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No matter if you’re raising Christmas trees or selling auto parts in your back yard, Michigan business owners should form an LLC to segregate their personal and business assets.

HOW TO FORM A MICHIGAN LLC

First: Choose a Name

A name for a Michigan LLC must contain the words “limited liability company” or the abbreviations “LLC” or “LC,” with or without periods between the letters. The name cannot include any words that suggest that the LLC is formed for any purpose other than those authorized by law, and cannot include any words that are used designate corporation names. Finally, the name must be distinguished from any domestic or qualified foreign LLC, corporation, or LP.

Second: File Articles of Organization

Michigan LLCs must file articles of organization that include: the LLC name, the purpose of the LLC, the name and address of the LLC’s registered agent, a statement saying if the LLC will have managers, and the maximum duration of the LLC (which can be perpetual).

These articles of organization are then filed with the Corporations, Securities and Commercial Licensing Bureau of the Department of Licensing and Regulatory Affairs with a $50 filing fee.

Third: Draft an Operating Agreement

Michigan requires that LLC operating agreements be in writing. This document is an agreement between all members of the LLC that sets forth how the LLC’s internal affairs will be managed and how it will conduct its business.

Ongoing: Compliance

EIN: Michigan LLCs with employees or more than one member will have to file for an EIN from the I.R.S. This can be done by yourself, or you can hire an incorporation service to do it for you.

Annual Report: The Michigan annual report only asks for the name of the LLC and the name and address of its Registered Agent. The filing fee for this is $25, for 2013-2015, and becomes $15 after October 2015. All LLCs must file this every year to maintain their authority to do business.

WHY FORM A MICHIGAN LLC?

Introduction

The Michigan LLC Act gives LLC members contractual freedom to customize their contributions, rights, duties, and distributions of profits and losses.  In addition, it provides that an LLC’s existence can outlive its members’ lifetimes, and it allows members to protect their control of an LLC.

Michigan is a Leader in Economic Rankings

Each year, Michigan forms approximately 45,000 new LLCs.  It has over 319,000 active LLCs.  Michigan is the ninth largest state by population and the thirteenth largest by gross domestic product.  Michigan’s economy ranked sixth for job creation, and the U.S. Chamber of Commerce ranked it the second fastest growing state for science, technology, engineering, and mathematics jobs.

Advantages of Forming a Michigan LLC

The Michigan LLC Act gives LLC members contractual freedom to customize their capital contributions and their shares of profits and losses.  The Act states that “[d]istributions of cash or other assets of a limited liability company shall be allocated among the members and among classes of members in the manner provided in an operating agreement.”  This gives members contractual flexibility to adapt their cash flows and risks of loss to further their broader asset management plans.

The Act enables members to create classes of membership.  An LLC operating agreement may establish classes of membership interests with different rights, powers, and duties, including voting and non-voting interests.  For example, Section 450.4502 states “[a]n operating agreement may establish and allocate the voting rights of members and may provide that certain members or groups of members have only limited or no voting rights.”  This facilitates everything from complex, high-dollar-volume transactions to succession planning in family businesses and estate planning by gifts of non-voting interests.

Formation

The Act does not require filing of members’ names.  A “person” may form an LLC by filing its articles of organization, and the definition of “person” includes almost any kind of business or legal entity.  An LLC’s members may therefore have an entity or person who is not a member file the LLC’s articles of organization with the Michigan Secretary of State.

Duration

The Michigan LLC Act provides for an LLC’s unlimited life.  If the articles of organization or the LLC agreement does not set the LLC’s duration, it is perpetual.  An LLC’s existence can therefore outlive its members’ lifetimes.

Preventing Unwanted Business Partners

The Michigan LLC Act allows members to protect their control of an LLC.  An LLC agreement may prohibit members from assigning their membership interests.  But if an LLC agreement does not prohibit it, an assignment does not dissolve the LLC or entitle the assignee to become a member.  Instead, the assignee may receive only the allocations of profit and loss and distributions to which the assignor would have been entitled, and all the other members must consent before the assignee can become a member.

