Limited liability companies (LLCs) offer numerous benefits to Michigan business owners. They are flexible, they’re easy to create, and they have less demanding reporting requirements than a corporation. However, they also have limitations, and there are some potential pitfalls that business owners can stumble into when setting up an LLC.
If you’re considering creating an LLC, keep reading for more information about this versatile business structure and about Michigan business law.
An LLC Can Protect You From Personal Liability
One of the biggest benefits of a limited liability company is that it shields its members (meaning the business owners who created the LLC) from personal liability. In other words, you typically can’t be held personally responsible for your LLC’s debts and obligations, and a creditor can’t try to seize your house or other personal assets in a business dispute.
However, forming an LLC won’t protect you from every possible type of personal financial liability while you do business. Business creditors can collect against you personally if you:
- Personally guarantee a business loan or debt
- Do something fraudulent, illegal, or reckless that caused someone harm
- Treat the LLC as an extension of your personal assets rather than a separate business entity
If you’re not sure whether you’re operating your LLC correctly, it’s a good idea to consult an experienced business lawyer. A lawyer can assess your potential liability in a business dispute and help you audit your business operations.
Additionally, you should still purchase commercial liability insurance when you create an LLC. While an insurance policy normally won’t cover your unpaid business debts, it’s an important protection against potential lawsuits that could range from contract disputes to personal injury claims.
LLCs Are Pass-Through Entities for Tax Purposes
While the law treats corporations as separate entities that must pay income taxes, most LLCs are “pass-through” entities. This means your LLC does not pay income taxes itself. Instead, the members must report their share of the LLC’s profits on their personal income tax returns. While your LLC doesn’t have to pay income taxes, it still must report its total income to the state and federal governments.
LLC owners can also choose to have their LLC pay corporate taxes instead of operating as a pass-through. Few business owners choose to do this, but it does make sense sometimes. For example, you might choose to pay corporate income taxes because your LLC retains significant amounts of its profits rather than distributing them to members.
Michigan LLCs Don’t Have to Follow Corporate Formalities
When you have an S corporation or C corporation, you must follow certain corporate formalities, like holding annual meetings and keeping a book of minutes. While LLCs must file an annual report with the State of Michigan, they don’t have to observe these types of formailities unless their operating agreement requires otherwise.
Even though it’s not required, some business owners prefer to maintain corporate formalities so they can keep a record of their business decisions and make the information available to members and employees. If you have questions about an LLC operating agreement or whether you should observe corporate formalities, contact our team at Phillips & Santana for more information.
A Michigan LLC Can Exist in Perpetuity
In some states, LLCs can only exist for a set period of time. This isn’t the case in Michigan, where an LLC can exist forever (“in perpetuity”). If you do decide to dissolve your LLC, then you typically must comply with your articles of organization (the documents that establish your LLC’s existence and outline its rules and structure) and either vote on the issue or obtain a court order.
How Do I Create a Michigan LLC?
It’s not difficult to form a Michigan LLC. To register an LLC in Michigan, you must:
- Name your limited liability company
- Draft and submit articles of incorporation
- Complete the necessary registration forms and pay the required fees to the State of Michigan
- Comply with state and federal taxation and reporting laws
Other documents, such as an operating agreement, are optional.
If all of this sounds surprisingly simple, keep in mind that creating a successful business involves more than completing a form and paying a fee. Running a profitable business takes lots of planning and hard work. While forming an LLC has important benefits and can make you feel like your business is “real,” it won’t help a business that doesn’t have coherent long-term goals and a detailed strategy to achieve them.
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How Phillips & Santana Can Help Your Business
At Phillips & Santana, we’re committed to our clients’ success. We work with our clients and build a strong foundation for their businesses through:
- Well-crafted business documents, including articles of organization and operating agreements
- Compliance audits that assess their policies and procedures
- Assistance transitioning from one business entity to another (such as converting a partnership into an LLC)
- Strategic and succession planning
Too often, we meet clients who formed their LLC using “one-size-fits-all” documents they found online. We have to help these clients clean up the mess they were left with when they discovered their operating agreement doesn’t comply with Michigan law or doesn’t meet their business needs.
While we’re happy to help business owners in this situation, it’s always better to avoid such headaches by working with an experienced business lawyer from the beginning. Working with our team from day one helps our clients identify potential risks, build contingency plans, and prepare for the future. And as your company grows, we can apply our deep understanding of your operations and Michigan business law to help you meet or adjust your long-term goals.
Contact the Law Offices of Kari Santana to Get the Legal Support Your Business Needs
Whether you’re a long-time business owner or you’re just creating your first start-up, we’re here to help you thrive in West Michigan. At the Law Offices of Kari Santana, we provide comprehensive services for business organizations and strive for long-term relationships that are grounded in respect, honesty, and shared goals. To schedule a consultation with one of our attorneys, fill out our simple online contact form or call us at 616-717-5759.
The content provided here is for informational purposes only and should not be construed as legal advice on any subject.