There are many small to moderate-sized businesses in California that must choose the type of entity they want to operate as with respect to structure. While there are many sole proprietorship and equal partnership arrangements, two of the most common are actually limited liability companies and family limited partnerships. Both business structures offer similar benefits regarding tax liabilities for both personal income and potential inheritance. Additionally, there are advantages in how the Internal Revenue Service values each unit of internal stock and determination of who actually owns the units. This can matter significantly in the event of an untimely death of a partner.
FLPs
Many businesses in California are family-owned and set up as a FLP, or Family Liability Partnership. They can be equal ownership or partially shared ownership structures that will designate income and ongoing ownership changes for all partners. This structure can be very important in estate planning. These are private businesses established within the family, but other than this designation are very similar to limited liability companies. The partnership can own property as a collective separate entity for taxation purposes, but they also serve as pass through entities for individual tax liability.
LLCs
The advantages for a LLC, or limited liability company, are very similar to FLP organizations in that they also serve as pass through entities for tax purposes. This is a very effective method when partners have unequal earnings and own unequal portions of the business. A LLC can own assets as well, and can serve as a tax shelter in this regard similar to a FLP as part of the estate planning process.
The primary distinction between the two is the family relationship, as members of a LLC typically are not related. However, ownership of shares can be designated as part of the contract in the event one of the partners passes.