If you have ever been involved with forming a new entity in Michigan within the last 20 years, you have undoubtedly heard of “LLCs”. The acronym stands for “limited liability company” (not “limited liability corporation”, as is often mistaken), and ever since Michigan adopted the Limited Liability Company Act in June 1993 (and later amended several times), they have become the top choice for most small to medium size businesses. The reasons?
- “The Best of Both Worlds” – LLCs are essentially a fusion between a partnership and a corporation, pulling the best legal and tax characteristics out of both types of entities. Like a partnership, LLC owners (referred to as “members”) have significant flexibility to structure the LLC with regards to its governance, capital structure, etc. And also like a partnership, the LLC will be set up by default with pass-through tax treatment for income tax purposes and will not be subject to “double taxation” at both the entity level and the member level. With pass-through taxation, no income taxes are paid at the business level – all business profits and losses are “passed through” to the members’ personal tax returns. On the other hand, like a corporation, LLC members and non-members running the business (referred to as “managers”) are not personally liable for the LLC’s liabilities, debts, etc. This is what is referred to as a LLC’s “liability shield”, although there are some important caveats (e.g. personal liability for a member’s or manager’s own negligence, fraud, or illegal act) that all LLC members must be aware of, too.
- More Flexibility and Creativity – As I mentioned above, there is a great deal of flexibility with LLCs that arises out of the world of partnerships. More specifically, a LLC’s ownership and management structure can be set up in almost any way imaginable, as the applicable law in Michigan does not contain a lot of limitations in this area. Additionally, the allocation of a LLC’s profits and losses can be modified to not directly correspond to the members’ capital contributions or ownership interests. This approach can be helpful with accounting for each member’s different efforts and services contributed to the LLC.
- Less Administrative Hassles and Paperwork – Unlike a corporation, which requires a myriad of complex documents to initially set up and the holding of annual meetings and documenting of all major decisions, there are less documents required by applicable law in Michigan to set up a LLC, and there is also not requirement that the members hold meetings or consistently maintain records and documentation of all business decisions and actions. However, as a conservative, “belt-and-suspenders” transactional attorney, I will say that these are still “best practices” for all businesses, even though the benefit for LLC still remains with the flexibility to handle these items in any number of ways.
These are just a few of the advantages of LLCs – there are others that I did not touch on. But with that said, a LLC is not always the best option for every situation, and an experienced and skilled business attorney can help you determine if your prospective business may fall into the “exception” category.
So, whether you are either a prospective business owner that still deciding which business entity might make the most sense or an existing business owner that would like to consider creating a new LLC or even converting a different type of entity into a LLC (yes, that is possible), please do not hesitate to contact me.