CategoryBusiness Law

Understanding Business Exit Planning

Have you been looking forward to the day you can retire, perhaps turn your business over to a son or daughter, or sell it? Even if you are not planning to stop working, you need to plan for the day you cannot run your business due to unforseen illness or death.

Most business owners do not take the time to plan for how they will leave their business. They are busy running the company, or they don’t know where to start. But if you continue to own a business until you die, it will be included in your estate, could be subject to substantial estate taxes, and will be at risk of surviving through the probate court process. Your family could be forced to sell the business or its assets at “fire sale” prices. Then you will have worked hard all these years so that the vultures and Uncle Sam, not your family, will reap the benefits.

Planning for how you will exit from your business should be an integral part of your estate and retirement planning. Proper planning now can provide you with retirement income, reduced income and estate taxes, and even let you benefit a charity if you so choose, regardless of whether you transfer your business to family members at discounted values, to employees, or to an outside buyer.

In today’s market, the economy and trends are affecting the timing and value of business transfers. So, let’s look at some of the conditions that make this market different, things you can start doing now to make the transfer process go smoothly, and provide some insight into how to make a business transfer work for all of those involved.

Today’s Climate for Business Transfers
Let’s look briefly at the various influences that are making today’s market different.

Demographics: The first wave of baby boomers applied for Social Security in January 2009. As more move into retirement, what will happen to their businesses? Due to the sheer numbers of this aging population, there may be two to three sellers for every qualified buyer. This increased competition will affect the values of their businesses.

Regulation Environment: Regulations on the financial markets continue to increase, affecting commercial and investment banks, insurance companies, broker-dealers, CPAs and valuators of all types. More regulation means fewer options for transfers.

Economic Environment: Generally speaking, since 1960 we have had a recession at the turn of each decade. During previous recessions, owners invested in their business, trimmed expenses, laid off employees – whatever it took to keep the business going. They did this knowing that when the recession ended, they would recover and make a return on their investment. That may not work this time. Many businesses may not survive and recover because the length and depth of a recession is dependent on current government policies – spending, tax and regulation. With this recession, we have added spending (war, stimulus, health care, entitlement programs, etc.); threat of additional taxes (income, gift, estate) and additional regulation (OSHA, EPA, etc).

Corporate Finance Environment: Outside financing is difficult these days. Typically a buyer might provide 40% cash, 40% from lenders and 20% to be paid over time. There will be less available from lenders until the capital markets recover from the downturn that started in 2007.

Taxation Environment: Taxation on business owners is increasing. If the Bush-era tax cuts are allowed to expire, income taxes will increase to 39.6%, long-term capital gains tax will increase from 15% to 20-28%, the estate tax will go back to a $1 million exemption (adjusted for inflation), and a 55% top bracket rate and the annual gift tax exclusion will be back to $10,000. Plus Congress is looking at a first-time Medicare tax on passive income and enacted a 3.8% health care surtax on higher incomes as part of the controversial healthcare legislation. In addition, business valuation discounts, popular with family limited partnerships and LLCs, are under attack in Congress.

What You Can Do To Prepare and Make the Transfer Process Go Smoothly
Most owners simply cannot wait until they reach age 68 and then decide to sell. In most cases, it takes time to prepare to go to market. Even in this climate, there are things you can do as a business owner to protect or increase the value of your business in anticipation of a transfer.

Cut Taxes and Expenses
Many private companies are “S” corporations and almost all of them pass an income tax burden to their owners. Therefore most business owners are already obsessed with minimizing or eliminating income taxes. But for the first time, we are looking at individual tax rates that will be higher than corporate rates; and the dividend tax rate is also increasing. Look at your business structure to see if you can find ways to reduce taxes. Also, take a closer look at your expenses. Are you doing things that are causing the value to go up or down? Are there personal expenses that should not be run through the business? Keeping cash flow in the business will allow for growth or can be used to support the transfer you desire.

Evaluate Management and Employees
Do you have the best people in the right jobs? Frequently family members are brought in as management. If they are not the best choice for the position, it can negatively affect the growth and potential value of your company.

Be Clear and Honest About Your Goals and Objectives
Most business owners have four goals when they leave their businesses: retire from the business; sell to a new owner (family members, employees or a third party); minimize taxes; and maximize profits. Some would also like to do good things for their community or favorite charity. Being clear about your motives and desires will make the planning process easier, saving you time and money.

