Instead of Operating Your Business as a Michigan General Partnership, Consider Forming a Michigan Limited Liability Company (LLC)
In my last post, I noted that sometimes, unsophisticated folk in Michigan will operate their businesses as a Michigan general partnership, instead of forming a registered business entity with the State of Michigan. Put simply, that is a terrible idea. Once upon a time, many Michigan businesses were run as general partnerships. However, with the invention of limited liability companies (LLC's), the usefulness of general partnerships ended. Nowadays, there is no reason to conduct business as a general partnership, and many why you shouldn't. Instead of operating your business as a general partnership, you should consider operating it as an LLC.
An LLC is formed by filing Articles of Organization with the State of Michigan. Even though this paperwork must be filed to form an LLC, this entity is still considered an unincorporated business association. In reality, an LLC is a hybrid between a partnership and a corporation, and combines the best characteristics of both types of business entities. The LLC business structure was specifically designed to give business owners and managers with a partnership’s operational flexibility and tax advantages and a corporation’s protective shield against personal liability.
Just like with a general partnership, those who organize an LLC have almost total flexibility to set up the company in the way they wish. Like partnerships (and S corporations for that matter), LLC's are given pass-through income tax treatment. In other words, the LLC is not taxed as an entity. Instead, all items of income, loss, credit, and deduction pass through the LLC, flowing directly to the LLC's members. In spite of these tax advantages, the most important aspect of the LLC is the members' limited liability to trade creditors for the LLC's debts and obligations. Generally speaking, LLC members and managers are not personally liable for any of the LLC’s debts, liabilities, or obligations. Of course, members and managers are always liable for their own negligent acts and intentional wrongful acts, even if done during the course of conducting LLC business.
While not best in every situation, the LLC provides a terrific way of doing business for many small businesses, and many larger ones too. In fact, the LLC has become the business entity of choice for many clients, replacing the more traditional forms of business organization, including C and S corporations.
