Beware of the Limited Partnership

Prior to the advent of the Limited Liability Company in Michigan, a common planning technique involved the Michigan Limited Partnership. The Limited Partnership allows for a General Partner who has control of the entity (and usually, liability for it, also). Other investors, known as Limited Partners, are equity-only owners. They do not participate in management (other than voting on major issues) and their liability is generally limited to the amount of their investment in the partnership. In the family business context, mom and dad would set up as the General Partners and would convey limited partnership interests to their children. This allowed them to retain essentially all control of the entity, while transferring equity ownership to their children, often over a period of time. Additionally, because of the limited nature of these interests, they could apply discounts to the transfer of these interests. For a number of years, the Family Limited Partnership (or FLP) was the only way to accomplish this.
However, there are some significant negatives to the Limited Partnership form of business. Often, clients (and sometimes lawyers who didn't do their homework) were unaware, for example of the detailed formal requirements for these partnerships. Unlike a general partnership, a Limited Partnership requires a formal filing in Lansing. The statute requires a detailed form of Articles of Partnership be filed. But more importantly, every time there is any change (even 1%) in ownership, the statute requires that these formal Articles of Partnership be re-filed. I am personally aware of several instances where partnership interests were purportedly transferred, but this re-filing was never done. The statute makes clear that any attempted transfer of a partnership interest without this re-filing is void!

 every time there is any change (even 1%) in ownership, the statute requires that these formal Articles of Partnership be re-filed

Another problem with this form of business is that the General Partner has no liability protection. In many cases, in order to protect the interests of the persons acting as General Partner, a corporation would be set up as the General Partner, adding yet another layer of complexity to these already formal and complex partnerships.
When the Limited Liability Company came along, it became a much better alternative for this type of planning. LLC's are perhaps the most flexible business organization available and it is possible to structure the ownership and management of an LLC so that it is essentially identical to a FLP. And, it can be done with all the flexibility of structure that is the hallmark of the LLC form of business. The filing required to establish an LLC in Michigan is much less formal and detailed than the Limited Partnership. There is no re-filing requirement on a transfer of ownership of any amount.

clients (and sometimes lawyer who didn't do their homework) were unaware of the detailed formal requirements for these partnerships

Within the LLC statute is a little-known provision for conversion from a Michigan Limited Partnership to an LLC. We have done a number of such conversions in the past couple years. As long as the Limited Partnership is in good standing, it is very simple to convert from the complex and problem-prone Limited Partnership form of business to the flexible LLC. It is something every current FLP owner should at least consider.

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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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