Do you have a limited liability company? If so, you probably established it to achieve member liability protection under the limited liability company statute. In other words, you want to protect your outside assets from liability associated with the assets the LLC owns.
Michigan LLCs also afford a different type of asset protection – one that protects the assets the LLC owns from a Member’s outside liability. It does so due to the charging order. Very briefly, a charging order arises when someone 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 remain as the Member, prohibits the creditor from taking over the Membership Interest, and only grants to the creditor the right to receive any distributions made by the LLC to the debtor owner. This is valuable in many respects and is especially useful if you can keep the LLC from making distributions. Then the creditor will get nothing from the charging order. At least it puts the debtor in a much better negotiating position!
However, to maximize both types of asset protection, you must use your LLC properly. Otherwise case law indicates that a creditor of an LLC could defeat your liability protection by “piercing the liability veil” just as can occur with corporations. This piercing of the veil typically occurs when business owners fail to observe the formalities of this type of business organization. For example, courts have found personal liability where an LLC member signed and otherwise represented himself as an individual instead of as a member of an LLC in a business transaction.
Here are some basic things you can do to reduce the risk of veil piercing and loss of other creditor protection:
- always use the LLC’s name in entering into transactions;
- avoid co-mingling LLC funds with personal funds;
- provide for adequate capitalization and insurance for the LLC;
- whenever you sign documents on behalf of the LLC, always make sure that you clearly indicate that you are not signing in your individual capacity; and
- do not indicate to any third party that you are personally liable for the obligations of the LLC.
Some more information regarding the proper operation of the LLC as a separate business entity includes:
- Ensuring that you or your accountant establish and maintain books of account for the LLC.
- Maintaining a bank account in the LLC name.
- Using checks bearing the name of the LLC.
- Issuing bills under the name of the LLC.
- Using letterhead, business cards, internet website and e-mail address(es) bearing the name of the LLC.
- Entering into ALL contractual agreements, including leases or other similar arrangements in the name of the LLC.
- Ensuring that all insurance pertaining to LLC assets or LLC operations reflects the LLC as the insured.
- Filing the annual statement with the Michigan Department of Licensing and Regulatory Affairs for the LLC each year. If any LLC does not do so for a period of two years from the date on which the report was due, the LLC will be deemed active, but not in good standing sixty days after the expiration of the two year period resulting in potential liability exposure, loss of the LLC name and accrual of certain fees and penalties to restore the LLC.
- If the LLC has a federal taxpayer identification number, using it in all transactions.
While this is not an exhaustive checklist, it should give you some of the basics to make sure you are handling the more routine entity matters of the LLC properly. If you have any questions or would like more detail on LLC’s or asset protection matters, I would be happy to discuss them with you.
For further information regarding these matters, please contact Ms. Umphrey at 248.361.3857 or via email.