The first means of accessing FLP funds is via distributions. Distributions from the FLP to its partners must be pro rata. In other words, if the general partner determines to distribute funds to the FLP’s partners, each partner must receive a distribution commensurate with his or her partnership percentage. It is important that distributions be made pro rata, otherwise a creditor may be able to demonstrate that the formalities of the FLP agreement have not been met, and convince a court to pierce the FLP and reach FLP assets. Distributions should be recorded properly for accounting purposes. Distributions that exceed FLP profits (and are a return of capital) should also be papered properly with FLP resolutions. Again, the proper formalities should be observed in order to preserve the integrity of the FLP entity.
Another way of accessing FLP funds is via a payment of compensation. Payment of compensation to a general partner is possible in return for the services that the general partner performs for and on behalf of the FLP, e.g., managing FLP assets and investments. While payment of compensation will be taxable as income to the partner who receives it, it will be a deductible expense to the FLP. Compensation need not be distributed pro rata to all FLP partners.
A third way of obtaining funds from an FLP is via a loan from the FLP to a partner. Again, formalities should be observed, e.g., proper loan documentation should be executed and the borrower should make regular interest payments to the FLP, otherwise a creditor may be able to pierce the FLP and argue that the loan is a sham. In addition, if the loan is not a bona fide loan, the IRS may be able to argue that the loan is really taxable income to the recipient.
Thus, once the FLP is funded with liquid assets, those assets can still be accessed by the partners in the FLP if the need arises. However, proper formalities must be observed in order to safeguard the asset protection benefits of the FLP and to avoid potential negative tax consequences.