Family Limited Partnerships for Urgent Care Owners and Operators
When urgent care center owners, operators and providers are faced with malpractice lawsuits, asset protection in the form of a family limited partnership (FLP) or limited partnership (LP) can keep their assets out of the hands of creditors.
“A family limited partnership is a great way to protect liquid assets like stocks, bonds and brokerage accounts,” Hillel Presser, asset protection attorney at The Presser Law Firm, says. “FLPs and LPs are types of protected entities.”
Presser says that the law looks at the owner of the assets (the limited partnership) as different from the personal individual being sued.
“The owner has a social security number, and the LP has a different tax ID number,” Presser says.
If you have a stock or bond account in your personal name, you can lose it all during litigation. However, if you have your stocks, bonds and/or brokerage accounts in the name of a limited partnership, and you are sued, the creditors cannot touch the assets. Presser says this because LPs have something called charging order protection.
“Charging order protection only gives the creditor who is owed money the right to a distribution,” Presser explains. “If no distributions are made from the LP, then the creditor doesn’t get paid.”
A limited partnership has one or more general partners, and one or more limited partners, according to Presser.
“General and limited partners in a limited partnership contribute money, assets or services for their partnership interest, but the general partner has the complete authority to manage the LP, while the limited partner has no managerial authority,” Presser says. “Since the general partner can incur liability for partnership debts, the general partner should be an LLC so creditors of the limited partnership can only pursue the assets of that LLC as the general partner. The assets of the general partners, stockholders or members would remain safe. The LLC, which owns only a nominal interest in the limited partnership, would then have only moderate exposure.”
Ike Devji, asset protection attorney at Pro Asset Protection, says that safe assets like stocks, bonds securities CDs and money market accounts may be titled directly in the name of LP. However, he says that risky assets should never be put directly into your LP.
“They should be safely wrapped in LLCs or other vehicles so that real property liability is one arm’s length removed from the LP itself,” Devji says.
Devji also says to make sure that assets transferred into the LP are properly re-titled to reflect the LP’s ownership.
“Your interest in real estate (properly insulated in an LLC), personal property (transferred through a bill of sale) and marketable securities should be properly transferred to the LP and recorded as soon as possible so that the LP will be the proper titleholder when income is received from those assets,” Devji says. “Records of all such transfers should be maintained with your LP records.”
Assets required for living expenses should remain outside the LP, according to Devji.
“Those assets necessary for your daily living expenses should be kept outside of the LP so that it does not create the appearance that the LP is merely a personal account holding any given partner’s personal assets,” Devji explains. “If a major contributing partner finds it necessary to dip into the LP due to the nature and level of their contributions, it may lead to a direct piercing by either a judgment creditor of the LP, by a reverse piercing of the LP veil by a judgment creditor of that partner(s), or even by the IRS at the time of that partner’s death.”
Devji says it’s important to refrain from co-mingling partnership and personal funds.
“Once the partnership has been fully formed, and the tax number (EIN) obtained, the LP should establish a separate money market account and/or investment account,” Devji says. “Do not have the LP pay personal expenses directly – instead, make a formal pro-rata distribution to all partners if you need to withdraw cash from it. Then use the distribution to pay for the expense.”
Devji says you also need to make sure that the LP complies with all organization and filing requirements and other formalities required by state law.
“This will help ensure that your LP maintains all required records, and will help avoid any proposed administrative dissolution,” Devji says. “Strict adherence to all state law requirements is necessary to meet the stringent scrutiny of the IRS.”
Paying attention to state laws is also important for another reason.
“You want to form the LP in a good jurisdiction in a good state,” Presser says. “It’s not enough to just have the LP; you need to have a very protected LP agreement that has all of the asset protection clauses and all of the anti-creditor clauses.”
LPs and FLPs can give you additional layers of protection, and can act as a holding company for other business entities that hold other assets, according to Presser.
“In addition to stocks and bonds, your LP may hold your interest in income-producing real estate (if properly insulated in one or more LLCs), personally owned office and business equipment and any equipment necessary to operate a lab, record business or related enterprise,” Devji says. “If any of these items are capable of generating liability, they too should be isolated in an LLC, and that interest assigned to the LP as you would with real state. Having your LP engage in multiple revenue generating and asset holding activities helps support the fact that this is a valid business that is a legitimate arm’s length joint enterprise.”
In addition, Presser says that in the LP, there is the potential for estate tax discounts for lack of control or lack of marketability.
“It’s income-tax neutral, meaning that you’re not going to pay any more or less on income taxes,” Presser says.
In order for an LP or FLP to work, it has to remain separate from any personal activity.
“Do not transfer personal, non-business assets into your LP – your LP must have a valid business purpose, and in the case of such partnerships, the business purpose is the management of your assets and investments,” Devji says. “The fatal flaw of transferring non-income providing assets, such as your personal residence, furniture and personal automobiles creates the appearance that the LP is being for personal, as opposed to business, purposes. More importantly, it carries the liability that each of those items may carry into the LP, defeating the essential purpose for which it was created.”
“LPs are inexpensive to set up and maintain,” Presser says. “And when formed correctly, having an LP is one of the best ways to protect your liquid assets inside the United States.”
If you have an interest in learning more about the subject matter covered in this article, the M&A process or desire to discuss your current situation, please contact Blayne Rush, Investment Banker at 469-385-7792 or Blayne@AmbulatoryAlliances.com
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