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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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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