Understand the Options Before You Agree

September 16, 2008
Lee R. Phillips, JD

Physician's Money Digest, January31 2003, Volume 10, Issue 2

Recently, I received a call from 2 doctors whoare investment partners. Growing concernedabout asset protection, both attendeda seminar given by an attorney. Impressed bythe seminar, the doctors decided to become theattorney's clients. The attorney provided them witha "royal setup."Unfortunately, both doctorsconsequently found themselvesdrowning economically. Their only questionfor me was: "Is all this necessary?"

A LESSON LEARNED LATE

Both doctors had invested in realestate throughout the years and hadaccumulated over 50 properties. Theattorney they hired was an advocate ofFamily Limited Partnerships (FLPs),and set up an FLP for each of theproperties. (An FLP is just like anyother limited partnership, except familymembers become the limited partners.)In addition, these FLPs hadbeen established in the attorney'sstate, and not in the state where theproperties or the doctors resided.

The annual state fees, in the state where theFLPs were established, were cheaper by a couple ofhundred dollars. However, the doctors had to payto hire a registered agent in the state where theFLPs were formed. Can you guess who they hiredas their registered agent? In this case, the attorneyacted as registered agent, made all of the state filingseach year (1 simple paper), and even preparedthe tax allocations. Since the doctors had 50 properties,their agent/attorney had to file with the stateand prepare tax allocations over 50 times.

The setup costs, though a bargain, proved heftyat $2000 per FLP, and the attorney charged a sumof $1500 per year for maintenance of each FLP.After seeing the big picture, the doctors now feltthat their attorney was bleeding themdry. Rightfully, both doctors wanted toknow if all of this was necessary sincethey couldn't afford to keep it up.

THE RIGHT ANSWER

There is no question that the FLP isa good tax shifting and asset protectiontool, but you don't need more than 1 or2. People, like these 2 doctors, often fallinto the trap and buy in on the conceptthat if 1 is good, then 10 has to be 10times better. I see many people whohave done their asset protection/estateplanning and are at the point wherethey're drowning in their own paperwork.In addition, often the ongoingpaperwork isn't done correctly or evendone at all, and the entire plan is bogus.

My reason:

I established an FLP 20 years ago, and it hasworked well, but today I would establish aLimited Liability Company (LLC). All limited partnerships have a "general partner"who is personally liable for all debts and liabilitiesof the limited partnership. LLCs, on the otherhand, don't have anyone who stands as a "generalpartner"or is personally liable. Anything thatan FLP can do, an LLC can do just as well.

MOST POPULAR CHOICE

Other than the fact that your attorney doesn'tunderstand them, LLCs (which include limited liabilitycorporations, limited liability partnerships,and even limited liability limited partnerships) aretoday's tool of choice. They are often preferred overS-corporations, because they have far fewer formalitiesto maintain them. Also, LLCs provide thesame liability protection as the corporations andlimited partnerships. The excuse has been thatLLCs are new and the courts don't have a body oflaw to act as precedence for problems that arise.But after 10 years in use, the LLCs have their ownbody of laws, and borrow heavily from corporatelaw. LLC laws vary quite a bit from state to state,so have a local attorney establish your LLC.

If you are doing business in multiple states, youmight want to consider Nevada, Delaware, or possiblyColorado as the site for your LLC. But ifyou're just doing business in 1 state, you shouldprobably have your LLC, corporation, or FLPestablished there. If you establish an entity in astate other than the state where you are doing business,be aware that the state will treat you as a "foreign"business entity, and the fees will be higher.

You can't shield yourself against your ownmalpractice, but the rest of the office activities,your real estate landlording, and all of your"extracurricular"business activities should bedone under an entity shield. Keep in mind,whether you're dealing with an FLP, LLC, orcorporation, that it's important to take the timeto learn how to use the tools available. Thenchoose the one that's right for your situation.

Lee R. Phillips , an attorney

of the US

Supreme Court, has

taught more than 5000

classes to insurance,

accounting, legal, medical,

dental, and other

professionals, and has

written hundreds of

articles. He welcomes

questions or comments

at 800-806-1997 or

lee@legalees.com.