Doing Business as a Limited Liability Company in Michigan

Since its establishment in Michigan in 1993, the LLC model has become the most
popular type of business entity in the state, so popular that today five in every six businesses set
up are LLCs. This popularity is due to the advantages of the LLC business structure: limited
liability for business owners; owner taxation as though they were in a partnership, hence no
double taxation; and the ease of maintenance relative to a corporation (Michigan Small Business
Development Center, 2017). However, this type of business entity also has its disadvantages,
including more complex starting requirements than sole proprietorships and partnerships;
members are prohibited from paying themselves wages; and members are not exempt from self-
employment taxes. In this paper, a few other issues pertinent to LLCs are discussed, including
the fiduciary duties of LLC members, discounting members’ shares during buyout, and the
importance of executing an operating agreement.
Article Review
Article 1: Fiduciary duties of LLC members in Michigan
The first article explores whether a minority member of a Michigan LLC owes a
fiduciary duty to the company and its other members. Specifically, the article examines this
question within the context of a manager-managed LLC. The Michigan Limited Liability
Company Act (LLCA) distinguishes between a member-managed LLC and a manager-managed
LLC (Carey, 2018). The Act states that two things apply if management is vested in the
members. First, to apply the Act, the members are treated as managers. Secondly and
consequently, the members bear all the managers’ duties and responsibilities and are subject to
managers’ limitations on liability and indemnification rights. In other words, the owners of a

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member-managed LLC are subject to the same duties that apply to managers in manager-
managed LLCs.
The author concludes that going by the wording and spirit of the LLCA and consistent
with well-established rules of statutory regulation, members of a member-managed LLC and
managers of a manager-managed LLC owe fiduciary duties, whereas members of a manager-
managed LLC do not. The author also notes that while there may be some rationale to impose
fiduciary duties on members of manager-managed LLC, such an imposition would possibly
apply to majority members only, not minority ones. Such an approach would be in line with the
approaches of other jurisdictions. The implication for practice is that for the time being, when
establishing a manager-managed LLC in Michigan, it would be wise for members, through their
attorneys, to spell out all members’ respective duties expressly.
Article 2: Applying valuation discounts to Michigan LLCs
The second article discussed whether Michigan courts have the power to apply valuation
discounts when ordering majority shareholders to purchase “at fair value” closely-held minority
shares as a cure for shareholder oppression under Michigan’s LLCA and Business Corporation
Act (BCA). When courts have applied discounts to arrive at the “fair value” of minority
shareholding, they have discounted those shares by more than fifty percent (Allen, 2020).
Therefore, whether a court should or can apply discounts is important. Both the BCA and LLCA
do not define “fair value”; they do not, therefore, state the applicable discounts by which an
oppressed shareholder’s shares should be reduced. As a result, there is a great deal of confusion
around the question. While attorneys and other legal experts may afford to play around with
technical interpretations of whether the BCA and the LLCA permit discounts in cases of
minority shareholder oppression, the Franks opinion’s discretion affords trial courts by several

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opinions of the Michigan Supreme Court suggests that that is the case. Indeed, given that the
circumstances and facts surrounding each oppression claim case will be different, it is only fair
that each trial court is given as much flexibility as possible in determining if to apply a discount
in ordering the sale of the shares of an oppressed shareholder. Meanwhile, if the Michigan
Legislature decides to clarify the issue, parties will have to continuously rely on precedents and
their good judgment. In addition, the authors outline in the article several principles parties can
use in crafting their positions on the matter.

Relevant Law: The Michigan LLC Law

Passed and signed into law in 1993, the Michigan Limited Liability Company Act
(LLCA), also referred to as the Michigan LLC Law, is the primary law governing limited
liability companies in Michigan. The LLC represents a new type of business entity that offers
business owners a strong degree of protection against personal liability, the same level of
protection they would enjoy under a corporation, but with flexibility in pass-through taxation like
a partnership or sole proprietorship. The law recognizes three main forms of LLC: domestic,
professional, and foreign. A domestic LLC is established as a business entity with its own legal
life, separate from its owners, and is established within the boundaries of Michigan. To create a
professional LLC, the owner(s) must be an individual(s) who is or is licensed by a state agency
to render professional services. A professional LLC must also lodge its articles of organization
with the licensing state agency and stipulate the type of professional service or services the
company will provide. A foreign LLC is registered in another state but is permitted to do
business within Michigan. In addition to the three forms of LLC, in 2009, the LLCA was
amended to provide for a business entity called a low-profit LLC. This is a combination of not-
for-profit and for-profit businesses. It is a new investment entity for not-for-profit organizations

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which, until 2009, was under the entity program-related investment (PRI). PRIs were not
desirable investment vehicles because they were costly, complicated, and required extensive
legal support.

Cases

While the LCCA does not require members to file an operating agreement to form an
LLC, as demonstrated by the case summarized here, preparing and signing one is highly
advisable. Especially for an LLC with many members, the operating agreement forms the basis
for consistency in how the company is run, decisions are made, and members relate with one
another. The case of Morris v. Bales, decided by the Michigan Supreme Court in 2017, illustrates
the importance of the agreement. The case pitted Charles W. Morris (the Plaintiff and Appellant)
against William T. Bales, Timothy J. Lock, and PlayData LLC (Defendants and Appellees)
(CaseText, 2017).
Defendant Lock founded PlayData in 2005. PlayData is a technology company that uses
software to monitor soccer players’ movements during a match. In July 2007, Bales joined Lock
as a member, and the two members transformed the company into an Ohio-registered LLC. Later
on, on August 1, 2013, Lock resigned and ceased being a member-manager only to join as a
consultant to the company. As part of the Lock’s exit deal, PlayData LLC was to settle a loan
Lock owed to Wells Fargo due to his past business dealings before joining PlayData, a
gentleman’s agreement that was ultimately not kept. In its verdict, the Michigan Supreme Court
ruled that the members did not have an operating agreement from day one. Such an agreement
outlines what should happen in the event a member exits.
Summary

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Despite its popularity as a form of business entity owing to its advantages, the LLC,
especially as legislated in Michigan, has its fair share of shortcomings. A few of these have been
discussed in this paper, including fiduciary duties of LLC members, discounting members’ shares
during buyout, and the importance of executing an operating agreement. Based on the findings, it
would be highly advisable for entrepreneurs looking to reap the benefits of the LLC in Michigan,
and their attorneys, to keep a keen eye on these potential pitfalls.

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References

Allen, M. P. (2020). Can Michigan courts apply discounts when determining the “fair value” of
minority shares in a share buyback remedy under Michigan’s Shareholder Oppression
Statutes? The Michigan Business Law Journal, 40(3), 47-53.
Carey, D. W. (2018). Fiduciary duties owed by minority members of a limited liability company.
The Michigan Business Law Journal, 38(2), 32-35.
CaseText. (2017, Nov. 28). Morris v. Bales. https://casetext.com/case/morris-v-william-t-bales-
timothy-j-lock-playdata-llc/
Michigan Small Business Development Center. (2017). Guide to starting and operating a small
business. Michigan Small Business Development Center.