Limited Liability Companies and Realtors, Summer 2012
Limited Liability Companies and Realtors SUMMER 2012
DefinitionA limited liability company (LLC) is an unincorporatedbusiness association, a cross between a partnershipand a corporation that combines the most favorableattributes of both. The LLC has been designed toprovide business owners and managers with apartnership’s flexibility and tax advantages and acorporation’s protection against personal liability.The Michigan Limited Liability Company Act (LLCA),MCL 450.4101 et seq., was adopted in April 1993 andtook effect June 1 of that year, thus making Michiganthe first industrial state in the country to have an LLCact.
Benefits of a LLC• Almost complete flexibility to structure the entity in the way they desire• Like partnerships and S corporations, the LLC will be treated as a pass- through entity for income tax purposes and will not be subject to income tax at the entity level.• Owners’ limited liability.
Benefits of a LLC• The LLC’s owners are known as members and those running the business are known as managers. Neither are personally liable for the LLC’s debts, liabilities, and obligations.• Continuity of life• Free transferability of interests
OwnershipAn LLC is owned by members, whoown membership interests which maybe evidenced by membershipcertificates.Members can be:• An individual• A partnership• A corporation• Another legal entity, including an LLC
FORMATION www.Michigan.gov/lara Navigate to “Commercial Services” Navigate to “Online Services” Navigate to “Business Entity Search”
FORMATION• Single Member or Multi-Member• Member managed or (hired) Manager managed• Operating Agreement – Purpose – Powers & Decision Making – Distributions – Dissolution & Buy/Sell
Maintain the Limited Liability Provided by the LLC“Piercing of the corporate veil” • Use of the mere instrumentality of the entity to conduct business; • Use of the entity to commit a fraud or wrong; and • An unjust loss or injury to another.
Maintain the Limited Liability Provided by the LLC• Was the LLC properly capitalized?• Did the LLC maintain appropriate records and bank accounts?• Did the LLC keep its funds separate from those of the owners?• Did the LLC keep appropriate documentation for any transactions between the owners and the company? e.g. “loans”
Maintain the Limited Liability Provided by the LLCWere actions clearly taken by the LLCand not the owner in an individualcapacity? • LLC must appear when using name • Sign all documents in representative capacity
Distributions to MembersLLC distributions are to be allocated among themembers in the manner provided in theoperating agreement or if the agreement issilent in equal shares to all members.Distributions from an LLC are prohibited if, aftergiving them effect, either:• The LLC would not be able to pay its debts as they become due in the usual course of business• The LLC’s total assets would be less than the sum of its total liabilities plus the amount that would be needed if the LLC were to be dissolved
Uses in the Context of Real Estate An LLC has the power to: • Purchase • Mortgage • Sell; and • Lease Real and personal property in connection with any lawful business purpose. The transfer of more than 50 percent of the membership interests of an LLC holding real estate will amount to a transfer of the ownership of the real estate itself for real property tax purposes and will release the constitutional cap on real property taxes in Michigan.
Uses of LLC for Realtors ?• Set up a single member LLC for the benefits described above and have the broker pay all future commissions to the LLC.• The LLC then makes a disbursement to the salesperson.
Real Estate Licensure Law NO!Real Estate License Law prohibits a broker frompaying a fee, commission or other valuableconsideration to an unlicensed person or entity.MCL 339.2512(h).The Real Estate License Law specifically prohibitsa real estate salesperson from accepting acommission or valuable consideration for licensedactivity from anyone other than the broker withwhom the salesperson is affiliated. MCL 339.2510.
Real Estate Licensure LawA broker license shall be issued to a legal entity only if theindividual who holds the broker license is identified on theapplication as 1 of the following: (a) A sole proprietor. (b) A partner in the partnership. (c) A partner in a limited partnership. (d) An officer for the corporation. (e) A member or manager for the association. (f) A holder of a responsible position of authority in any other legal entity authorized by the state of Michigan under which the business is organized.Associate broker and salesperson licenses shall only be issuedto individuals. Michigan Administrative Code R 339.22201
Presented by: T. SCOTT GALLOWAY GALLOWAY AND COLLENS, PLLC 26075 WOODWARD AVENUE SUITE 200 HUNTINGTON WOODS, MICHIGAN 48070 (248) 545-2500 GALLOWAYCOLLENS.COM OUT FROMUNDERMYHOUSE.COM Scott@GallowayCollens.comDisclaimerThe content of this handout and the accompanying presentation are for informational purposes only. The information presented doesnot create an attorney-client relationship and is not intended to provide legal advice. As the law is constantly evolving and each case isfact specific, you should contact a qualified attorney to review and analyze the facts and law as they relate to your individualcircumstance.