Michigan Business Lawyer Blog

Michigan's state government provides some very good online resources and tools for businesses. One of these tools is a web page for filing annual reports for Michigan corporations and LLC's. As long as the corporation or limited liability company is in good standing, current and prior year annual reports may be filed online.

The deadline for submitting annual reports for Michigan LLC's is February 15. However, there is no late fee if the annual report is filed late, and it can still be filed online so long as the LLC is classified by the state as being in good standing. The deadline for submitting annual reports for Michigan corporations is May 15. There is a late fee for late filings that ranges from $10 to $50 depending on when the late filing is made.

It is important to remember that when filing annual reports only required information should be included on the report statement. If non-required information is included on the report, it could delay the filing of the annual report. Finally, a business that files its annual report online must pay the required fee using a valid Visa or MasterCard.

The state maintains a very helpful web page that explains the online filing service and has answers to commonly asked questions.

Posted by Michael J. Hamblin | Permalink | Email This Post

Posted In: Corporations , Limited Liability Companies

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One of the main reasons people form Michigan corporations and limited liability companies (LLCs) is to protect themselves against personal liability for the obligations of their businesses. Under Michigan law, the risk of an owner of either a corporation or LLC is limited to their investment in the business. See Michigan Compiled Laws 450.1317 (for corporate rules) and Michigan Compiled Laws 450.4501 (for LLC rules). This is in total contrast to the rules for partnerships, which is one reason why no one in their right mind should be conducting business in Michigan as a partnership.

As with all rules, the rules of limited personal liability for owners of Michgian corporations and LLCs have exceptions.

First, an owner of these entities remains personally liable for their own personal negligence. This is true even if they are acting on behalf of their business entity. Thus, depending on the type of business one is conducting, a corporation or LLC may not provide very much protection from personal liability as a practical matter.

Second, an owner of a corporation or LLC is liable for any debts or obligations that they personally guarantee. Unfortunately, owners of small businesses are often required to personally guarantee the business's obligations as a condition of getting bank credit, desirable leases, supplier contracts, etc. This is a reality of life that further chips away at the limited liability protection that Michigan law provides to those who conduct their businesses through corporations or LLCs.

Third, there are certain situations that can result in the protective limited liability veil of a corporation or LLC being "pierced" so that the owner has personal liability for entity debts or obligations. These circumstances include (1) failing to follow the required formalities in company administration; (2) undercapitalizing the company; (3) using the business to achieve fraud; (4) failing to properly document transactions between the company and its owner(s); and failing to keep separate financial records for the company and its owner(s).

It is important that people conducting business through a Michigan corporation or LLC consult with a knowledgeable Michigan business lawyer to ensure they are following all of the requirements for obtaining and maintaining the limited liability protections these entities offer their owners.

Posted by Michael J. Hamblin | Permalink | Email This Post

Posted In: Business Formations , Corporations , Entity Selection , Limited Liability Companies

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A typical Michigan business owner has invested a tremendous amount of time and energy into building up his or her business. But, many neglect one of the most important things they can do to protect their business and their families: succession planning.

Although it can be daunting to undertake business succession planning, it is truly critical for business owners to face this issue head on. One of the worst things a business owner can do is to wait to tackle business succession planning until circumstances force the owner or his or her family to consider the future of the business. This is because by then it might very well be too late to prepare and implement the desired or appropriate succession plan. Even in the best of circumstances it can sometimes take between three to five years to put a comprehensive business succession plan into place.

Many business owners think that succession planning is concerned only with naming a successor. But, there are a number of other issues that are addressed in a comprehensive succession plan. A good plan should address such issues as how the business owner plans to reduce his or her role, how the business owner communicates his or her departure to employees, and what will happen to the employees' benefits.

It is important to remember that business succession planning is a process, not a one time event. It is also important to use the appropriate professionals to assist in the process, such as knowledgeable business lawyers, accountants, financial planners, and even investment bankers in certain situations.

Posted by Michael J. Hamblin | Permalink | Email This Post

Posted In: Corporations , General Topics , Limited Liability Companies

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While limited liability companies (LLC's) are the right choice of entity for many Michigan businesses, in some situations, using a corporation instead of an LLC may be the better choice. This post discusses some of the specific advantages for a Michigan business to use a corporation instead of an LLC to conduct its affairs.

1. Unlike LLC's, corporate profits are not subject to Social Security and Medicare taxes

As with sole proprietorships or a partnership, profits and salaries of an LLC are subject to self-employment taxes. Self-employment taxes are Social Security and Medicare taxes. The rate of these taxes are currently equal to a combined 15.3% rate. Unlike LLC's, with a corporation, business owners will have to pay Social Security and Medicare taxes only on salaries, not profits. This may provide for greater planning opportunities for entrepreneurs to legally avoid paying higher Social Security and Medicare taxes.

