Understanding How DELEG Treats Business Entities

Wednesday, June 17, 2009

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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