A Family Limited Partnership paired with an LLC in Texas is formed by filing two documents with the Secretary of State — a Certificate of Formation for the LLC ($300) and a Certificate of Formation for the Limited Partnership ($750) — but the filings are the easy part. The structure only delivers the asset protection and estate tax benefits it promises if the LLC is formed first, the FLP owns the LLC, assets are properly transferred in, and the family operates both entities as genuinely separate from their personal affairs over the long run.
How the Two Entities Fit Together
In the standard arrangement, the family’s investment assets, real estate, or operating business go into a Texas LLC. The Family Limited Partnership owns the LLC’s membership interests. Senior family members serve as General Partner of the FLP and keep day-to-day control through that role. Children and grandchildren hold Limited Partner interests, which carry economic rights but no management authority.
The two layers do different jobs. The LLC provides a statutory liability shield between the assets and outside creditors. The FLP is the estate planning engine, because Limited Partner interests can be gifted at discounted values and moved out of the senior generation’s taxable estate over time. Neither entity works as well on its own. The order of formation matters too: the LLC should exist before the FLP is organized to hold its membership interests.
Filing the Certificates
The LLC is created by filing Form 205 with the Texas Secretary of State for a $300 fee.1Secretary of State of Texas. Texas Secretary of State Form 205 – Certificate of Formation Limited Liability Company The form asks for the LLC’s name, a brief statement of purpose, and the name and physical Texas address of a registered agent. The entity exists the moment the Secretary of State accepts the filing, unless a future effective date is specified.
The registered agent can be an individual Texas resident, the entity itself if it maintains a Texas office, or a commercial service. Don’t treat this slot as a formality. If the agent address lapses, the entity can lose its ability to receive lawsuits and official notices.
The FLP is created by filing Form 207 for a $750 fee.2Texas Secretary of State. Texas Certificate of Formation Limited Partnership Form 207 The certificate must name at least one General Partner. Texas also requires the partners to enter into a partnership agreement before or alongside the filing.3Texas Secretary of State. Form 207 – General Information, Certificate of Formation – Limited Partnership
The General Partner is often the senior family member personally. In more sophisticated setups, a separate LLC controlled by the senior generation serves as General Partner, adding another liability layer between the family members and the partnership’s obligations.
The Governance Documents That Actually Matter
The filed certificates create the legal entities. The governance documents define how they operate, and courts will examine those documents if anyone challenges the structure. Neither one gets filed with the state.
The LLC Company Agreement
Texas calls the LLC’s governing document a “company agreement,” though “operating agreement” is used interchangeably. It should set who manages the LLC, how capital contributions are tracked, how profits and losses are allocated, when distributions will be made, and what happens if a member dies, becomes incapacitated, or wants to transfer an interest. Because the FLP will be the LLC’s primary or sole member, the agreement should reflect that ownership chain and spell out how the FLP’s General Partner exercises management authority over the LLC.
The FLP Partnership Agreement
This is the backbone of the estate planning strategy. The partnership agreement creates two classes of ownership: a General Partner interest (typically 1–2% of total value) with exclusive management control, and Limited Partner interests (the remaining 98–99%) that are passive. The General Partner decides investments, approves distributions, and controls any liquidation.
Transfer restrictions matter here. The agreement should include rights of first refusal and prohibit transfers of LP interests to outsiders without General Partner consent. Those restrictions protect family control and also support the marketability discount that makes the gifting strategy work.
Moving Assets Into the Structure
An empty FLP-LLC does nothing. Once both entities exist and the governance documents are signed, the senior generation contributes assets to the FLP in exchange for General Partner and Limited Partner interests. The FLP then contributes those assets (or cash) to the LLC in exchange for membership interests.
For cash, publicly traded securities, and brokerage accounts, the transfer is mostly a matter of retitling and documenting the capital contributions in the governance documents.
Real estate takes more work. The owner signs a deed, usually a warranty deed or special warranty deed, moving title from the individual to the LLC. The deed is then recorded with the county clerk in the county where the property sits. Recording fees vary.
Two things catch families off guard. If the property has a mortgage, most loan agreements include a due-on-sale clause that technically lets the lender demand full repayment when title changes. Transferring to your own LLC can trigger that clause, though many lenders don’t enforce it when the borrower still controls the entity. Contact the lender first and get written confirmation. Second, moving a homestead into an entity can cost you the homestead exemption for property tax purposes, because the property is no longer individually owned and the appraisal district may strip the exemption.
Keeping the Entities Separate
The whole structure collapses if a court decides the entities are alter egos of the family members personally. The legal term is “piercing the veil,” and it happens more often than families expect, usually because the discipline slips once the initial excitement of forming the entities fades.
The non-negotiable practices: separate bank accounts for each entity, no personal expenses paid from entity funds, documentation of every transaction between a family member and the entity (loan, distribution, or capital contribution), and accurate capital account records for every partner and member. The General Partner should hold and document regular management meetings, even if a meeting is just a recorded decision about annual distributions. Those records become the evidence of legitimate governance if the structure is ever attacked.
Asset Protection Through the Charging Order
Texas gives unusually strong creditor protection to both LLC membership interests and limited partnership interests. If a family member is sued personally and a creditor wins a judgment, the creditor cannot seize the assets held inside the LLC or FLP. The creditor also cannot foreclose on the debtor’s interest in the entity. The only available remedy is a “charging order,” which lets the creditor intercept distributions that would otherwise flow to the debtor.4State of Texas. Texas Business Organizations Code 101.112 – Members Membership Interest Subject to Charging Order5State of Texas. Texas Business Organizations Code 153.256 – Partners Partnership Interest Subject to Charging Order
The charging order is the exclusive remedy. The creditor gets no vote, no management rights, and no power to force a sale of entity assets. The General Partner, who controls distribution timing, can simply decide not to distribute cash, which leaves the creditor holding a lien that produces nothing. That dynamic frequently pushes creditors to settle for pennies on the dollar.