2. Corporations enjoy greater respect and acceptance

LLC's are still a relatively new business entity form. As such, not everyone (including some accountants) is as familiar with them as they are with corporations. In some cases, banks, financing companies, and certain kinds of vendors may be hesitant to extend credit to LLC's. Also, a number of states, including Michigan, restrict the type of business an LLC may conduct.

3. Corporations are able to offer a greater variety of fringe benefits at a lower tax cost

One of the biggest advantages corporations have over other business entities, including LLC's, is in the area of fringe benefits. Thanks to the tax code, corporations can offer a better variety of fringe benefits than other business entities. A number of retirement, employee stock purchase, and stock option plans are available only for use only by corporations. In addition, sole proprietors, partners and employees owning more than 2% of an S corporation are required to pay taxes on fringe benefits such as group-term life insurance, medical reimbursement plans, medical insurance premiums and parking. Stockholder-employees of a C corporation are not required to pay taxes on these kinds of benefits.

4. Corporations can lower taxes through a process called income shifting

One of the drawbacks of the corporate form is that C corporations (the type of corporation that has the most options for fringe benefits) are subject to double taxation. In other words, the corporation is taxed on its profits, and then the stockholders are taxed on any distributions the corporation makes to them. Despite this double taxation issue, in some situations corporations can offer greater flexibility for tax planning than LLC's. For example, a closely held C corporation with competent legal and accounting advisers rarely pays tax on its profits due to a number of techniques. Moreover, a C corporation can employ a very useful technique called income shifting to take advantage of lower income tax brackets and shift income from high tax brackets to lower tax brackets.

Choosing the right entity for a business is a serious decision that should only be made in consultation with a trusted business attorney. The stakes are high and the wrong decision can cost a business dearly.

Posted by Michael J. Hamblin | Permalink | Email This Post

Posted In: Corporations , Limited Liability Companies

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As the end of this year approaches, you are likely involved in reviewing the various aspects of your business's financial and operational health. Likewise, you should consider giving your business a legal checkup. Legal checkups, or legal audits, are something like an accountant's financial audit or medical examinations given by a physician.

During a legal checkup, your lawyer examines business records and practices and recommends steps that you can take to protect the legal health of your business. In a typical legal checkup, your lawyer will review documents such as your corporate charter, corporate minute book, purchase order forms, sales contracts, employment agreements, and loan agreements. Afterward you may get a written report summarizing findings and recommendations. An audit may uncover legal problems that should be corrected. For example, it may reveal that the company should revise sales contracts to limit warranties and liabilities or revise its employment applications to preserve the right to fire unsatisfactory employees.

Besides a written report, your lawyer can meet with you to explain the audit findings and recommendations and tell you how to avoid potential legal problems. At the meeting you can also learn which problems need immediate attention and which ones are less serious. Having a legal checkup can help you prevent and remedy a variety of problems that could get in the way of your business's success. Consider contacting a good Michigan business lawyer to schedule a legal checkup for your company.

Posted by Michael J. Hamblin | Permalink | Email This Post

Posted In: Corporations , General Topics , Limited Liability Companies

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In my last post, I discussed the basics of buy sell agreements. In this post, I will explain some of the specific advantages to having a buy sell agreement between the owners of a closely held Michigan business.

1. Creating a Market for Selling Partner's Interest. When a buy sell triggering event does happen such as the death or disability of an owner, there is an automatic market for selling that owner's interest in the business. The importance of this cannot be overstated since it can be difficult to locate buyers for interests in closely held companies. Without a buy sell agreement, it might be possible to sell the interest of a deceased or disabled partner only at a bargain basement price.

2. Establishing a Transition Plan. Having a buy sell agreement allows the owners to plan in advance for a smooth transfer of the business when an unexpected triggering event occurs. This allows the business to continue operating and growing in an organized fashion while at the same time limiting disruptions to customers in what will likely be a very hectic and difficult time.

3. Generating Funds for the Selling Partner and/or His or Her Family. The proceeds from the sale of a business interest under a buy sell agreement can be a life saver for the deceased or disabled owner's family. In the event of the business owner's death, buy sell proceeds can be used to defray certain estate-settlement expenses such as death taxes and administration costs. Also, part of the proceeds can be allocated to help pay living expenses of the deceased partner's family. If the partner is disabled, the proceeds can be used to pay the living expenses for the entire family.

4. Establishing Value for Estate Tax Purposes. The price set in the buy sell agreement may be used to establish a valuation of a deceased partner's business interest for estate tax purposes. There are certain requirements that buy sell agreements must meet in order for the values set therein to be respected by the IRS, so for this reason alone (although there are many others) it is imperative to have a competent Michigan business lawyer prepare these agreements.