Creditors Only Get Passive Rights, Not Control Rights

If a member’s judgment creditor obtains a charging order against the member’s membership interest, “the court may charge the membership interest of the member with payment of the unsatisfied amount of judgment with interest.”  The judgment creditor cannot become a member, however, and the member whose interest was charged retains all the rights and powers of membership other than the amount of distributions subject to the charging order.  A charging order is a lien on the membership interest, but “a person may not foreclose on that lien or on the membership interest under this act or any other law, and the charging order is not an assignment of the member’s membership interest.”  In addition, a charging order is a judgment creditor’s exclusive remedy, and a court cannot order an LLC to take an action for a judgment creditor, provide the creditor with an accounting, or answer an inquiry from the creditor.

Michigan Registered Agent

A Michigan LLC must continuously maintain an agent for service of process in the state.  A commercial registered agent service may act as a Michigan registered agent.

Qualifying Foreign LLCs

An unusual aspect of Michigan is its penalties for failing to obtain a Certificate of Authority for a foreign LLC.  This is sometimes called “qualifying” a foreign LLC to do business in the state.  A foreign LLC is an LLC that is formed under the laws of a state other than Michigan.

In most states, a foreign LLC may defend itself in state court if it has not qualified to do business in the jurisdiction, but it may not be a plaintiff in state court until it has qualified.  Many states also require a foreign LLC to pay the taxes and fees that it would have paid if it had qualified when it first started doing business in the jurisdiction.  In addition to these two penalties, Michigan charges a civil penalty between $100 and $1,000 per month that a foreign LLC did business in Michigan without being qualified, up to a maximum of $10,000 total.  Because an application for a Certificate of Authority costs only $50, foreign LLCs should qualify to do business in Michigan if there is any doubt about their status of “doing business” in Michigan.

Conclusion

Because of the advantages of forming an LLC in Michigan, over 45,000 new LLCs are formed in the state each year.
Should you wish to have more flexibility and protection, you may instead form a Delaware LLC even if you operate in Michigan.  What are the advantages of a Delaware LLC?  (Delaware LLC Advantages).  We can then help you file an application for registration to do business in Michigan with your Delaware LLC (Form Delaware LLC).

Michigan LLC Act Statutory References
§ 450.4102“Definitions”
§ 450.4103“Documents; Signatures; Requirements”
§ 450.4202“Limited Liability Company; Formation; Filing as Evidence that All Conditions Performed; Exception; Duration”
§ 450.4203“Articles of Organization; Contents”
§ 450.4207“Maintaining Registered Office and Resident Agent; Service of Process, Notice, or Demand; Appointment of Agent; Annual Statement; Service of Process by Mail”
§ 450.4208“Resident Agent; Resignation; Notice; Appointment of Successor; Termination of Appointment”
§ 450.4209“Changing Registered Office or Resident Agent; Statement; Filing; Contents; Changing Business or Residence Address of Resident Agent”
§ 450.4303“Distribution of Assets; Allocation; Manner; Basis”
§ 450.4501“Members; Admission; Liability for Acts, Debts, or Obligations”
§ 450.4502“Members; Voting Rights”
§ 450.4505“Membership Interest; Assignment; Liability of Assignee; Assignor as Member; Liability of Assignor Not Released”
§ 450.4506“Assignee of Membership Interest; Conditions for Membership; Rights and Powers; Liability for Obligations of Assignor”
§ 450.4507“Charging Membership Interest with Payment of Judgment; Rights of Judgment Creditor; Rights and Powers of Member; Charging Order as Lien on Membership Interest; Section as Exclusive Remedy”
§ 450.4508“Encumbrance Against Membership Interest; Effect”
§ 450.4801“Dissolution and Winding Up; Conditions”
§ 450.5002“Transacting Business; Certificate of Authority by Foreign Limited Liability Company Required; Application; Filing; Contents”
§ 450.5007“Foreign Limited Liability Company; Transacting Business Without Certificate of Authority”
§ 450.5008“Activities Not Considered To Be Transacting Business in State; Applicability of Section to Other State Laws”
§ 450.5101“Filing Fees; Use; Charges for Certifying or Copying Files or Records; Dishonored Checks; Payment by Credit Card; Waiver”