Business Valuation for Family Limited Partnerships (FLPs)
A business valuation is often necessary to determine an interest in a Family Limited Partnership (FLP). In an FLP, generally, senior family members (parents or grandparents) contribute assets in exchange for a small general partner interest and large limited partner interest. They can then give all or a portion of the limited partner interest to their children and grandchildren.
Hypothetical scenario that require an expert in business valuation:
A couple wishes to gift a majority interest of their family business to their children. The couple wants to maintain control of the company, so they create an FLP and maintain the controlling, general partner interest and a minority limited partner interest. Since the majority limited partner interest being gifted is non-controlling, valuation discounts must be applied which reduce the taxable value of the gift.
Special considerations for Family Limited Partnership valuations:
The IRS has ruled that FLPs must be established for valid business reasons and not for the sole purpose of minimizing taxes. Before forming an FLP consult with a qualified attorney to ensure that it is being formed properly.
Special consideration should also be given to the valuation discounts used with an FLP interest. Valuation discounts can be prime targets for IRS scrutiny if they are not properly supported. Fortunately, a significant amount of research has been published which examines valuation discounts and how they apply to FLP interests. The proper application of discounts requires an in-depth understanding of the supporting research, as well as a keen understanding of the interest being valued.
Documents required to complete an appraisal for a FLP:
Profit and loss and balance sheet statements for the last three to five years
Interim profit and loss and balance sheet statements for the current year
Federal income tax returns for the last three to five years
