A guaranteed payment is a specific term in the Internal Revenue Code, which is defined as payments to a partner (in a partnership) or a member (in a limited liability company) in his or her partner or member capacity for services rendered to the partnership or limited liability without regard to the income of the entity. For a more detailed discussion on guaranteed payments click here.
A Family Limited Partnership (FLP) is a limited partnership made up of family members. The advantages of this kind of partnership are tax savings, asset protection, and asset control. FLPs allow general partners to transfer limited partnership interests to children, while still holding onto decision-making and distribution control over assets. Come tax time, transferred interests in an FLP count toward annual gift tax exclusions, so many transfers are not subject to gift tax. Further, since gifts of limited partnership exclude decision-making and control of the everyday running of the partnership, the value of these transfers may be eligible for discounts for tax purposes. Transfers of limited partnership interests also reduce the amount of the transferors’ taxable estate upon death, helping heirs pay less in taxes on the remaining estate.
FLPs also protect assets from future creditors and claims from former family members (such as ex-spouses). Creditors cannot control or access assets without the general partners’ consent, and the FLP agreement can require partnership interests to transfer back to the family in the event of divorce. In general, FLPs help families to build wealth and keep family businesses family controlled.
Business, especially small businesses, should consider whether to incorporate as C versus S corporations. Businesses file with the state of incorporation, for example Montana or Washington, but they must meet federal IRS standards. The most important difference between C and S corporations is tax treatment. C corporations are double-taxed, paying once at the entity level and once on shareholder dividend income. S corporations, however, are taxed only once at the shareholder level because all income, losses, deductions, and credits pass through to the shareholders. Avoiding double taxation is a huge benefit, especially for small businesses.
In return for the tax benefit, however, S corporations must meet formation requirements that are stricter than those for C corporations. In general, S corporation requirements promote small businesses by limiting the type, kind, and number of eligible shareholders. Our experienced business attorneys will help you determine which type of corporate status offers works best for your goals.