Be Realistic About the Value of Your Company
Frequently there is a gap between what the owner thinks the company is worth and the actual fair market value. In both good and bad economic times, an appropriate multiple for most U.S. businesses (those with annual sales of $5 million or less) is two to three times annual sales. Expect to get a lower multiple (one to one and a half) for a company that would not survive without the owner continuing to work in it, and a slightly higher multiple for one that is strong without the owner’s participation.

Be Realistic About Your Role After the Transfer
It is not unusual for the owner and the recipient to have different objectives. Things will go much more smoothly if you understand what motivates each of you. Here are examples to consider.

Family Transfer
The owner may want to transfer ownership of the business to the children now or after his death, maintain his current lifestyle, treat the children equally and fairly and, most of all, keep control.

The buying children will want to grow the business, try new ideas and take risks. They are willing to pay a fair price for the company, and will want a clear path and plan for the change of control. They are willing to work for a below-market wage for a while, but eventually they want to be able to compensate themselves for their efforts. They want to treat their siblings equitably but not have them share in the growth forever, especially if they do not work in the business. And they are willing to pay their parents a reasonable salary for a time, as long as they are contributing to the growth of the business.

Planning Tip: You may be able to continue doing what you love in the business, especially if it will contribute to the bottom line. Consider providing for your nonworking children through other planning, for example, life insurance.

Management/Employee Transfer
Usually the seller is not as comfortable transferring the business to management or employees as he or she would be with transferring the business to family members. The seller may want to remain in control until death or retirement, or at least until paid in full. The seller may want to make sure the legacy lives on and may even want restrictions on the transfer so the seller can take the company back if unhappy with the direction it is going. The seller will usually want to maintain his or her current lifestyle and may want a significant cash payment at closing, but does not want to personally guarantee the loan.

Management’s objectives are very similar to those of the second generation in a family transfer. They will want to grow the business, try new ideas, and take risks. They are willing to pay a fair price for the company, and want a clear path and plan for change in control. They are willing to work for a below-market wage for a while, but eventually be able to compensate themselves for their efforts. And they are willing to pay the seller a reasonable salary for a time, as long as he or she is contributing to the growth of the business.

Planning Tip: You may want to contribute to the company in an area in which you excel; for example, spending time in sales or training a sales force. Also, you may have to guarantee a loan for a period of time, especially if you still have some control.

Select Experienced Advisors
A successful business exit plan requires an experienced team of advisors, which can include an attorney, CPA, financial advisor, insurance agent and valuation expert. These advisors will review your situation and recommend the best strategy to accomplish your objectives. It is critical that you understand the plan, why you are doing it, any potential risks, how the transfer will occur, and who is responsible for each step. Whether your business transfer will involve a family limited partnership, a buy/sell arrangement, charitable trusts, employee stock ownership plan, or a private sale will depend on your situation, goals and desires.

Don’t Procrastinate
Your final job is to follow through and implement the plan.

Conclusion
Planning now to exit your company will result in you and your family receiving the best possible results, both now and after your retirement, disability or death. You can receive retirement income; you can transfer your business to your family, your employees or an outside buyer; you can make a difference for a charity or your community; and you can do all of this with reduced income, gift and estate taxes. You just have to get started now. We can help you do that.

 

What is a Michigan Registered Agent?

As a Grand Rapids, MI business lawyer, this is a question I’ve been asked quite a bit.  Due to the large number of corporations and limited liability companies (LLCs) formed in Michigan every year, it is important to know the requirements of a registered agent.  Why?  Because whether you form a Michigan corporation or a Michigan LLC, you are required to appoint a registered agent.  The law for requiring one for Michigan corporations is here, and the law for requiring one for Michigan limited liability companies is here.

A registered agent can be an individual Michigan resident, or a domestic or foreign corporation (or LLC) authorized to transact business in Michigan.  The registered agent of a Michigan corporation or LLC (I’ll refer to it as the “Company”) is the Company’s agent for the purpose of service of process.  Service of process is the procedure used to give legal notice to the Company of a court or administrative proceeding against it.  In other words, it’s how a Company is notified that it is being sued or that someone is bringing an administrative action against it.

