Mark J. Kohler compares limited partnerships and LLCs for asset protection. LPs offer stronger creditor protection in more states than LLCs, but trap losses in a carry-forward bucket. He recommends LPs for non-depreciable real estate like second homes and ranches, not rental properties.
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Hi, Mark Kohler here with another tax and legal tip. Let's talk about the limited partnership. Now, these aren't used too often. With the advent of the LLC limited liability company. They tend to be used much less because they have a unique feature when it comes to tax planning. Asset protection. And LLCs have tried to fit that mold for the most part. And so once in a while you'll find a reason to use a limited partnership. But I want to give you two big ones. Now, number one, let's compare the LLC to limit partnership as it may make more sense to explain it in that fashion. So here you have your LLC and it holds a rental property and if there's any problem, you're protected from a lawsuit, right? Well, with a limited partnership you get the same protection with a limited partnership. But let's say someone wants to sue you and they come after you personally, can they get into your LLC and take away your property? In about 25 states to 30 states they can. This is called a charging order protection issue. I've got other videos and articles written on this, but only about 15 states do we see an LLC really giving you the powerful protection from the outside as well as the inside. Well, this is where limited partnerships give a lot more protection from the outside. So if someone comes at you personally, they can't get into the limited partnership to take away your rental property. Now as to the structure of a limited partnership, they're very different than a corporation or LLC as well. In a limited partnership you have limited partners and a general partner. So lp, here's your limited partners down here, which can be you, but then you want a general partner entity, you don't want a person as the general partner because they're liable for everything in the limited partnership. So up here you usually have a corporation, typically an S corp. This serves as the 1% general partner for the limited partnership and it runs the show. You get excellent asset protection, everything's great, right? So we think the limited partnership is the best way to go. However, hold on now. The problem with the limited partnership are the deductions that flow through losses. That will generally come with rental property or any sort of real estate holding long term with deposit appreciation. So that's where the LP causes problems. In an llc, any losses flow through down to you personally and then you've got your active versus real estate professional classification. More videos, more articles. But in an lp, any losses that come through get sucked into a carry forward bucket and that bucket just grows and you can't use them until you sell anything in the limited partnership. So from a tax planning standpoint, limited partnerships can be terrible. Now when do you use a limited partnership? When you don't have property you're depreciating like a rental, maybe a second home, a beach house, a cabin or a ranch or farm. Limited partnerships can be fantastic for that. Better than an llc. So again, this is why getting the advice of a professional that understands the nuances and differences between an S Corp, an llc, a C Corp, and an LP can help you design the right structure for your situation. Be careful going online and click, click, click. I'm going to get an LLC because everybody else does. It can oftentimes be the wrong decision. Anyway, hope that helps and keep living the American dream. Thanks for listening and I hope that information was helpful and let me speak from the heart here. I've been talking about topics like this for 1015 years. I'm a CPA attorney, best selling author, radio show host and I am passionate about helping small business owners save taxes, build wealth and protect it. Please check out the link right here. Download my free ebook on 10 Common Mistakes Small business owners make in the tax and legal arena. Also check out my social media links here. I've got Daily Tips, a weekly blog radio show every week. This information is free and I'd love to help you. Click below. Find out more about me and thanks for listening.