The pressure grows through what practitioners call “phantom income.” If the entity earns taxable income during the year but the General Partner withholds distributions, the creditor holding the charging order may owe income tax on the debtor’s allocated share of that income without receiving any cash to pay the bill. That possibility makes the remedy even less attractive.
One correction to a common misconception: Texas extends charging order protection to single-member LLCs as well as multi-member LLCs. The statute explicitly covers both.4State of Texas. Texas Business Organizations Code 101.112 – Members Membership Interest Subject to Charging Order Many states do not, so this is a real advantage of forming in Texas.
Estate Tax Savings and Valuation Discounts
The estate planning payoff comes from gifting Limited Partner interests to the next generation at a discounted value. Because LP interests carry no management control and have no public market, a qualified appraiser will value them at less than their proportionate share of the partnership’s underlying assets.
Two discounts apply. The Discount for Lack of Control reflects that a Limited Partner cannot force distributions, direct investments, or compel liquidation. The Discount for Lack of Marketability reflects that nobody can sell a fractional interest in a family partnership on an open exchange. Combined, they commonly reduce the taxable value of gifted interests by 25% to 35%.
Working With the Annual and Lifetime Exclusions
For 2026, each person can gift up to $19,000 per recipient per year without using any lifetime exemption or filing a gift tax return.6Internal Revenue Service. Gifts and Inheritances A married couple can combine exclusions to gift $38,000 per recipient. With a 30% combined discount, a $38,000 gift of LP interests actually transfers roughly $54,300 of underlying asset value to each child or grandchild per year.
For larger transfers, each individual has a lifetime estate and gift tax exemption of $15,000,000 for 2026.7Internal Revenue Service. Revenue Procedure 2025-32 Gifts above the annual exclusion count against this lifetime cap, and discounts stretch it further. A gift of LP interests appraised at $1 million might represent $1.4 million or more in underlying value.
Any gift of discounted LP interests requires filing IRS Form 709 with a qualified independent appraisal attached. The IRS scrutinizes FLP valuation discounts closely, and claiming a discount without a credible, well-documented appraisal is the fastest way to invite an audit. The appraisal must describe its methodology, the specific restrictions on the interest, and the financial data supporting the discount percentages.
The Section 2036 Trap
The biggest risk to the estate tax benefits of an FLP is the IRS arguing under Internal Revenue Code Section 2036 that the transferred assets should be pulled back into the senior generation’s taxable estate. The statute lets the IRS include previously transferred property in a decedent’s estate if the decedent kept the right to the income from that property or the right to control who enjoys it.8Office of the Law Revision Counsel. 26 USC 2036 – Transfers With Retained Life Estate
In Estate of Powell v. Commissioner (2017), the Tax Court held that even a limited partner’s ability to join other partners in dissolving the partnership was enough to trigger Section 2036(a)(2) inclusion. The decedent held only a limited partnership interest, but because she could vote with others to dissolve, the court treated her as having retained the right to designate who enjoys the property. The entire value of the partnership assets was pulled back into her estate, erasing years of gift tax planning.
The statutory exception that saves well-structured FLPs is the “bona fide sale for adequate and full consideration” carve-out. To qualify, the FLP must have a legitimate, non-tax business purpose, such as centralized management of family investments, creditor protection, or holding a family business together across generations. The senior generation must also receive partnership interests proportional to what they contributed. Families who dump assets into an FLP on a deathbed, commingle personal and entity funds, or treat entity assets as a personal piggy bank are the ones who lose these cases.
Annual Tax and Reporting Obligations
Both the FLP and the LLC are pass-through entities for federal income tax purposes. Each owner’s share of income, losses, deductions, and credits flows through to a personal return; the entities themselves pay no federal income tax.
The FLP files IRS Form 1065, the partnership information return, by March 15 for calendar-year partnerships, and issues a Schedule K-1 to each partner reporting that partner’s allocated share.9Internal Revenue Service. About Form 1065, U.S. Return of Partnership Income If the LLC is owned entirely by the FLP, the LLC is a disregarded entity for federal tax purposes and files no separate federal return; its income appears on the FLP’s Form 1065. Late filing of Form 1065 carries a penalty of $255 per partner for each month or partial month the return is late, up to 12 months.10Office of the Law Revision Counsel. 26 USC 6698 – Failure to File Partnership Return
Texas has no personal income tax but imposes a franchise tax on most business entities, including LLCs and limited partnerships. For the 2026 report year, an entity with annualized total revenue at or below $2,650,000 owes no franchise tax.11Texas Comptroller of Public Accounts. Franchise Tax Entities below the threshold must still file a Public Information Report or Ownership Information Report with the Comptroller each year.12Texas Comptroller of Public Accounts. Requirements for Reporting and Paying Franchise Tax A $50 penalty applies to each franchise tax report filed after the due date, and an entity that fails to file can lose its right to transact business in Texas and ultimately have its charter forfeited.
Winding the Structure Down
When the family is ready to end the FLP or LLC, each entity must file a Certificate of Termination (Form 651) with the Secretary of State, with a $40 filing fee per entity.13Secretary of State of Texas. Certificate of Termination of a Domestic Entity, Form 651 Before filing, the entity must complete a winding-up process that settles debts and distributes remaining assets. The termination filing requires a certificate from the Texas Comptroller confirming that all franchise taxes are paid; without it, the Secretary of State will reject the filing. A final federal return, including a final Form 1065 for the FLP, must also be filed for the short tax year through the date of termination.