Of course, to “serve process” on a Company, the Company is also required to have a registered office.  Both the name of the registered agent and the street address (and mailing address if different than the street address) of the registered office must be included in the Articles of Organization (if the Company is a LLC) or Articles of Incorporation (if the Company is a Corporation).

Michael Lichterman is a relationship-based business attorney who leverages his business, marketing and legal knowledge to help business owners and entrepreneurs create a Foundation for Business Success™.  This goes beyond merely drafting a set of documents – it’s about  proactively preparing the business and the business owner for continued growth while remembering the “human side” of running a business.  He best serves small business owners (less than 50 employees) and entrepreneurs.  He takes the “counselor” part of attorney and counselor at law very seriously, and enjoys creating life long relationships with his clients  and their businesses – many of which have become great friends.

What Are Michigan Articles of Organization?

You may have read my previous post on LLC Operating Agreements and thought, “that’s not the first step, is it?”  Well, no, it’s not.  The first step in legally forming a business should be to meet with a Michigan business lawyer to get the critical advice and help you need to make sure you get the full, legal benefits of forming the business.

The first documentation step in forming a Michigan Limited Liability Company (LLC) is to draft and file Articles of Organization (the “Articles”).  Filing the Articles means that the business entity officially “exists.”  Although the Michigan Limited Liability Company Act (the “Act”) doesn’t require a particular form for the Articles, it does set out what information is required in the Articles. For example:

  • The name of the LLC,
  • The purpose(s) for which it is formed,
  • The street and mailing address for the LLC’s registered agent,
  • Whether the LLC will be managed by a manager or by the members, and
  • How long the LLC will last.

Generally, I favor using the form from the State of Michigan Department of Licensing and Regulatory Affairs (click here for the form). Don’t let the simplicity of the form fool you.  There are many important decisions that need to be discussed and decided with a Michigan business lawyer before knowing whether or not the state form is sufficient for your particular business.  And in certain cases it is better to use custom-drafted Articles rather than the form, to make sure your goals and objectives for the business are accurately represented.

Have questions about getting your business “off the ground?”  Want to make sure that your existing business was set up to give you the maximum protection and help reach your full potential?  Call us at 616-827-7596 and schedule your business needs analysis meeting to have added peace of mind.

Michael Lichterman is a relationship-based business attorney who leverages his business, marketing and legal knowledge to help business owners and entrepreneurs create a Foundation for Business Success™.  This goes beyond merely drafting a set of documents – it’s about  proactively preparing the business and the business owner for continued growth while remembering the “human side” of running a business.  He best serves small business owners (less than 50 employees) and entrepreneurs.  He takes the “counselor” part of attorney and counselor at law very seriously, and enjoys creating life long relationships with his clients  and their businesses – many of which have become great friends.

What Is a Michigan Benefit Corporation?

Short answer – nothing . . . yet.  You see, as a Grand Rapids, Michigan business lawyer I try to keep my “ear to the ground” when it comes to the future of business law – both here in Grand Rapids, Mi and nationally.  There seems to be a growing national trend for state business laws to allow a “Benefit Corporation.”  Five states already have such laws and Michigan is one of six states currently considering enacting B Corporation laws.

Generally speaking you can currently form two types of Corporations in Michigan – for profit or non profit.  Yes, there are more, but those are the two most common.  For profit Corporations can then elect to be treated as either a C Corporation or an S Corporation for tax purposes.  Please note that you don’t “form” a C Corporation or S Corporation – that is a tax election (and a topic for a future blog post).

Benefit Corporations would function the same as C Corporations in terms of taxation, but would give businesses the fiduciary duty to consider non-financial interest when making decisions and require accountability through annual reporting.  This is mainly accomplished and carried out by appointing a “Benefit Director.”  The driving cause behind the Benefit Corporation is providing a way for business Corporations to further environmental, sustainability and other goals without running afoul of Director fiduciary responsibilities.

You see, Directors are legally obligated to act in the best interest of the Corporation’s shareholders.  This could leave them open to the threat of lawsuit from one or more shareholders if they make a decision that is more mission driven (e.g. good for the community with potentially little or no benefit to the shareholders).  Forming as a Benefit Corporation would not only allow for those types of “greater good” decisions but also hold them accountable via a Benefit Director and Benefit Officer(s), annual reporting and a shareholder right to enforce a higher standard of action.

