An FLP is a limited partnership under Scottish or US law whose partners are members of the same family.
Like any limited partnership, an FLP consists of:
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a general partner, who is responsible for managing the partnership and its assets, and
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limited partners, who each hold a share in the capital and income of the FLP but have no control over its management or day-to-day business.
The general partner is usually a legal entity of which you are the director and shareholder. This ensures that you keep ultimate control even after transferring your assets to the FLP. The limited partners are usually children and other family members, while you usually also hold a minority interest as a limited partner.
How it works in detail
An FLP is designed to separate legal control over the partnership's assets from their economic enjoyment. Legal power over the partnership assets lies with the general partner, in practice with you. The economic use of the assets (that is, the right to income and capital) belongs to the limited partners; decisions on distributions, however, generally lie at the discretion of the general partner. This resembles the relationship between the trustee and the beneficiaries of a trust, or between the board of directors and the shareholders of an FIC.
FLPs are a popular wealth planning structure, because this separation of control and economic ownership improves asset protection against creditors and minimises the risk of waste by the "beneficiaries" (the limited partners). A limited partner shares in the income or capital of the FLP only to the extent provided in the partnership agreement, which can be drafted to suit each family's needs and succession planning. In addition, the right to allocate profits lies at the general partner's discretion: even if a creditor were to acquire a partnership interest, that interest is therefore only a contractual right and cannot be enforced against the partnership's assets.
FLPs are treated as tax-transparent in the UK and the USA. The partnership pays no tax. The limited partners are taxable, and they must also file a tax return in the UK or the USA respectively. But if the FLP has no profits with a UK or US connection, no tax arises there either.
Any limited partner can contribute assets to the FLP. It is usual, however, for only you (as the owner of the assets to be transferred to the FLP) to move assets into the FLP.
Assets you contribute to the FLP are treated as a gift to the other limited partners; the value of the gift depends on the limited partners' shares in the FLP.
It is important to remember that transferring assets to the FLP, and any later changes in the limited partners' percentage interests, can have consequences for inheritance tax or gift tax in the partners' country of residence. Careful planning can reduce this tax burden, however. It is therefore a great advantage if you and your family are resident and taxable in a country where there is no inheritance tax and no gift tax to consider.