Michigan Business Law Questions and Answers

Q.    What is a corporation?

A.    A corporation is an entity formed and authorized by law to act as a single person, although constituted by one or more persons, and legally endowed with various rights and duties including the ownership of property and succession. A corporation is a distinct legal entity that is separate from its shareholders.

Q.    What are the benefits of incorporating?

A.    Businesses are incorporated for a variety of reasons, including: limited liability for owners, perpetual existence of the business, free transferability of ownership interests, and simplicity in organization and governance.

Q.    What are the drawbacks of incorporating?

A.    The biggest drawback to incorporating your business is the double taxation of corporate revenue. However, federal law does permit the choice of pass-through tax treatment through the selection of S corporation status. To discuss which option is best for your company’s goals and circumstances, contact an experienced Michigan business law attorney.

Q.    How do I incorporate?

A.    A business is incorporated upon the filing of prepared and executed Articles of Incorporation with the Michigan Department of Consumer and Industry Services Bureau of Commercial Services. These Articles of Incorporation reserve the name of your corporation and identifies its address, the amount of shares issued, and states its lawful business purpose.

Q.    What is a Limited Liability Corporation?

A.    An LLC is basically a cross between a corporation and a partnership that combines the favorable attributes of both entities. An LLC is an unincorporated entity under which neither its member nor its managers are personally liable for its obligations and debts. An LLC is permitted to own and transfer property.

Q.    What are the benefits to forming an LLC?

A.    An LLC not only provides its members with the protection from individual liability, but also avoids the hazard of double taxation. An LLC, for tax purposes, is treated as a pass-through entity, and is not subject to federal income tax at the entity level. All items of income, gain, loss, deduction, and credit pass through directly to the owners of the business. The liability protection and pass-through tax attributes are very desirable to a sole proprietor. The LLC has basically replaced the joint venture: a contractual vehicle between individuals or businesses that wish to conduct business for a limited purpose and duration. This is because a joint venture arrangement cannot protect its individual members from personal liability.

Q.    How do I form an LLC?

A.    The Articles of Organization create the LLC, and must be filed with the Michigan Department of Consumer and Industry Services. This document identifies the distinct name of the LLC, its lawful business purpose, the identity and location of the resident agent, as well as the duration of the LLC if other than perpetual. The Articles of Organization provides the basic rules that the LLC managers and members must follow in the operation management and dissolution of the LLC. The Articles can be crafted to suit the individual needs of your business.

Q.    What is a Partnership?

A.    In Michigan, partnerships are defined and governed by the Michigan Uniform Partnership Act. A partnership is an association of two or more persons who carry on as co-owners of a business for profit. (MCLA 449.6) Under Michigan law, a partnership is a distinct legal entity separate from the individual partners.

Q.    What are the benefits to forming a Partnership?

A.    A partnership offers its partners flexibility, as all partners have the authority to act on behalf of the partnership. Further, partnerships have the benefit of avoiding the double taxation consequences found with corporations. A partnership is permitted to own and transfer property.

Q.    What are the drawbacks of a Partnership?

A.    All of the partners are personally liable for the debts and obligations of the partnership. A limited liability partnership can be formed to shield an individual partner from personal liability arising out of the negligence and omissions of other partners and employees not under his direct control or supervision. However, that partner is still personally liable for his own wrongdoing as well as that of employees under his direct supervision.

Q.    How do I form a Partnership?

A.    Partnership Agreements set forth the rights and obligations of the individual partners, allocation of ownership interests, amount of capital contributions, transferability of ownership, allocation of profits and losses, as well as dissolution issues. Limited liability language can be included as well.