If you are interested in reading the proposed legislation, you can find it here: Senate Bill 359, Senate Bill 360, House Bill 4615, and House Bill 4616.

I can see this being of particular interest here in West Michigan.  We have a remarkable reputation for incorporating sustainability into our businesses and lives and for having a focus on the “greater good.”  I’m looking forward to monitoring developments on Benefit Corporations in Michigan and will post again with any updates.

Michael Lichterman is a relationship-based business attorney who leverages his business, marketing and legal knowledge to help business owners and entrepreneurs create a Foundation for Business Success™.  This goes beyond merely drafting a set of documents – it’s about  proactively preparing the business and the business owner for continued growth while remembering the “human side” of running a business.  He best serves small business owners (less than 50 employees) and entrepreneurs.  He takes the “counselor” part of attorney and counselor at law very seriously, and enjoys creating life long relationships with his clients  and their businesses – many of which have become great friends.

Business Membership Plans and How It Can Protect Your Business

As many of my readers and business clients know, I bring a very unique background to being a Michigan Business Attorney.  A degree in Finance, Vice President of a commercial equipment leasing company, small business owner and entrepreneur.   This background and my own personal view on true client service caused me to step back and look at the way Michigan small businesses worked with their business lawyer.

Guess what?  I didn’t like it.  The most common model is based on the “billable hour.”  I’ve experienced that both as a client (at the leasing company) and as an attorney.  Yes, it’s true, I billed by the hour when I first opened my firm . . . it was all I was taught and all I knew.  I quickly realized that billing by the hour is a lose – lose situation.  When you’re billed by the hour you don’t want to talk with your attorney.  Trust me, I know because I didn’t want to when I was a client.  And it felt a little bit like giving the attorney a “blank check” because the bill would be for however much time it took.  Sure there were estimates, but it wasn’t set in stone.  I wanted to have a relationship with my clients, and I knew I couldn’t do that billing by the hour.

Then there was the flat-fee model.  A specific dollar amount for a specific transaction.  It still felt cold and impersonal.  The reason was that it was “just a transaction.”  Again, I wanted to have an ongoing relationship with my clients and many of them expressed an interest in something more than the “one off” transaction.  Why?  Because we’ve seen first hand the incredible value provided by ongoing counsel from a business lawyer (thankfully it was at a time that I wasn’t paying the bill!).  Even with a flat fee for the services, once the transaction was over it was a case of “well, if you need anything else, just give me a call.”  That was it!

I can tell you from personal experience that the followup call was rarely made.  Why?  Well, the simplest reason was the owner was busy running the company and it didn’t come to mind.  Another common reason was fear of the cost involved for making that call.  I knew there had to be a better way.  So I thought about what I would have wanted as a business owner who wanted to help ensure the longevity of my business: ongoing guidance, value and a reasonable fee.

The result?  The Lichterman Law Business Membership Program.  Sounds awfully official doesn’t it?  The aim of the business membership program is to provide small business owners and entrepreneurs with the ongoing legal guidance they need and want at a monthly flat rate they can afford.  Membership levels range from our base Counsel Plan all the way up to our Pinnacle Plan.  Each membership level is designed to provide small business owners with the most commonly needed business legal services.  The best part (according to current business members) is the as needed phone and email access included in every plan level . . . and the kicker is that the phone/email access is not limited in any way.

The best part about our Business Membership Program is that it is the result of years of research, talking with dozens of business owners and business advisers about what they need and value most.  It’s no surprise that many of those owners have or are current business membership participants.  It truly is created for business owners, by business owners.

Despite offering business membership plans for the past few years, you probably haven’t heard much about it.  That’s because we are very selective in who we offer business membership plans to so that we can provide the unsurpassed level of client service for which we are known.  We’ve had so many business owners tell us to spread the word, that we finally decided to unveil it more publicly (starting with this and future blog posts).

You can get started by reading more about our philosophy by clicking here.  Then call at 616-827-7596 to find out if you qualify for a business membership plan.  Remember, we take a limited number of monthly membership clients and it is first come, first served, so call quick.  We’ll even provide a 2 hour small business needs analysis meeting at no charge if you mention this blog post.  Why wait?

