MICHIGAN SINGLE MEMBER LIMITED LIABILITY COMPANIES

Michigan Limited Liability Companies have become the “entity of choice” for many business ventures in the State. When the Limited Liability Company (LLC) was first recognized in Michigan, single-member LLC’s were not authorized. 1997 amendments to the statute permitted them and for many of us as advisors, it seemed like telling our Sole Proprietor Clients that converting to a Single Member LLC was the proverbial “no-brainer.”

But is it a foregone conclusion that every sole proprietor business should become a Single Member LLC?

There are a number of advantages offered by the LLC form of entity. Most importantly, the LLC offers protection to the owner from liability which may arise from the activities of the business. Perhaps the next most important advantage is the ability to accomplish centralized filing of the entity statewide, at the Michigan Department of Labor and Economic Growth (DLEG). The DLEG filing gives the entity a statewide name and prevents others from using that name. It also allows the used of “assumed names” on a statewide basis. Another perceived advantage is that of protection of the individual member from his creditors. As we will see below, there may be some question about whether that confidence is misplaced. Additionally, as the “LLC” gains notoriety, the name may give the business a perceived bona fides as a business that it did not already enjoy as a sole proprietorship.

But there are always other considerations. Contrary to popular view, there is no “cookie cutter” business form that fits all or even most businesses. Careful consideration needs to be given to the actual goals and circumstances of the particular business activity. Often, when reviewing the efficacy of LLC status for a new client, we will conclude, after some thought and discussion, that another form of business (or businesses) better suits the client’s overall goals.

There are always tax and financial considerations. There are times when corporate, partnership, or other ownership form may create more advantage to the owner than an LLC. This may arise because of income tax rate structures, other activities of the owner, or government program options available to the business.

There is always a concern with whether a business operated by a married couple falls within the IRS default classification of single member or partnership. While there is some authority that the IRS will treat a married couple, filing jointly, as a sole-member LLC, there may be other reasons why the “partnership” form may be preferable.

One item that often catches an unsuspecting sole proprietor, recently turned Single Member LLC by surprise is insurance coverage issues. Insurers often take the position that they now have to cover not only the proprietor (individually), but the new (and technically separate) entity. This can involve multiple policies (and premiums) that didn’t previously exist.

It is also sometimes a surprise to the new LLC owner that their financiers do not readily embrace their newly formed entity. One of the biggest “liabilities” for most small business owners, is their business loans. Banks will typically require the owner(s), individually, to sign a personal guaranty of any business loans. Occasionally, commercial lessors of premises will also require personal guaranty. In my experience, employees of financial institutions often do not “understand” the premise of a Single Member LLC and will insist upon an Operating Agreement for the entity. On the theory that it is easier not to “fight city hall,” we have routinely prepared them as part of our setup, but have done so knowing that the LLC statute provides that they are “unenforceable” (MCL 450.4215).

Many advisors have touted the LLC (including the single member variety) as a method to protect the individual member from creditors. In a partnership, or limited partnership historical context, it is not possible for a judgment creditor to obtain control of the assets of such a partnership. The best that they can hope for is something called a "charging order." From a creditor's perspective, that has limited utility, and may even have some negative consequences (the IRS has taken the view that the holder of a "charging order" is liable for tax liability that passes through that order). The charging order analysis has been extended to the LLC, as it is very much like a limited partnership in that context.

I believe that we need to be very careful in advising our clients regarding “asset protection” schemes and methods, however. In 2003, a Colorado Bankruptcy Court held that the bankruptcy trustee could take possession of the assets of a Colorado Single Member LLC. Although the Michigan Statute is significantly different and would arguably yield the opposite result, many commentators take the view that a creditor will probably be able to get to the assets of a Single Member LLC if they have a judgment against the sole owner.

It is important to seek counsel experienced and knowledgeable in these issues when structuring a new business or converting an old one.

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Understanding How DELEG Treats Business Entities

Formal Michigan business entities, Corporations, Limited Liability Companies (LLC), Limited Partnerships, and variations, all derive their legal authority by filing appropriate documentation with the Michigan Department of Energy, Labor and Economic Growth (DELEG), Commercial Services and Corporations Division. Once established, it is incumbent on the business to maintain their "good standing" with the state, by periodic annual filings.

Ironically (to me) while these periodic filings are pretty simple (and more often than not, pre-filled out when sent), I see a lot of clients neglecting the simple chore of signing (ocassionally correcting) and sending them in with their annual fee.

The rule for corporations is that if the annual filing is not made (and the fees not paid), for 3 consecutive years, the department automatically dissolves the corporation. Indeed, while I am not personally an advocate of this, many practitioners whose clients wanted to dissolve their corporations, simply purposely failed to file for 3 years.

