Institute of Continuing Legal Education (ICLE)



|TO: |Member of [Name of LLC], a single-member, manager-managed LLC |

|cc: |Managers of the LLC |

|FROM: |[Name of Attorney] |

|DATE: |[Date] |

You have chosen a single-member, manager-managed Michigan limited liability company (LLC) for your business. This memo explains how an LLC works, what rights and duties LLC members have, how members vote in an LLC, and how to make the most of an LLC’s liability protections.

LLC Basics

Do you need an operating agreement? No, not in a single-member LLC. However, you may have one if you want. If you are not also the sole manager, or if you want to admit one or more additional members, you should have one.

What would an operating agreement contain? That agreement addresses such subjects as

• member and manager voting rights,

• which decisions managers make and which decisions are left to members,

• manager election and removal,

• member capital contributions,

• membership interest transfer restrictions,

• membership interest purchases on death, etc.

You should always consult your operating agreement before drawing any conclusions about rights and duties. If the operating agreement does not address the subject, the LLC statute might.

What is an LLC membership interest? A membership interest means all of an LLC member’s rights, including the right to vote, inspect LLC records, and receive distributions from the LLC. Members are also the beneficiaries of a manager’s obligations to act in the LLC’s best interests.

Can a member transfer his or her membership interest? Yes, unless an operating agreement prevents it. Operating agreements may permit some transfers and require member consent for others. If you transferred all of your interest, you would automatically cease to be a member.

What does the recipient of a transferred interest receive? Receiving a membership interest from an LLC member does not make that recipient a member. Nor does it give that recipient all of the member’s rights. The recipient is entitled only to the distributions that the transferring member could have received and only to the extent transferred. The recipient has no right to vote and has no duty to make contributions. The recipient’s interest is often described as only an “economic interest.”

How does the recipient become an LLC member? Most operating agreements allow recipients (or anyone else) to become members only with a unanimous consent of the current members.

What’s the difference between a manager-managed LLC and a member-managed LLC? LLCs are either manager-managed or member-managed. Your LLC is manager-managed. The following chart shows the key differences (any of which may be altered in an operating agreement):

| |Management Rights |Authority to Bind the LLC |Fiduciary Obligations to Others in the |

| | | |LLC |

|Member-managed LLCs |Members have all management rights. |Each member has the authority to bind |Members have fiduciary obligations to |

| | |the LLC. |each other and to the LLC. |

|Manager-managed LLCs|The manager has most management |Only the manager may contractually bind|The manager has fiduciary obligation to |

| |rights. Members make few decisions. |the LLC. Members have no such |members and to the LLC. Members have no |

| | |authority. |such duties. |

How can you tell if an LLC is member-managed or manager-managed? Manager-managed LLCs must say so in the articles of organization. If the articles are silent regarding management rights, the LLC is member-managed.

Do members or managers have any fiduciary duties? Members have no fiduciary duties in a manager-managed LLC. Managers do. But these duties are irrelevant if you are both the sole member and sole manager. In a manager-managed LLC, where the manager is not also the sole member, the manager owes duties of loyalty to the LLC and its members. The managers must act in the LLC’s best interests, not in their own interests. Managers may not favor the interests of one group of members if those actions are “willfully oppressive” to other members. Managers may not take personal advantage of an opportunity that could be useful to the LLC. A manager cannot cause the LLC to enter into a contract with that manager on terms that are less favorable to the LLC than the terms that the LLC may have reasonably obtained from a third party. Two examples illustrate how fiduciary duty problems might arise in an LLC where the manager is not also the sole member. Assume that you are the manager.

Example 1: You learn that the vacant lot next to the LLC’s office will be for sale soon. Your LLC members have always wanted that lot for expansion and parking. Instead of telling your LLC members about the seller’s desire to sell, you purchase the lot yourself, hoping to resell it to the LLC for a profit. Your failure to give this opportunity to the LLC may violate your duty of loyalty.

Example 2: You provide property management services to the LLC to manage several of its properties in the state. Other property management companies in the area charge much less than what you charge the LLC. You know about those companies and their fees but your LLC members do not. Your fees to the LLC may violate your duty of loyalty to the LLC.