Michael Lichterman is a relationship-based business attorney who leverages his business, marketing and legal knowledge to help business owners and entrepreneurs create a Foundation for Business Success™.  This goes beyond merely drafting a set of documents – it’s about  proactively preparing the business and the business owner for continued growth while remembering the “human side” of running a business.  He best serves small business owners (less than 50 employees) and entrepreneurs.  He takes the “counselor” part of attorney and counselor at law very seriously, and enjoys creating life long relationships with his clients  and their businesses – many of which have become great friends.

A Small Business Horror Story

From time to time I will reference the blog posts of some of my colleagues.  In this case, the story was so typical of similar ones I’ve experienced and the post was so well written, I’m reproducing it here with permission.   The author is Business Lawyer Gina Bongiovi of the Bongiovi Law Firm in Las Vegas, NV.  If you or someone you know owns or plans to start a business in Las Vegas, I strongly recommend contacting Gina.  As a Grand Rapids, MI business lawyer I assure you that these same situations crop up here in West Michigan.  Enjoy the post and please share your thoughts with a comment.

When I sign a new monthly retainer client, I always conduct what I call a “legal checkup” on the business.  I review the company’s formation, licensing, employee or contractor agreements, lease agreements, service agreements, etc. to find ways I can better protect the company and its owners.


Wait, let me clarify.  I *request* these documents in order to review them.  Often, it takes the owners a while to gather all the information to give me and sometimes they simply ignore my requests, preferring that I instead put out fires.  While I’m great at putting out fires, my real value lies in working proactively – modifying these documents to better protect the company before a fire breaks out.


One particular client was in an LLC with another person.  We’ll call them Jack and Bill.*  Jack requested the initial meeting with me, apparently without telling Bill.  Bill walked in during our meeting, demanded to know “who the hell” I was, and threw a fit, yelling at the top of his lungs that “we don’t need no &*%$ attorney!”  Following that outburst, I gently asked Jack to send me a copy of the company’s operating agreement.  He said it was the one that came with the corporate binder he got when he formed the company and he had no idea where the binder even was.  Seeing the writing on the wall, that this partnership was going to crumble sooner rather than later, I made a more urgent request to see the operating agreement.  And I requested the operating agreement every few days for the next two months with no response.


A month ago, Jack called to say Bill was leaving the company.  I again asked for the operating agreement to make sure Bill’s exit was in compliance with its terms.  I also suggested that Bill be removed as a signer on all company bank accounts as soon as humanly possible.  No response.


Last week Jack called in a panic.  While he was at the bank removing Bill as a signer on the account, Bill was at a different branch, withdrawing $21,000 in cash from the company’s checking account.


Because Bill was still a signer on the account, the bank had no choice but to give him the money.


Because the operating agreement didn’t restrict an LLC member’s ability to take money out of the account, Bill didn’t breach any agreement.


And because Bill pulled the money out in cash, there was no way to stop payment.


Jack’s only option would be to file a lawsuit against Bill, hope that he wins, and then hope that he could collect the money.  Of course, a lawsuit would drag on for months and more likely years, tying up company resources in what is probably a losing battle.  Plus, even if Bill lost, he could file bankruptcy and then the company would have lost the original $21,000, plus attorney fees, plus time lost while embroiled in a lawsuit.


Lessons learned:


1) make sure your operating agreement is thorough and addresses issues like when a member can take money out of the account,


2) if someone leaves the company, remove them from the bank account IMMEDIATELY.  Unless you notify the bank that someone is no longer an owner, the banker has no way of knowing not to give an owner access to company funds.


* Names have been changed to protect the innocent.


Michael Lichterman is an estate planning and business planning attorney who helps families and business owners create a lasting legacy by planning for their Whole Family Wealth™.  This goes beyond merely planning for finances – it’s about who your are and what’s important to you.  He focuses on estate and asset protection planning for  the “experienced” generation, the “sandwich generation” (caring for parents and children), doctors/physicians, nurses, lawyers, dentists, professionals with minor children, family owned businesses and pet planning.  He takes the “counselor” part of attorney and counselor at law very seriously, and enjoys creating life long relationships with his clients – many of which have become great friends.