Those familiar with this might expect that the LLC, in many ways an essentially similar entity in terms of the DELEG adminstrative requirements, would be treated the same. In fact, the Michigan LLC statute does not provide for automatic dissolution, and DELEG takes the position that an LLC may not be dissolved in any other manner than by filing appropriate documentation.This can create an interesting result where filing has not been done. After failure to file and/or pay the annual fee for 3 years, an LLC is put in the status of being "Active, but not in Good Standing." In order to dissolve such an LLC, DELEG requires that it first be put back in Good Standing (by filing all back fees and Michigan Annual Reports). Only then will they accept and file a Certificate of Dissolution!

Another area that is often a source of confusion is the use of an "Assumed Name." Corporations and LLCs may use an Assumed Name, but filing is made in Lansing at DELEG, not, as some clients assume, in the County Clerk's office. (nder Michigan Law, Certificates of Co-Partnership and "d/b/a" certificates (of assumed name for individual proprietorships) are filed in the County Clerk's office where those entities do business).

For Corporations and LLCs, the Assumed Name or d/b/a Certificate is filed with DELEG. This "central filing" has the effect of protecting the name from use by another corporation or partnership in Michigan. An Assumed Name Certificate expires after 5 years unless renewed! This is different from most Corporate and LLC filings which are perpetual in most cases unless dissolved. This means the user of the Assumed Name must be vigilant and have some kind of tickler system. If an LLC is not in good standing, their Assumed Name is not in good standing either and another entity may apply for and use it.

It is important to understand that these are just filing requirements with the State of Michigan. While DELEG will not give a name being used (or a name they believe is too similar) to another applicant, this does not necessarily mean the name is yours as a legal matter. There are Trademark and Trade name issues, which may--in litigation--ultimately supercede DELEG's determination.

One can see that this is an area fraught with pitfalls. My prior experiences with it is one of the reasons form my "legalwhatever.com" Rant earlier this month. It is important that the rules be negotiated and that the entity maintain its "good standing" status for many reasons, including readiness for a lawsuit, IRS audit, loan by a financial institution, or "suitors" for the purchase of the business or an investment in it.

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My First Rant

I have become an XM Radio listener. I enjoy being able to tune in the major news outlets like CNN, FOX and NPR, as well as some of the Sports Stations. Recently, I have begun to ocassionally enjoy the Comedy stations, too.

XM (and Sirius) once touted "commercial free" listening. While I liked that, the realist in me acknowledges that any service has to be somehow paid for, so I don't hold against them that they indeed advertise.

What I do find offensive is the onslaught of advertising (perhaps in other places too) of so-called Internet "Business Legal Services." You know the commercials:

"We aren't a law firm, but we were founded by lawyers." "Even my brother-in-law, the lawyer was astounded at how good the documents were." " We had it checked out by a nationally known professor at a Law School."

And so on.

I know.....this sounds, not only like a rant, but like whining about the competition. Frankly, I don't care about competition. I have been blessed (as I have previously mentioned on my Michigan Estate Planning Blog) with some truly wonderful relationships with other professionals and with many loyal clients. I am not concerned about competition. Indeed, my conservative political leanings lead me to continue to believe that competition is healthy. What I am concerned about is the misleading nature of these commercials--and the corresponding sites.

Sure, they provide documents (often reasonably well-written). Sure, they provide filing services with State Departments of Commerce (ironically, most states now offer direct filing services for the customer that would allow filing the documents without the assistance of the "dotcom" companies). What they do not do is give advice and counsel on which forms to file, and more importantly, why or why not. Nor do they do any analysis on whether the entity format is even correct for the client.

Forms are just that -- Forms. They do not think or analyze.

And, there is simply no "one-size-fits-all" legal entity or form. Nor is there any quick, shortcut to properly establishing a business entity. A business entity is not automatically properly created just by filing and signing forms. I cannot think of a worse result than for a client to believe it has been properly set up as a corporation or a limited liability company, to rely on that, only to find out too late that the protections or status sought are simply not there, because the job was not completed properly.

So there it is. My rant. I firmly believe these "services" do a great disservice both to business and to the professionals who advise businesses.

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Why I Started This Blog

Those of you who know me must be wondering, by now, whether I have time to do anything else, and if I have become addicted to "Blogging."

A significant portion of my business involves the set up and maintenance of business entities for clients. I also assist clients with business succession planning, often in conjunction with estate planning for them. But I thought the Business Topics justified their own place, with issues often separate and distinct from Estate Planning. Today, specialization seems to be the norm, in practice and on weblogs. So another Blog is born.

I will address Business and Business Succession topics here, as well, perhaps, as the occasional rant on current web and media-based practices. There are a number of fascinating legal and current issues relating to small businesses, ranging from mundane issues such as corporate maintenance, to more "exotic" issues involving intellectual property (copyright, trademark, trade secrets and the like), and internet-based issues, and things in between, such as taxation, sales issues, employment issues, noncompetition, buy and sell agreements, insurance and many others.

I hope you will find the information here useful and informative and that this will become a resource for business-law information.

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