Updated: Dec 6, 2018
WHAT IS AN LLC?
An LLC is an unincorporated business association.
It is a cross between a partnership and a corporation, that combines the most favorable features of both. More specifically, it allows for the free-form management and operational flexibility of a partnership as well as the partnership tax advantages. Additionally, it provides the same shield from personal liability to its members and managers that is characteristic of the corporate form.
WHERE DID THIS HYBRID CONCEPT COME FROM?
The LLC form of organization originated in Germany in 1892 and spread to Latin America. It did not reach the United States until 1977 when Wyoming became the first state to adopt the LLC business form. However, the idea did not catch on until 1988 when the IRS granted pass-through tax status (no taxation at the entity level, instead tax obligations pass-through to owners) to the Wyoming LLCs. These tax advantages (no double taxation of the corporate entity and shareholders) combined with the liability shield caused the form to spread across the country.
LLCs IN MICHIGAN
As the American Bar Association began working on prototype LLC legislation in 1991, the State Bar of Michigan put together a legislative drafting committee of Michigan practitioners, chaired by James R. Cambridge of Kerr, Russell, & Weber PLC to produce draft LLC legislation. The Michigan Limited Liability Company Act (LLCA), MCL 450.4101 et seq., was adopted in 1993 and Michigan became the first industrial state in the country to have an LLC act.
LAW GOVERNING LLCS
Features of corporate law (involving fiduciary duties) generally govern the liability and duties of LLC managers in a centrally managed LLC (where these duties are not eliminated by the members). In addition, features of partnership law govern areas involving relations among members, the treatment of membership interests, and the allocation of votes and distributions.
DECISIONS IN STARTING AN LLC
Three decisions have to be made by the organizers of an LLC about what characteristics the LLC will possess.
1. MANAGEMENT: Whether the power to make management decisions for the LLC will be spread equally among all members, or whether the LLC will be managed by a small group or individual Manager.
2. DURATION: Whether the corporation will continue to exist despite the death, retirement, resignation, bankruptcy, or removal of an owner, OR whether it will have continuity of life.
3. TRANSFERABILITY OF INTERESTS: Whether membership/ownership interests will be freely transferable without obtaining other member/owner consent.