Michigan LLC Charging Order Asset Protection

So you’ve read my post about charging orders against Michigan LLCs and are thinking, “so what?!”   Well, the key is not so much what it is, but whether it is the only remedy a creditor may have or just one of many.

Much review and comment has been made about a 2010 Florida case, Olmstead v FTC, 44 So 3d 76, and the effect it may have on the level of asset protection provided by a Single-Member Limited Liability Company.  Why?  Because the court determined that, under Florida law, a creditor is not limited to a charging order as a means of collecting on the judgment.  That could mean the creditor could “step into the shoes” of the LLC Member, effectively taking all ownership in the company and directing it as the creditor sees fit.  I think all Michigan LLC owners can agree, that’s a bad thing.

Well, Michigan business attorneys and the Michigan legislature were listening to the scuttlebutt.  What came out of it was a change to Michigan law via a 2010 amendment to the Michigan Limited Liability Company Act (the MLLCA).  Section 507 (MCL 450.4507) of the MLLCA now makes it clear that the charging order is the “exclusive remedy” by which a judgment creditor of a Member may satisfy a judgment out of a Member’s membership interest.

And THAT is a good thing for asset protection.  It limits the creditor to distributions from the LLC.  No distributions = nothing to the creditor.  And the creditor is not able to have any say in the LLC’s actions . . . it leaves the Member in control of the company.  And that is a great thing for Michigan business owners!

Important Note: there is still some belief that a court could find that a charging order is not the only remedy in certain circumstances involving a single-member LLC.   Make sure to meet with a Michigan business lawyer before making any decisions.

Michael Lichterman is a relationship-based business attorney who leverages his business, marketing and legal knowledge to help business owners and entrepreneurs create a Foundation for Business Success™.  This goes beyond merely drafting a set of documents – it’s about  proactively preparing the business and the business owner for continued growth while remembering the “human side” of running a business.  He best serves small business owners (less than 50 employees) and entrepreneurs.  He takes the “counselor” part of attorney and counselor at law very seriously, and enjoys creating life long relationships with his clients  and their businesses – many of which have become great friends and trusted confidants.

What Is A Michigan Charging Order?

As a Michigan Business Attorney and Estate Planning Attorney I have worked with numerous business owners and individuals to help protect their business and/or their family assets.  In many cases that protection involves forming a Michigan Limited Liability Company (an LLC).  One of the main reasons for forming LLCs is right there in their name . . . limited liability.

Many Michigan business owners desire to limit their personal liability for their business activities.  The idea being, if the business is liable for some damage to a person, business or property, the business owner does not want his or her personal assets (home, financial accounts, cars, etc.) at risk for the business liability.  Simply forming the LLC is not enough, but it is a good first step.  I will discuss additional liability limiting steps in a future post.

It’s a fact of life for many businesses and business owners . . . the dreaded lawsuit.  And what happens if you lose?  Well, you become a “judgment debtor,” meaning you are a debtor to the individual(s) or business(es) that won the lawsuit against your business.  And they have all sorts of “remedies” – actions they can take to collect on the court judgment amount.  One of those is commonly referred to as a charging order.

A charging order is a court-authorized right granted to a judgment creditor to attach distributions made from a business entity (such as a LLC) to a debtor who is a Member in the entity.  In a way, it is similar to garnishment of wages or income.  It does not give the creditor ownership or management rights in the LLC.

Remember that a charging order was just one of the “remedies” available to a judgment creditor?  Well, many business owners and individuals who want to protect their assets would like it to be the only remedy.  Can you guess why?  Let me know what you think by commenting on this post.  I will let you in on the reason in my next post and uncover the Michigan law relating to the “charging order only” remedy.

Michael Lichterman is a relationship-based business attorney who leverages his business, marketing and legal knowledge to help business owners and entrepreneurs create a Foundation for Business Success™.  This goes beyond merely drafting a set of documents – it’s about  proactively preparing the business and the business owner for continued growth while remembering the “human side” of running a business.  He best serves small business owners (less than 50 employees) and entrepreneurs.  He takes the “counselor” part of attorney and counselor at law very seriously, and enjoys creating life long relationships with his clients  and their businesses – many of which have become great friends and trusted confidants.

