A little tune up Amendments keep state's LLCA in step with the times

By Paul Janczewski

Legal News

Jim Carrey, the comedian, gets a lot of laughs from his act. Professor James L. Carey has an act, too, but no one laughs when he talks, unless the audience contains business owners raving about recent amendments to Michigan's Limited Liability Company Act.

Carey said those amendments, like a finely-crafted joke that stands the test of time, will reap benefits by possibly avoiding future problems.

"There was a lot of simple maintenance that needed to be done," Carey said of the previous LLCA.

He likened it to the simple, but necessary, things a person does to their house - painting, changing light bulbs, cutting grass, and checking the plumbing - that individually are not problems. But if all those tasks are ignored for long enough, "eventually things will go wrong and the house will fall apart," Carey said.

"And a lot of things that happened in this amendment package were those kind of very boring, very dull maintenance sort of things that, if you don't do it right now, it won't necessarily hurt you, but eventually the act will get old, less useful, and less important," he said. "So we wanted to make sure we kept it updated with the best acts in the country."

Michigan's initial LLCA was passed in 1993, making the Wolverine state the 17th and first industrial state to adopt LLCs as a form of business organization, Carey said. It is also the most popular form used here for new businesses.

"On average, three LLCs are formed every year for every one corporation," Carey said.

While the corporate form of business organization has been around for hundreds of years, some states adopted LLCs in the 1970s and 1980s, which combined some of the best parts of corporations and the tax advantages of a partnership to make LLCs a more flexible form of organization while giving owners the same limited liability corporation shareholders enjoy.

"A lot of those looking to establish a business enterprise look at both corporations and LLCs," Carey said, adding there is some overlap between the two, but important differences also.

The changes to the LLC Act took effect last December 16 after Sen. Tupac Hunter (D-Detroit) sponsored the legislation based on recommendations from a blue ribbon committee of business and tax lawyers who are members of the Business Law Section of the State Bar of Michigan. Carey said this committee periodically reviews the LLCA here and those in other states to ensure Michigan has one of the most current, and best, acts in the country.

And it's impossible to talk about the LLCA without including James R. Cambridge, a member of the Kerr, Russell and Weber law firm and "the leading light for LLCs in Michigan," Carey said.

Cambridge was the chairperson of the Legislative Drafting Committee that wrote the first LLCA, has taken part in subsequent amendments to it, and continues today in that role. During a recent interview in his office at the Auburn Hills campus of Thomas M. Cooley Law School, Carey held up a large thick book called "Michigan Limited Liability Companies." The book, which contains about 300 pages covering a number of sections, is the business lawyers' bible of the LLCA. Cambridge, "an exceptional lawyer," worked tirelessly on the book, Carey said.

"If you want to know about LLCs in Michigan, this is the book to get," he said, noting that the newest version of the book will contain maybe 30 new pages. "It was a big rewrite, but not a whole new act."

Carey, an associate professor at Cooley who teaches business law and organization classes, is no slouch himself on the LLCA. He also is the official reporter for the committee, a role that sees him taking minutes, reviewing and drafting materials, researching LLCs in other states, and making suggestions on how to maintain and clarify Michigan's LLCA. Carey not only has assisted in drafting legislative bills, but also has testified with Cambridge before state House and Senate committees regarding these bills.

Prior to joining Cooley, Carey was in private practice with several law firms working in business law. He has written many articles on that and other subjects, and co-authored with Cambridge an article that was distributed to 3,500 Michigan attorneys who are members of the Business Law Section of the State Bar. The article will be published this year in The Michigan Business Law Journal.

Carey said other brilliant Michigan attorneys were involved with the committee and getting the legislation passed, such as Joseph Palamara and Karoub Associates, Ann Baker, Tania Fuller, Tim Damschroder, Tony Ilardi Jr., Chris Maeso, and Dan Minkus.

He said they all worked for free on the project but volunteered because "they're trying to help make the business law climate here in Michigan better."

"Being able to work with these lawyers and get ideas from them on how to improve the act is just a fantastic experience for me, and I'm learning from them," Carey said.

Carey said the recent amendments were technical and updating, although there were six major changes, sort of a "deferred maintenance" to the LLCA.

One of the most significant changes was a conversion amendment, which allows corporations to convert into LLCs, or LLCs to convert into corporations, Carey said. It was possible before these amendments, he said, through a series of actions, but was akin to using a screwdriver to hammer in a nail. It could be done, but was not the most effective way to accomplish it.

Another change contains wording only a lawyer could love. It authorizes LLCs to provide broad indemnification to members, managers and others, with a few exceptions. Carey said LLCs could do that in the past through contracts.

"But by putting it in the statute, we've given people a more firm foundation for a lot of things they probably already thought were true, and probably were already doing. Now, they don't have to be as worried about it if there is a problem."

A related amendment authorizes the LLC to purchase errors and omission insurance. Like the previous change, Carey said since the language of the LLCA was subject to interpretation, "we thought it was important to make it explicit."

The fourth amendment deals with transactions with an interested person. In its simplest form, it allows the LLC to accomplish transactions with its members, which have been used by corporations for years.

Amendment five centers on clarification on how a person becomes a member of an LLC. Carey said in the past, the act required a member to sign an operating agreement. But the act also did not require an LLC to have an operating agreement.

"The act had a disconnect," Carey said. "We wanted to clarify that so the act really does work the way people are thinking it does, and intending it to."

Carey said this amendment was "just good, solid maintenance," which allows a member by signing an operating agreement, or reflecting the person's status through LLC records, or if members agree in writing.

"People have been doing a lot of things that we put into the statute, but there wasn't statutory support for it," he said. "If someone questioned it, there could be a big argument, and that means a court case, and a lot of uncertainty for a long time while people hash out the issues."

The final big change prohibits creditors from taking a member's interest. Carey said basically "you cannot be forced to be a partner with someone you don't want to be a partner with." He said court cases in other states centering around this issue have caused controversy.

"We think the Michigan act is pretty clear, but in light of what's going on elsewhere, let's make it as crystal clear as we can."

Carey said shareholders in corporations do not have the same powers that members of an LLC have, "and we think that's an important distinction that needs to be preserved."

A number of technical changes were also made, Carey said, that are similar to keeping your house looking good.

"I like to think we have one of the best LLCAs in the country, and if we wanted to keep it the best, we had to do this maintenance."

He said hundreds of LLCs are formed each year, and multiple thousands are already in existence.

"And all of those are better off now because of these amendments," Carey said.

Some of the amendments eliminate the potential for confusion, others add clarity, but all of them together avoids future court cases, he said, "where people are arguing over technicalities instead of just getting down to business."

"We want to have an act that lets people work together, interact with each other, and understand what their rights and obligations are," Carey said.

He said problems will crop up - that's the nature of business - but these amendments should eliminate many of those potential traps.

"This helps business by giving them some certainty," he indicated.

He said the committee has been working on these amendments for about three years, on and off, and it took some time to gain the legislature's attention. Carey said they've had their hands full in recent years with far more pressing matters. But the time was right for change now to the LLCA.

"If we go 10 years without doing this sort of stuff, all of a sudden, things that shouldn't be a problem will start to become really, really big problems," Carey said.

Like a house, maintenance can be put off, but it has to be done sooner or later. This was the LLCA's time.

And that's no joke.

Published: Wed, Jan 19, 2011

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