January 28, 2008

Why a Michigan Limited Liability Company (LLC)?

MarkClark_small Why select a Michigan Limited Liability Company over a corporation or other business entity such as limited partnership or general partnership?  All good questions which deserve explanation and answer.  The following are some general observations concerning the benefits of forming a limited liability company (LLC) in Michigan and reasons why you may want to consider forming the Michigan LLC over other available types of entities for your business. Consider the following in deciding whether to form a Michigan limited liability company.

If you have questions about starting a Limited Liability Company, you should contact one of our corporate attorneys for a free evaluation or call 866.936.7447 (International Toll Free).

Tax advisors often and mostly because old habits die hard advise clients they need an "S" corporation.

The terms "C corporation" and "S corporation" refer to the specific subchapter of the Internal Revenue Code under which an entity is taxed for federal income tax purposes.  Like corporations, LLCs can be taxed under subchapter S or subchapter C of the Internal Revenue Code, but if the LLC elects either of those methods of federal income taxation, the LLC does not  itself become a corporation.  The LLC remains an LLC even if it is taxed under subchapter S or subchapter C of the Code.  You can form an LLC and be taxed as if you were an "S" Corporation.

What Type of Business Entity Do I Need?

Before engaging in business or forming an entity the first question is always:  Which type of entity should you form?

The types of entities used to conduct a for profit business in Michigan are:

  1. the limited liability company
  2. the corporation,
  3. the limited partnership, and
  4. the general partnership.

The general partnership has become virtually obsolete as it does not protect an owner from individual liability.

The limited partnership ("LP") was the entity of choice especially in holding real estate, and the corporation was the entity of choice to operate a business before the creation of the the LLC was authorized in the State of Michigan in the early 1990's.  The LLC is now far and away the business entity of choice in Michigan.

Selecting How the Entity Be Taxed For Federal Income Tax Purposes

After creation you must select how the LLC or other entity is to be taxed for federal income tax purposes? 

If you form a corporation, it will be taxed one of two ways, either under:

  1. subchapter C of the Code, or
  2. subchapter S of the Code.

However, if you form an LLC, it can be taxed four possible ways. The four choices of federal income taxation for an LLC are:

  1. a sole proprietorship (if the LLC has only one member or only two members who are a husband and wife who own their interest as community property,
  2. under subchapter K of the Code as a partnership (if there are at least two members),
  3. under subchapter C of the Code as a "C corporation," or
  4. under subchapter S of the Code as an "S corporation" (if the LLC satisfies the requirements for subchapter S taxation).


Four Tax Choices Instead of Two Tax Choices

One reason the LLC is favored is because the LLC has maximum flexibility in the selection of federal income taxation.  LLCs can choose the best of four methods of federal income taxation, while corporations only have two of the four choices.   You have 75 days from the date of formation to decide how to tax the entity and to file with the IRS any necessary election forms after your entity is created.

LLC's Have the Same Asset Protection as a Corporation.

In Michigan, LLC's offer the same protection from liability as a Corporation. As a member of an LLC you will receive the benefits of protecting yourself individually from company liabilities as a corporation, with fewer formalities to follow.

LLC's Have Fewer Formalities than a Corporation.

Another reason to form an Michigan LLC is to avoid several formalities that apply to Michigan corporations.  Michigan for profit corporations must satisfy the following corporate requirements:

  1. hold annual meetings of shareholders,
  2. hold annual meetings of the board of directors,
  3. document the meetings of shareholders with minutes or resolutions,
  4. document the meetings of the board of directors with minutes or resolutions.

None of those four corporate formalities apply to a Michigan LLC.

LLC's Have Fewer Legal Formalities and are Small Business Friendly

One of the main reasons informed people prefer to form Michgian LLCs over a corporation is because the Michigan LLC does not have any of the corporate formalities listed above.    A Michigan LLC is not required to have meetings of members and managers or to document meetings with minutes or signed resolutions (though it it recommended for internal bookkeeping practices only).  If a creditor tries to pierce the company veil and hold the members liable for the debts of a Michigan LLC, the LLC is superior because it will not need to observe those formalities required by a corporation to preserve its legitimacy.

CONCLUSION

People are forming many more LLCs as opposed to corporations in Michigan because the LLC is cheaper to form, cheaper to operate, has four choices of federal income taxation, and has fewer formalities than corporations.  Contact Traverse Legal if we can assist you in forming your Michigan LLC.

COMMENTS

Shouldn't you also consider the relative lack of case law when considering forming an LLC?

Corporate legal services are critical for a companies success. You should spend 5-15% of your gross revenue on legal and business advice to help you strategize and grow. Legal services can reduce risk and increase reward.

Finding a lawyer to provide corporate legal services or act as general counsel to a growing company is tough. IT is about relationships. Find an attorney you can work with and trust.

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