Managers also must act with reasonable care. They cannot act frivolously or carelessly, for example. Managers may be protected from liability for some kinds of carelessness, though. Consult your articles or operating agreement for these optional protections.

What voting rights do members have? You hold all the member voting rights as long as you are the sole member. Members in most multimember LLCs vote based on ownership percentages. An operating agreement will also describe how many votes are required for which actions. For example, a unanimous vote may be required to amend the operating agreement but only a majority vote of ownership percentages may be required to sell all of the LLC’s assets.

What decisions do the managers make? In a typical manager-managed LLC, managers make most of the LLC business decisions, such as

• day-to-day LLC operations;

• major purchases, sales, and leases;

• employment agreements;

• borrowing money; and

• distributions to LLC members.

If you are not the sole manager, you should have an operating agreement to address the division of power between the manager and you as the sole member.

What decisions do the members make? The Limited Liability Company Act requires that the following decisions be made only by the members:

• amendment of the operating agreement or articles of organization

• dissolution of the LLC

• merger of the LLC

Unless you have an operating agreement states otherwise, the following decisions must also be made only by the members:

• transactions involving a conflict of interest between a manager and the LLC

• transfer of substantially all of the LLC’s assets

• election, removal, and replacement of managers

• admission of new members

• compensation of managers

• procedures for approving distributions to members

Consult your operating agreement for any additional actions requiring member approval.

How do members make decisions? As the sole member, meetings are inapplicable so you should document your decisions in writing.

Must the LLC hold meetings or send reports? The LLC need not hold meetings. The LLC must keep certain business records available to members, such as LLC tax returns, a list of current members, etc. But these requirements make no difference to you as the sole member. In multimember LLCs, the operating agreement may require certain meetings, reports, and other activities.

Your LLC must file an annual report with the Michigan Corporation Division. The state sends the report form each year to the LLC’s registered agent at the LLC’s registered office. If the LLC does enough business in other states, the LLC may have to register in those states to do business as a foreign LLC.

We recommend that you consult an accountant to determine what LLC financial records must be kept. An accountant can also assist in preparing any required tax filings.

The LLC’s Liability Shield

Does the LLC give “limited liability” protection to its members? Yes. Whether your LLC has one member or several members, the LLC’s members have no personal liability for the LLC’s obligations. Neither do its managers. This limited liability protection is similar to that enjoyed by corporation shareholders. It is also a bit more complicated than meets the eye. Consider these two examples that have opposite results:

Example 1 (liability protection): The LLC leases property to a tenant and promises to keep the parking lot in good repair. But the LLC neglects this duty, letting potholes exist for long periods of time. These potholes damage one of the tenant’s delivery trucks. The tenant sues the LLC as landlord for a breach of the lease. The members are not liable for the LLC’s breach of the lease.

Example 2 (no protection): An LLC member drives a car to make a sales call for the LLC. That member carelessly causes an accident that seriously injures a pedestrian. The member could be personally liable for that carelessness even though the member was acting on the LLC’s behalf.

How do you keep the liability shield in place? Follow these rules to keep the LLC’s liability shield in place:

1. Do not mix up the LLC’s money with your own. The LLC should have its own bank account.

2. Do not mix up the LLC’s property with your own. List the LLC’s equipment on the LLC’s fixed asset ledger. If the LLC will own a vehicle that has a certificate of title, put the LLC’s name on that certificate. Make sure insurance on LLC property is in the LLC’s name.

3. Do not mix up LLC transactions with your own. If the LLC leases property to a tenant, make sure you sign the lease in the LLC’s name, not your own.

4. Every signature on behalf of the LLC should include three things: the LLC’s name, your signature, and words that show you are signing on behalf of the LLC, such as “Mark Twain, Manager” or “T.S. Eliot, Authorized Agent.” The signature block should look like this:

[Name of LLC]

By [Manager’s signature]

Manager

5. Document any transactions between the LLC and you or any other member. If the LLC will own equipment previously owned by you, make a list and sign a bill of sale that transfers title to the LLC. If the LLC borrows money from you, have the LLC sign a promissory note with a stated due date and interest rate (and make sure the LLC manager approved the borrowing, if necessary). If the LLC leases a building from you or other members, sign a lease.

