FLP Distributions

FLP Distributions

FLP Distributions: Your recent Planning Potpourri column in the Practical Planner newsletter mentioned the need to have pro rata distributions. My FLP has such distributions of net income but the drawings are unequal. Does that create an audit danger?


Let's give a little bit of background for visitors that are not as familiar with some of the concepts. Family limited partnerships ("FLPs") and limited liability company ("LLCs") which are typically taxed as partnerships for income tax purposes, are a commonly used estate, asset protection and financial planning technique. For FLPs and LLCs to be respected there are a host of formalities which should be adhered to. One of the requirements is that distributions be made in proportion to partnership interests (membership interests in an LLC). So for example, if you own 35% of the FLP or LLC and a distribution of 10,000 is made, you must receive $3,500. Now you mentioned that drawings are unequal. If a distribution is made that is not in proportion to ownership interests it can be a salary and treated as such. If it is a distribution/drawing that is not in proportion to ownership then it must either be a loan documented with a loan agreement and interest payments, or a distribution of capital with a commensurate adjustment of capital accounts. If you draw more than your pro-rata share, there must be an economic impact to address it. Also, you should be aware that legal status, asset protection and other matters are also important, not just IRS audit issues. You need to consult with an accountant familiar with partnership tax issues to review your partnership distributions, drawings and other matters each year.

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