.
4. There is no right to distribution in an FLP until winding up.
5. An FLP can allocate income, gain, loss, deductions or credit items in any manner it deems appropriate. This is not the case for an LLC.

For all of the above reasons, when it comes to structuring the most effective Asset Protection Plan possible, the use of an FLP as the primary consolidating entity is preferable. This is particularly true if the planning combines the use of an Asset Protection Trust. Since the APT would typically hold a majority of the FLP interest, using a Limited Partnership share is ideal as opposed to attempting to draft around the LLC rules with a membership interest.

The LLC is, nevertheless, extremely useful. Most often an LLC will be used to hold and shield individual “risky” assets such as real estate, boats, airplanes, and other potentially liability generating assets. These may be held by a multi or single member LLC, which in turn may be held by the master FLP. The clients may directly hold the General Partnership interest of the FLP with the APT serving as the majority Limited Partner. The net effect is that the majority of the client’s assets would be ultimately held in the FLP with the wrap around protection of the APT.

This structure is the ultimate in ease of use, protection and lawsuit deterrence, while maintaining the level of comfort and control most clients require. The mere existence of this level of planning is often enough of a deterrent to dissuaded potential plaintiffs’ and their aggressive attorneys.