Can managers be protected from liability to the LLC for breach of their manager duties? Yes, but this is irrelevant as long as you are both the sole member and the sole manager. Members have the power to limit some of a manager’s so-called “fiduciary duties.” These limits are effective if put into either the articles or the operating agreement. These limits protect managers against monetary liability only.

What kinds of personal liability do you retain, even with an LLC? The LLC liability shield does not protect you or other members from all personal liability. You will continue to have personal liability in at least the following significant areas:

• You remain liable for your own personal carelessness that injures someone or destroys property, even if you were acting on behalf of the LLC.

• You will be personally liable for any contracts you make personally, such as your personal guarantee of a bank loan to your LLC. You may even have personal liability under some written LLC contracts if you fail to indicate the representative capacity in which you are signing (see above).

• You are personally responsible for income taxes on your share of LLC taxable income, if any.

• If you have authority for payment of LLC taxes, you can be personally liable as a “responsible person” for income tax liabilities for certain state and federal withholding taxes.

• You can be held personally liable for all of the LLC’s obligations if you lose the LLC liability shield. This is more likely to happen, for example, if you comingle the LLC’s funds with your personal funds or otherwise fail to follow the principles described above.

LLC Tax Matters

Does the LLC pay income tax? No. LLCs are taxed like partnerships. Each member reports its share of the LLC’s income, loss, deductions, credits, etc., on that member’s tax return. Each member must pay tax regardless of whether the LLC distributed any cash during the year. Your operating agreement may require distributions in amounts sufficient to pay these taxes. The LLC may alter these rules by electing to be taxed as a corporation.

Must the LLC obtain a federal employer identification number (EIN)? The LLC must either obtain a federal EIN when it begins to do business or use the EIN of its sole member if it will be a “disregarded entity” under IRS rules. Use IRS Form SS-4 to apply for this number.

What federal and state tax filings must the LLC make? You should consult your accountant regarding the necessary income tax filings on behalf of the LLC. Those may include filing with the Michigan Department of Treasury for the state taxes (such as the sales and use tax) and unemployment compensation registration.

Local personal property tax statements. The LLC must file a personal property statement in February of each year in each locality where the LLC has personal property. Appeal deadlines are extremely short (often less than two weeks) and you should carefully review any assessment notices as soon as you receive them.

Other LLC Business Matters

The name you do business under. If you plan to do business under any name other than the LLC’s exact, complete name (including the “LLC” at the end), you must file an assumed name certificate with the state of Michigan. The filing is good for five years and the state will send you a notice when refiling is needed to extend the certificate.

You should file the certificate for two reasons. First, the statute requires it. Any name other than the exact, complete name of your LLC is an “assumed name.” For example, if your LLC’s name is “Amalgamated Technology Services, LLC,” but your website, business cards, stationery, etc., refer only to “Amalgamated Technology Services,” you are doing business under an assumed name and you must file a certificate.

The second reason is that failing to file the certificate creates the possibility of personal liability on the LLC’s employees and owners. This arises from the common-law rule that an agent has personal liability for the agent’s actions on behalf of an undisclosed principal.

Do federal and state securities laws apply? Yes. A membership interest can be a “security” under federal and state securities laws. If so, the seller cannot issue, sell, or even offer to sell the interest unless the seller makes adequate disclosures to the buyer and registers the securities with federal and state securities agencies. Some securities and some securities transactions are exempt from registration but not exempt from disclosure rules.

Buyers may rescind sales that violate these laws and may recover the purchase price plus interest or damages and attorney fees. Violators may be subject to criminal penalties.

Worker’s disability compensation insurance. Certain LLCs with employees must have worker’s disability compensation insurance. This insurance may be obtained through a commercial insurance company or, under certain procedures, an employer may be self-insured.

Licensing. Some businesses may need licenses to conduct business. These licenses may restrict certain LLC or member activities.

Other. A variety of other federal and state laws and regulations may apply to your particular LLC’s business activities. You should contact your attorney if you have questions.

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