The decision of whether to form an LLC, corporation or other entity used to be primarily driven by tax and other concerns. However, a primary motivation for those using Michigan entities may now be creditor protection.
In December, Michigan passed Senate bill 1455 which caused Michigan to become the most debtor friendly state in the US for LLC owners. The bill states very clearly that:
- Charging orders are the sole remedy against LLCs, such that foreclosure is not a possibility; and
- This applies to multi member LLCs and to single member LLCs without distinction.
For basic clarification, a charging order arises when a creditor gets a judgment against the owner of a Membership Interest in an LLC and the Membership Interest is to be used to satisfy the judgment. Instead of simply giving the Membership Interest to the creditor, or allowing the creditor to reach the assets of the LLC, the court issues a charging order against the interest. The charging order, under Michigan law, permits the owner of the interest to stay on as owner, prohibits the creditor from taking over the interest, and only grants to the creditor the right to receive any distributions made by the LLC to the debtor owner. This is obviously valuable in many respects, especially if you can keep the LLC from making distributions. In that case, the creditor will get nothing from the charging order. At least it puts the debtor in a much better negotiating position!
What does this mean to you? If you are considering forming a new entity, a great choice might be to use an LCC even if you want to elect S Corporation status for tax purposes. This is because you can have an LLC for state law purposes (so you get the creditor protection you want), but elect S Corporation status for tax issues (so you get the tax status you want). If you have an existing S Corporation, don’t despair! You can change the form of your S Corporation to an LLC for state law purposes and elect to maintain S Corporation tax status. This can typically be done without creating a taxable event. If we can assist you with this or other creditor protection matters, please contact us.
For further information regarding these matters, please contact Ms. Umphrey at 248.619.2591 or via email.