Limited Liability Corporation Act Amendments

Michigan's Limited Liability Company Act as amended in 1997 provides substantive changes which bring the Act in line with recent Internal Revenue Service rulings. Prior to the amendment, the limited liability company form was of limited utility in that formation required a minimum of two individuals to form the company. Moreover, LLC's were required to adopt certain corporate characteristics and typically required a detailed operating agreement. In the event that the operators failed to comply with the corporate characteristics selected, then their status of preferred taxation as an LLC was jeopardized.

The recent amendments provide that a single person can form an LLC (§103). This change will make the LLC entity selection available for individuals who want to obtain insulation from liability but do not want partners in their venture. Previously, those individuals were limited in form typically to a corporation with a Sub-S election in the event that they desired partnership text treatment. These limitations were problematic in instances where entities desired to hold appreciated real property because the corporate entity could not take advantage in a step-up in basis at death. With a one person LLC, the benefits of insulation from corporate liabilities can be obtained without sacrificing the tax advantage of being taxed as an individual and the potential estate planning benefits. Additionally, the Act as amended addresses the former corporate characteristics criterion with "check-the-box" regulations which very simply provide that in filing the tax forms, you simply don't "check the box" to avoid corporate level taxation.

Another important change makes memberships in a limited liability company freely transferable. Although the statutory default provision still requires unanimity for acceptance of an assignee into full membership (in a limited liability company having more than one member), an operating agreement may provide otherwise, without limitation. In a single-member limited liability company, the membership of the assignee is determined by the agreement between the member and the assignee. Also significant is a new provision which authorizes the "conversion" of a domestic partnership, general or limited, into a limited liability company. The procedure is simple; the conversion is approved by the partnership, and both a certificate of conversion and articles of organization are filed with the administrator. The partnership and all of its property and rights continue without change, except that the partnership is reclassified as a limited liability company, and the partners become members with the attendant post-conversion protection from liability for the company's debts and liabilities.

The Michigan Limited Liability Corporation Act as amended echoes the national trend to permit individuals to avail themselves of the advantages of the corporate form without sacrificing individual tax advantages. The amendments bring Michigan law into conformity with IRS regulations. Other states including Delaware, New York and California have followed suit. Kaufman and Payton can answer your questions regarding the Act and your business planning needs.