Recently American businesses, both large and small, have chosen the Limited Liability Company (LLC) entity as a solution to meet its needs—featuring both limited personal liability and ideal tax rates. In Michigan, MCL 450.4101 et. seq., known as the Michigan Limited Liability Act (unsurprisingly) sets out the requirements and procedures involved in forming an LLC. And LLCs, being state law, acquires power from the state, but has its status from federal regulations (primarily IRS).
First, decide if an LLC is right for your business.
If you are a professional with a license, a straight LLC is not available to you in Michigan; you should speak with an attorney about a similar alternative such as a professional limited liability company.
Advantages: LLCs are appealing because (1) they offer limited liability protection at a personal level, which is very similar to a corporation; and, (2) they offer pass-through taxes similar to a partnership or sole-proprietorship. LLCs offer unlimited membership like a C-corporation, and less formalities unlike a C or S-corporation. (“C” and “S” refer to subsections in the internal revenue code).
Disadvantages: LLCs do not allow corporate income splitting or stocks, but a skilled attorney may offer solutions to meet a similar effect. LLC statutes are so young (no earlier than the 1970s) that the law is still open to some interpretation (and misinterpretation); unlike partnerships or corporations that offer a long history for the courts to rely.
For example in Florida: the Fl. Supreme Court found that, in some situations, a judicial lien creditor may use foreclosure on a single-member LLC—this eliminates nearly all asset protection intended by the single-member LLC (this may be avoided by adding a member to a single-member LLC). A new amendment to Florida Statute 605.0401 (2014) makes it easier to add a member to an existing single-member LLC (speak with a licensed Florida attorney for more information). California, New York, and Georgia have followed Florida and questions have been raised in federal bankruptcy courts in Colorado.
Practical Considerations: LLCs may file IRS taxation forms such as 8832 and 2553 and with the help of a licensed accountant (or tax attorney), may maximize your businesses taxes; however, if you anticipate losses for a few years after formation the pass-through taxes by default may better suit your needs. LLCs have far less formal accounting, management, annual meetings, records, and important business decisions—converse—to a S/C-corporation. LLCs are suitable for owning real-estate. LLCs may be filed in any of the 50 states and the District of Columbia. An attorney will advise you on the implications of doing business in multiple-states.
Next, how do you form an LLC in Michigan?
Simply forming an LLC, under the default statute, takes very little paper work. Michigan requires a the filing of the entity’s Article of Organization (CSCL/CD-700). That alone will essentially form a raw LLC. A raw LLC, is like sap straight from a maple tree, is necessary, but it is not a finished product (beloved maple syrup). A finished product, must be refined and polished. A professionally constructed LLC will be an entity that accomplishes your goals for the future and today. Some states like Illinois have articles of organization filing fees as high as $600, but others like Michigan cost as little as $50. Many have annual filing fees as well (Michigan $25), but there are some that do not.
Operating Agreements (a contract between the members and the organization) are highly advisable; Federal Tax ID and state tax registration is also in many cases important and necessary. Further, there are several other documents that are used by an experienced attorney to form an ideal LLC—custom designed—for your business.
Finally, through the advisement of professionals your LLC will protect your personal assets from possible risks from your business ventures. It is no coincidence that all high-level companies utilize several professionals to help the business operate smoothly; getting a smooth well-planned start is the prudent thing to do. One of the biggest mistakes that a small business owner falls into, is trying to do everything themselves. A little investment now brings favorable returns in the future.