Business Formation (LLC)

Michigan entrepreneurs starting new businesses have multiple options for structuring their ventures. One of the most common options for business formation is the limited liability company (LLC). LLCs have grown in popularity in recent years due to their combination of advantageous aspects of corporations and partnerships. However, determining whether you should use an LLC for your new venture requires experienced legal advice.

Let an experienced lawyer from Murphy & Spagnuolo P.C. help you with the business formation process by evaluating the suitability of an LLC and guiding you through each step of business formation. Contact us today for an initial case evaluation to discuss your legal options.

Understanding LLCs

A limited liability company (LLC) is a legal structure for a business entity, one of several structuring options such as sole proprietorships, general and limited partnerships, corporations, and benefit corporations. An LLC combines many of the benefits of partnerships and corporations, including the “limited liability” aspect of a corporation and the management flexibility of a partnership. “Limited liability” means that an LLC’s owners generally only bear liability for the company’s debts and liabilities to the extent of their investment in the company. Owners generally do not have personal liability for an LLC’s liabilities absent a separate guaranty agreement.

LLCs also give owners substantial flexibility in structuring the company’s management and tax structure. An LLC can adopt a more corporation-like management form, including having stock-like ownership units and a board of directors or managers. Alternatively, LLCs can adopt a partnership-like management structure where control and management of the business remains the responsibility of its owners. LLCs can also elect any federal taxation structures for businesses that the company qualifies for, such as sole proprietorship, partnership, or Subchapter C or S corporate taxation.

Steps to Form an LLC

In Michigan, forming an LLC is a multi-step process. Michigan requires a party called an “organizer” to form the LLC. The organizer may but need not be one of the LLC’s owners (called “members”). The first step in forming an LLC is choosing a business name. An LLC must have a unique name and cannot share the same name as another Michigan LLC. Furthermore, business founders should also consider whether they need to secure trademark protections for their business name. An LLC can operate under a different name than its legal name by filing a Doing Business As (DBA) certificate.

An LLC must have a registered agent, or a person (18 or older) or entity appointed to receive legal documents and government correspondence on the LLC’s behalf. Examples of parties who may serve as registered agents for LLCs include:

Registered agent companies charge annual fees to serve as registered agents for LLCs. Depending on the company, these fees usually range from $100 to $150.

Forming an LLC in Michigan requires the organizer to file Articles of Organization. The Michigan Department of Licensing and Regulatory Affairs has a form for LLC Articles of Organization on its website. An organizer must pay the required filing fee when filing Articles of Organization.

An LLC may also create an operating agreement, which serves as the governing document for the business. Operating agreements outline the LLC’s members’ and managers’ rights and responsibilities. An operating agreement can designate an LLC as a member- or manager-managed LLC. A member-managed LLC means the company’s members retain control over the business’s operations. In a manager-managed LLC, the members elect a manager to whom they delegate operational responsibility. The operating agreement can address other aspects of the company’s management and operations, including:

• The business’s purpose
• The company’s duration (if the organizer or members intend for the LLC to last for a limited period)
• The identity of the members and the members’ rights (e.g., management and voting rights) and responsibilities (e.g., capital call obligations)
• The company’s management structure, including whether the LLC will have managers and their rights and responsibilities
• How the LLC will divide profits and losses among the members
• Indemnification provisions
• Alternative dispute resolution provisions
• Procedures for admitting new members or exiting existing members
• Procedures for dissolution
• Restrictions on the transfer of membership interests

After filing the Articles of Organization, an organizer or the LLC’s members can perform other necessary steps for starting operations, such as:

• Obtaining an Employer Identification Number (EIN), which serves as the company’s tax identification number
• Opening a business bank account
• Opening a merchant account with payment processors
• Obtaining seller’s permits and other local licenses
• Setting up tax withholding for employees
• Purchasing workers’ compensation insurance if the company will have employees
• Obtaining insurance coverage, such as professional malpractice insurance, liability insurance, or commercial property insurance

Benefits of Forming an LLC

LLCs provide various benefits compared to other types of business structures, such as:

• Limited Liability – An LLC’s owners generally owe no personal liability for the company’s debts, expenses, or judgments, with an owner’s potential financial loss limited to their investment in the company.
• Flexible Tax Structures – LLCs can choose between pass-through taxation and corporate double taxation, providing flexibility based on how members plan to manage the company’s finances.
• Flexible Management Structures – Organizers and members have significant flexibility in managing their new business, including creating more formal structures when the company has multiple partners or diverse ownership or using more informal management procedures for small teams that work well together.
• Fewer Legal Formalities – LLCs have fewer legal formalities and compliance requirements than corporations, which can help reduce the risk of mistakes or oversights that can create legal issues for your business and its owners.
• Enhanced Credibility – Customers, vendors, and other business partners may feel more comfortable doing business with an entity formally registered as an LLC.

Common Mistakes to Avoid

Frequent mistakes that entrepreneurs make when forming LLCs include:

• Settling on a name already used by a Michigan LLC
• Not filing all required paperwork with the state
• Choosing not to create an operating agreement to have formal management procedures in place
• Choosing an unsuitable tax structure
• Comingling personal and LLC finances

How Can an Attorney Help You with Business Formation?

Working with a knowledgeable lawyer can help you avoid the pitfalls of the business formation process. A business formation attorney from Murphy & Spagnuolo P.C. can assist you through each step of the LLC formation process, including:

• Sitting down with you to discuss your business goals to assess the suitability of an LLC
• Explaining your legal options, including other business structures you might choose from
• Assisting you with gathering the information needed for the Articles of Organization, including the registered agent’s information
• Overseeing the filing process
• Advising you through the process of structuring your company’s operating agreement
• Helping you with additional aspects of the business formation process, such as obtaining an EIN, opening a bank or merchant account, setting up tax withholdings, and procuring insurance coverages

Contact Our Firm Today to Learn More About the Business Formation Process

When you decide to start a business in Michigan, having experienced legal counsel to guide you through the business formation process can help you avoid mistakes or pitfalls and put you on the best path toward success. Contact Murphy & Spagnuolo P.C. today for an initial consultation with our legal team to learn more about limited liability companies and discuss whether you should choose an LLC for your new business’s structure.