The Partnership Agreement and Capital Structure
Concurrently with the filing of the Certificate of Limited Partnership, a written partnership agreement must be prepared. This is a crucial and often overlooked document that governs the affairs of the partnership. It sets out the purpose of the partnership, the duties of the general partners, matters on which the vote of the limited partners is required, the share of partnership capital and profits to which each partner is entitled, and all other matters affecting the relations between the partners.
When creating a Family Limited Partnership for estate planning and asset protection purposes, the partnership agreement must also contain certain key provisions designed to accomplish your objectives. Taken together, these provisions must contain specific legal restrictions on the limited partnership interests to ensure that the interests are worth as little as possible if seized by a creditor and that he can never achieve any influence over partnership affairs under any circumstances. These provisions for restricted partnership interests are unique and essential to a properly structured Family Limited Partnership.
Based on the law of the particular state where it is formed, a Family Limited Partnership is permitted to create whatever variety of traditional equity, debt, or combination hybrid securities that it needs to maximize the asset protection features. An FLP has great flexibility in designating variations in the amount and the timing of payments to partners, preferences and values on liquidation, voting rights, and every other contract governing the operation and management of the FLP and the distribution of its profits. By carefully structuring the management and profit distribution rights of its debt and ownership interests, a wide variety of important asset protection advantages can be achieved.
The capital structure of the FLP should always be addressed in the partnership agreement and must be specifically tailored to the circumstances and the objectives of the individuals or the company forming the FLP. What rights to income or distributions should be retained? How should voting preferences and liquidation values be tailored to maximize asset protection? In other words, who gets what and when? This is an essential question in making the FLP useful for whatever purpose is desired. A capital structure which employs different classes of partnership interest and hybrid securities will provide the most effective asset protection and estate planning and must be properly structured within the partnership agreement (or within the trust which owns the partnership interests) The possibilities for varying the capital structure of an FLP (as well as an LLC and a corporation) are virtually unlimited and are crucial to accomplishing client objectives.