A LLP or Limited Liability Partnership is a way of structuring a business that provides limited liability to its members (partners) but also the structural and tax flexibility of a partnership. The limited liability aspect of the LLP protects the assets of its limited partners from the debts, losses, and legal claims related to other individual partners and in many cases the partnership itself. Also, like partnerships, LLPs avoid taxes and organizational requirements associated with corporations.
A LLP can only be formed under state law. As a result, the requirements and protections for LLPs can vary widely from state to state. While there is a lot of flexibility in creating and structuring LLPs in Michigan, there are a few mandatory requirements:
- Choose a Name for the LLP. This name must be different from all other business names on record at the Michigan Bureau of Commercial Services and must include either “Limited Liability Partnership,” “L.L.P.,” or ends with “LLP.”
- Choose a registered agent. Michigan does not require a registered agent unless the business is registering as a foreign entity.
- Certificate of Co-partnership. To create a LLP in Michigan, the business must first be formed as a co-partnership. This requires filing a Certificate of Co-partnership with your local county clerk. The forms required can often be found on the county clerk website (e.g. Wayne County Clerk website).
- File Registration with LARA’s Bureau of Commercial Services. After the business is registered as a co-partnership it can be converted into a LLP by filing with LARA’s Bureau of Commercial Services. A blank application can be found on LARA’s website. The application requires the name of the LLP, the address of the principal office, the general nature of the business, and the information of the registered agent (if required).
- Partnership Agreement Optional. Michigan does not require a partnership agreement but such an agreement is a good idea to resolve issues such as partner contributions, distribution of profits, partners’ authority, etc.
- Annual Reports. Michigan does not require LLPs to file annual reports.
The Co-Partnership forms can be found with your local county clerk. The application to convert a co-partnership into a LLP can be found on LARA’s website. The Co-partnership forms can be filed with your local county clerk and the LLP application can be filed with the Bureau of Commercial Services either by email or by mail.
There are several reasons why you might want to structure your business as a LLP:
- Limited Liability: Like a corporation, LLPs shields the personal assets of its limited partners from the debts and legal liability of the company.
- Pass-Through Tax Entity: LLPs are taxed as a pass-through entity and avoid the double tax associated with corporations. This means that the LLP itself is not taxed. Instead, partners are taxed according to their individual tax bracket when they receive a share of the LLPs profits.
- Survivability: Unlike a general partnership, LLPs do not have to be reformed every time a partner dies.
- Late Filing: An existing general partnership can convert to a limited partnership at any time if it fulfills the requirements listed above.
- General Partner Liability: Unlike a limited partnership, LLPs do not require there to be a general partner that is liable for the actions and debts of the partnership.
While the limited liability an ability to avoid the double tax associated with corporation can be appealing, there are a few disadvantages to structuring your business as a LLP:
- Filing and Fees: Unlike a general partnership or sole proprietorship; LLPs require filing formation forms and payment of some administrative fees which can cost upwards of $100 for initial filings and may require hiring lawyer.
If you are looking for an attorney to help you with structuring your business, then contact a Michigan business lawyer.