The Limited Partnership (LP) is one of the most advantageous protective entities available to protect liquid assets. Most Asset Protection attorneys recommend LPs to protect U.S.-based investments of their clients for numerous reasons. To name a few, LPs are not only a tax-neutral, reversible, and low-maintenance entity, they also offer special rights, duties, and Asset Protection for limited partners.
In a limited partnership, there are two types of partners: general partners and limited partners. General partners participate in the day-to-day management of the entity and hold complete control of the assets in the LP. Limited partners receive an ownership interest in exchange for capital to the partnership but have no power to act on the company’s behalf. As a result of their limited responsibility to the partnership, limited partners may enjoy limited liability when the entity faces legal trouble. Keep in mind that in an LP, general and limited partners can be the same parties. In other words, the same parties can exclusively and equally own and control the partnership and its assets. This allows individuals to hold the same power over assets previously titled under their name but with the bonus of Asset Protection.
With that in mind, it is never a good idea to put an individual as the general partner of the partnership. Given that the general partner incurs all liabilities, it’s important to consider placing an Asset Protection entity as the general partner. A good arrangement is using a limited liability company in a debtor-friendly state as the general partner. This protects individuals from incurring liabilities and adds an extra layer of privacy regarding the parties involved with the partnership.
It is important that an LP or LLC acting as a general partner is registered in a state that holds a strong charging order mechanism. Delaware for example limits creditors of a partnership to the partner’s partnership interest without giving the creditor voting or partnership rights of the LP. California, on the other hand, is particularly unfriendly to LPs by allowing creditors of a partnership to seize and sell a debtor partner’s partnership interest.
Given the income-producing nature of limited partnerships, they are great for holding liquid assets and investments. Checking accounts, saving accounts, stocks, bonds, brokerage accounts, and money market accounts are safe assets and are appropriate to be held directly by a LP. Ultimately, an LP should only hold safe non-retirement liquid assets.
It's important to avoid placing liability-producing assets into an LP. For example, personal cars, boats, bicycles, and other vehicles are not safe assets and should not be placed directly into an LP. Additionally, investments, operating business and other high-liability assets should not be titled directly to an LP. Remember that the transfer of assets to an LP can be a complex process given the tax and legal implications associated with title transfers. Always check with your Asset Protection attorney to find the most suitable protective entity for your investments and hard-earned assets.
Lastly, an LP is only as good as its LP agreement. The protection an LP grants its partners depends mostly on the protective provisions within the partnership agreement. Most LP agreements available online do not have Asset Protection provisions, failing to include protective language that outlines profit distributions, transfers of LP interests, anti-creditor strategies, options to redeem partnership interests, and special protections for spouses.
If you already have an LP in place, ask yourself the following three questions:
(1) Is your LP registered in a debtor-friendly state?
(2) Are the assets in your LP “safe” assets?
(3) Does your partnership agreement have Asset Protection provisions?
If you are unsure about any of these questions, contact us for a complimentary preliminary consultation with one of our attorneys.