COMMENTARY: Conversion to LLC status now easier with recent amendments

By Brad Brelinski

The Michigan Limited Liability Company Act ("LLC Act") was recently amended, and took effect on December 16, 2010.

There were a number of changes, most of which involved basic fixes and clarifications to the law, but there were a few substantial changes as well, which this article will address.

Rights of Creditors of Member

One of the biggest advantages to creating an LLC is that, when utilized properly, it can limit liability for its members/owners.

This liability shield has come under scrutiny in a few cases around the country in which creditors of members have attempted to take over the benefits of the membership interest of an LLC, and attempt to actively manage the LLC, sell the membership interest, liquidate the LLC's assets, or distribute LLC funds to satisfy the debt.

To address these concerns, and to clarify the original intent of the LLC Act with respect to the rights of creditors, the amendments make it clear that a judgment creditor is entitled to receive only the distributions of a debtor member.

It further states that the debtor member remains a member of the LLC and retains all rights and powers of membership provided by law and the operating agreement, except the aforementioned right to distributions to the extent charged.

The amendments further provide that the lien on the right to receive distributions cannot be foreclosed on, nor can the membership interest be sold as personal property.

Conversion of Corporations and LLCs

The other major substantive change to the LLC Act involves converting corporations into LLCs and vice versa.

Previously, only general and limited partnerships could convert into an LLC, and an LLC into a general/limited partnership.

In order to convert to an LLC, it was necessary to create a new LLC and formally merge the entity (usually a corporation) into the LLC, which is more costly and time consuming than a simple conversion.

Now, with the amendment, a corporation can be converted directly into an LLC, or an LLC into a corporation, without the merger process.

This simple fix to the LLC Act will save time and money for Michigan companies.

LLCs are usually the preferred choice of entity for small businesses; however, even large Fortune 500 companies have recently converted from corporations to LLCs.

It is thought that tax, corporate governance and other considerations make the LLC the desirable entity choice.

The amendment will make this process smoother, quicker and less expensive.

Before converting though, you and your advisors must analyze your LLC's specific situation to ensure there will be no negative consequences, such as a taxable event.

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Brad Brelinski is an associate with Curtis and Curtis PC, a full service law firm located in Jackson providing legal services and advice to individuals, families and businesses throughout mid-Michigan since 1901. Brelinski can be reached at brad@curtiscurtislaw.com or by calling (517) 787-9481.

Published: Fri, May 20, 2011

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