Forming an LLC – Why Hire an Attorney?

To the internet savvy, which applies to most of us today, it is not difficult to find forms to create your own limited liability company – known as the LLC. In Michigan, to form an LLC, all you really need to do is pick out a name for your company (that isn’t already taken) and file a simple sheet of paper with some basic information with the Secretary of State.

Why do you need to pay an attorney to do that for you? The truth is, to file the form you don’t. You can easily fill in the required information on the form and file it with the Secretary of State. Simple and done, right? Perhaps. In some cases, that may be all you ever need. In many other cases, though, there are other steps that could have, and should have been taken that you would never know about from simply looking at the form.

Under the Michigan Limited Liability Act (the Act) you have several options when setting up an LLC. If you merely fill in the open blanks on the form, you do not take advantage of any of those options. One of those options includes making an election as to whether the entity will be managed by one or more Managers, or will be Member managed. In addition, while the Articles of Organization incorporate your entity with the State of Michigan, the Act specifies that the rights of the Members are governed by the company’s operating agreement. If you do not have an operating agreement (and have more than one member), the rights of the Members default to the provisions of the Act. The default provisions are not always what you would expect. As one example, if no election is made in the Articles regarding management, then your company is Member managed, with all Members having the full authority as a Manager, which includes the ability to bind the company to anything that Member wants. This may or may not be what you intended.

Another example is that the Act, at Section 502, states that every Member of the LLC gets one vote – regardless of ownership percentage. Therefore, if you set up an LLC and the initial investment is 51/49, 60/40 or 60/20/20, you cannot assume that the person who contributed the majority of the equity will have voting control – if an operating agreement is not executed and drafted properly. These are just two examples of the options/choices to be made that can have significant consequences if not handled correctly. Of course, you can always find forms of Operating Agreements online, or from companies like Legal Zoom, but unless you are sure you understand what all of the provisions mean, and what all of your options are, be prepared to be stuck with what you pay for.

The other area that always merits exploration is the tax structure. After you file with the State of Michigan, you will need to obtain a tax ID number from the IRS. There may be other tax registrations that you need depending upon your business. In addition, if you make no special elections, your LLC will be taxed like a partnership. An LLC can, however, make other tax elections. Whether such elections make sense in your particular situation depends upon a whole host of factors, which are best analyzed with your legal and tax professionals. In some instances these tax elections can save your entity thousands in tax dollars. Again, though, if you don’t know to ask the questions, you will never receive the benefits.

So, why pay a legal professional for advice when setting up an LLC? Because, the right professionals can ensure that it is done correctly, and that you maximize all options and benefits you are entitled to. A few hundred dollars spend up front can save you potentially thousands in the future should an unexpected event arise.

For assistance with your business or LLC, you may contact Briar Siljander or Catherine Riesterer at 810-227-3103.

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