You Pay For What You Get

“You get what you pay for,” is a phrase that we’ve all heard so much it is has become almost a cliche.  What I’ve come to realize is that, although “you get what you pay for” may not be true in all cases, “you pay for what you get” seems to be true in all cases.  Whether the “cost” is money, like we typically think, or something intangible such as lost time, lost opportunity, worry, regret or pain.

You may have read my post about the Honda, the big screen and estate planning.  The idea being that we “pay” (money, time, emotions, etc.) for something based on the perceived value it has to us.  I was reminded of this when I talked recently with a nice gentleman.  At one point he said, “that’s more than I’m willing to pay.”  It doesn’t matter the context – estate planning or business planning – there’s a lot going on behind the scenes in that statement.

It could be a reflection of lack of concern, lack of understanding how things work (estate planning or business planning), not fully understanding the situation, or valuing other things higher than the estate planning or business planning being considered.  Ultimately, I think it is a combination of all of these (and more), although I see the value comparison being the deciding factor in most situations.

I’m not saying any decision is good, bad or indifferent.  I think it is good for us to understand how we make purchase decisions and to not forget all the non-monetary considerations that come into play and how they, ultimately, lead us to the decision we make.

How do you make a decision between two or more “purchases”?  Maybe it’s getting an iPad versus purchasing more life insurance, maybe it’s leasing a new car versus purchasing a new one, or getting a “discount” haircut versus going to a salon.  When you stop and think about the monetary and non-monetary considerations, how do YOU make your choices?  I would love to hear what you think of this!

Michael Lichterman is an estate planning and business planning attorney who helps families and business owners create a lasting legacy by planning for their Whole Family Wealth™.  This goes beyond merely planning for finances – it’s about who your are and what’s important to you.  He focuses on estate and asset protection planning for  the “experienced” generation, the “sandwich generation” (caring for parents and children), doctors/physicians, nurses, lawyers, dentists, professionals with minor children, family owned businesses and pet planning.  He takes the “counselor” part of attorney and counselor at law very seriously, and enjoys creating life long relationships with his clients – many of which have become great friends.

What Is A Michigan Operating Agreement?

As a Grand Rapids, MI business lawyer, I have helped many Michigan entrepreneur business owners start their businesses.  Many of them want to form their business as a Limited Liability Company (LLC).  This leads us to a conversation about the LLC Operating Agreement.  To my initial surprise, many of the business owners I meet with ask, “what is an operating agreement?”

A LLC operating agreement is like Bylaws for a corporation.  Don’t worry – if you don’t know what Bylaws are, I will cover them in a future post.  According to wikipedia, an operating agreement is “an agreement among [LLC] Members governing the LLC’s business, and Member’s financial and managerial rights and duties.”

LLCs are a “creature” of state law, so it is important to note that you can find Michigan’s Limited Liability Company Act here.  Michigan law defines an operating agreement as “a written agreement by the member of a limited liability company that has 1 member, or between all of the members of a limited liability company that has more than 1 member, pertaining to the affairs of the limited liability company and the conduct of its business.” (MCL 450.4102(2)(r)).  Pretty close to the wikipedia definition.

Although not required, an operating agreement is a very important tool for two key reasons: (1) it forces the Members (owners) to determine how they want the LLC internally governed, and (2) it puts those directions down on paper so it’s not left up to “he said, she said” if there is a disagreement among Members down the road.  If you don’t have one, you will be at the mercy of the LLC statute’s default provisions.  It’s your business, don’t YOU want to decide how it’s governed or do you want the State of Michigan to tell you?!

And in case you are thinking “I’m the only owner, an operating agreement isn’t even valid with only one owner,” think again.  Michigan law specifically authorizes operating agreements for single-member LLCs and having one is a great idea for the #1 reason mentioned above and as additional support for the “limited liability” provided by the LLC in the first place.

Thinking about starting a business and want to form an LLC?  Already have an LLC but not an operating agreement?  Or do you have an operating agreement and not understand why or what it means to your situation?  Call us today at 616-827-7596 to schedule a comprehensive Small Business Strategy Session.  And if you mention this blog post we’ll waive the session fee (a $1,250 value!)