A buy sell agreement is a tremendous tool that allows partners in closely held businesses to do advanced planning for their business and personal affairs in a way that can benefit all involved. But, preparing these kinds of agreements should not be a "do it yourself" project. Contact a good business lawyer to assist you.

Posted by Michael J. Hamblin | Permalink | Email This Post

Posted In: Business Formations , Corporations , General Topics , Limited Liability Companies

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Most entrepreneurs have their hands full actually running their businesses. It's not uncommon for entrepreneurs to leave planning for contingencies for later. But, it is important to make plans to protect your family should the unthinkable happen. One way to do this is to have a buy sell agreement with your business partners that will protect your family's interests if you become disabled or die. Not only will a properly drafted buy sell agreement protect your family, it can also help to protect your partners and the business you have worked so hard to grow.

In a nutshell, a buy sell agreement is a legally binding contract that provides for the orderly disposition of a business interest when a specified event happens. Typically, a buy sell agreement is prepared so that the triggering event is the death of one of the business owners. But, a triggering event can also be a disability, retirement, or some other kind of major event in the lives of the owners. When the triggering event happens, the disabled or retired owner or the deceased owner's family will sell their interest to either the business itself or the remaining business owners. A properly prepared buy sell agreement is a win-win situation for all involved. A market is created for the business interest of the selling owner or their family, the remaining owners are able to keep control of the business as agreed on by everyone before a major event occurs, and the business can continue to operate and grow in an orderly and organized fashion.

The exact details of how this transition happens depends on the kind of buy sell agreement that is used. There are three basic kinds of buy sell agreements:

1. Cross-purchase agreement.
2. Redemption agreement.
3. Hybrid agreement.

A cross-purchase agreement is used when the remaining or surviving owners basically agree to buy each other out. For example, if a business has three partners, under a cross-purchase agreement, if one of the partners dies, the other two partners would purchase the deceased partner's interest in the business from his or her estate.

When a redemption agreement is used, the business itself buys the interest of the deceased or departing partner.

A hybrid agreement is often used and typically provides the remaining business owners the first option to buy the deceased or departing partner's interest, with the business itself obligated to purchase that interest if the remaining partners do not exercise their option.

Buy sell agreements are often funded with life insurance policies taken out on the lives of each of the business's partners. This provides for ready capital to purchase a deceased partner's interest without burdening the finances of the business or surviving partners. It is imperative that an experienced business lawyer be consulted regarding the preparation of a buy sell agreement. There are many legal, tax, and practical issues that must be accounted for when using these types of agreements and an improperly prepared buy sell agreement can be worse than not having one at all.

In my next post, I'll discuss some of the specific advantages to having a buy sell agreement.

Posted by Michael J. Hamblin | Permalink | Email This Post

Posted In: Business Formations , Corporations , General Topics , Limited Liability Companies

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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.

Posted by Michael J. Hamblin | Permalink | Email This Post

Posted In: Entity Selection , Limited Liability Companies

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In Michigan, a limited liability company (LLC) is created by filing a simple form of articles of organization with the Michigan Department of Labor and Economic Growth (formally known as the Michigan Department of Consumer and Industry Services).

The articles must include such information as the name of the company and its organizers, the address of the company's office, and whether the LLC's existence is perpetual, and if not, the date on which the company is to be dissolved. The articles may also contain provisions appointing individuals to manage the company, creating obligations for owners to contribute capital to the company, limiting the authority of owners to bind the company, and other information desired by the owners. However, most of that information is usually contained in the LLC's operating agreement (which is a private document), and not in the articles (which are public information).

An operating agreement is an agreement the members of an LLC generally enter into in order to specify how the LLC's internal affairs will be governed. An LLC's operating agreement is similar to the bylaws and shareholders' agreement of a corporation or to a partnership agreement. The operating agreement is private and confidential since it is not filed with a public authority. Operating agreements usually cover topics like capital contributions, allocation of profits and losses, distribution of earnings, management, transfer of investment, and dissolution of the company.

Some states require that limited liability companies be owned by at least two persons. However, in Michigan, the law allows for an LLC to be owned by a single person. There can be some creativity when it comes to owning an LLC. Generally, the owners of the company can be individuals, partnerships, trusts or corporations.

A lawyer experienced in Michigan LLC's can help you plan how to meet the various organizational and ownership requirements, prepare articles of organization and an operating agreement, and provide general advice for making your LLC venture a safe and productive venture.

Posted by Michael J. Hamblin | Permalink | Email This Post

Posted In: Limited Liability Companies

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Limited liability companies offer investors and business owners a new alternative for doing business. Although limited liability companies have existed in some states for more than ten years, they did not become popular until the Internal Revenue Service began to tax them as partnerships rather than as corporations.

Continue reading "A Michigan Limited Liability Company (LLC) May Be the Perfect Entity for Your New Business" »

Posted by Michael J. Hamblin | Permalink | Email This Post

Posted In: Limited Liability Companies

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