Michael Lichterman is a relationship-based business attorney who leverages his business, marketing and legal knowledge to help business owners and entrepreneurs create a Foundation for Business Success™.  This goes beyond merely drafting a set of documents – it’s about  proactively preparing the business and the business owner for continued growth while remembering the “human side” of running a business.  He best serves small business owners (less than 50 employees) and entrepreneurs.  He takes the “counselor” part of attorney and counselor at law very seriously, and enjoys creating life long relationships with his clients  and their businesses – many of which have become great friends and trusted confidants.

What is a Michigan Limited Liability Company (LLC)?

As a Grand Rapids business lawyer, great folks routinely call our office and say “I need to form an LLC.”  When I ask them why, the answers range from “because I want to start a business,” to “my buddy started one and said it was the best way,” to “my CPA suggested I form one.”  This lets me know that there is some confusion among business owners and entrepreneurs about what, exactly, a LLC is.

As you can tell by the title of this post, LLC is the abbreviation for Limited Liability Company.  The law on Michigan LLC’s can be found here.  In short, a LLC is a form of legal business structure under which you can operate your business.  Some other well-known forms of business structure are corporations and partnerships.

Michigan LLCs are typically more flexible in their formation and operation than corporations and typically provide a greater level of liability protection than a partnership.  The “owners” of a LLC are called “Members.”  There can be as little as one Member (referred to as a single-member LLC or SMLLC) and up to as many Members as you want (collectively referred to as multi-member LLCs or MMLLCs).

LLCs, like corporations, offer a certain level of liability protection for the owner’s personal assets if certain legal and practical steps are taken.  This, combined with the flexibility mentioned above, is why many business owners choose to formally operate as a LLC.

This brief explanation would not be complete without mentioning everyone’s favorite topic…taxes.  By default, LLCs are taxed as a “pass through entity.”  That means that the profits and losses “pass through” the entity down to the owner(s) personal tax return…the LLC does not pay the taxes, the owner(s) does.  Although that is the default, there are elections that can be made to be treated differently for tax purposes.

It is important to keep in mind that a LLC is not always the best way to form your Michigan business.  The considerations mentioned above are just the “tip of the iceberg.”  Starting a Michigan business without talking with a relationship-based Michigan business attorney could cost you (and your business) dearly down the road.

Looking to start a business or want to make sure your business has the correct foundation for continued success?  Call us at 616-827-7596 for a comprehensive Small Business Strategy Session.  Mention this blog post and we’ll waive the strategy session fee (a $1,250 value!).

Michael Lichterman is a relationship-based business attorney who leverages his business and legal knowledge to help business owners and entrepreneurs create a foundation for success™.  This goes beyond merely drafting a set of documents – it’s about  proactively preparing the business and the business owner for continued growth while remembering the “human side” of running a business.  He best serves small business owners (less than 50 employees) and entrepreneurs.  He takes the “counselor” part of attorney and counselor at law very seriously, and enjoys creating life long relationships with his clients  and their businesses – many of which have become great friends and trusted confidants.

How Should I Sign Business Documents?

It depends on whether you are right handed or left handed.  Ok, not really.  This is a question I hear on a regular basis and an important one to make sure you do correctly.  Many Michigan business owners form their company as a Corporation or a Limited Liability Company (LLC).  They do this because they want to protect their personal assets from business liabilities, among many other reasons.  Many Grand Rapids business owners have read stories about lawsuits against a company and “piercing the veil” to access the owner’s personal assets.  That is definitely something to avoid.

A key component in avoiding “veil piercing” is to make sure you treat your business as just that . . . a business . . . separate and apart from you, the owner.  And how you sign documents on the company’s behalf can reinforce that notion.  I generally recommend the following: [Your Name], as [Your Title] of [Business Name].  For example, “John Doe, as Member of Masters of the Universe LLC.”

This clearly sets out that you are signing the document in your business capacity, not your personal capacity.  I also recommend always including the abbreviation for the type of business entity – LLC or Inc. – at the end so that you are putting the other parties to the document on notice that the business name is not just a sole proprietorship.

Sure, signing this way can take a little extra time and room on the paper, but it’s time (and room) well spent if it help reinforce your business entity’s existence and protect your personal assets from business liability.  If you need to make sure your Grand Rapids small business is working like a “well oiled” machine, call us at 616-827-7596 for a small business “tune up.”  Mention this blog post and we’ll waive the typical “tune up” fee ($950 value!).