Wednesday, September 01, 1993
by Richard D. Weber, J.D.
MDA Legal Counsel
Published in the September 1993 issue of the Journal
This "Dentistry and the Law" feature departs from our usual question-and answer format so that we may present this timely article written by my partner, James R. Cambridge. It should be of great interest to MDA members. — R.D.W.
Michigan dentists and other professional now have a new entity to use in organizing their businesses--the Limited Liability Company (LLC). On June 1 the Michigan Limited Liability Company Act became effective, authorizing the formation and operation of LLCs in Michigan. An LLC is a cross between a partnership and a corporation and combines the most favorable attributes of both. The LLC has been designed to provide owners and managers the flexibility and tax advantages of a partnership along with the protection against personal liability of a corporation. Michigan dentists who have practiced in the form of a partnership or professional service corporation in the past will be able to use an LLC for their practices. The LLC is expected to provide new opportunities and alternatives for practicing and doing business in Michigan.
The LLC is an unincorporated business entity under which neither its owners (known as members) nor those running the business (known as managers) will be personally liable for the obligations of the LLC. If properly structured, the LLC will also be treated as a pass-through entity for federal income tax purposes and will not be subject to federal income tax at the entity level. Rather, all items of income, gain, loss, deduction and credit will pass through directly to the owners of the business. Because of the double taxation of corporate profits at both the corporation and shareholder level and other tax consequences of incorporation, a pass-through entity such as an LLC is very attractive from a tax standpoint. The addition of the corporate attribute of limited liability makes the LLC even more attractive.
The Michigan LLC was designed around four corporate characteristics that the Internal Revenue Service has traditionally looked for in determining whether an unincorporated business entity will be treated as a corporation for tax purposes. Generally, an unincorporated business entity cannot have more than two of the four corporate characteristics of limited liability, centralized management, continuity of life and free transferability of interests if it is to avoid being considered a corporation for tax purposes.
An LLC automatically has limited liability. The Michigan LLC has been designed to give members the flexibility of choosing one more corporate characteristic of the three remaining. With no more than two corporate characteristics in hand (one automatically being limited liability), the Michigan LLC should qualify as a pass-through entity for federal income tax purposes and owners should be able to avoid federal income tax at the entity level. A revenue ruling by the IRS will be sought.
Two or more persons may organize and become members of an LLC. However, individual members and managers of a professional LLC must be licensed to provide the professional services of the LLC and only duly licensed individuals can render professional services. If a professional LLC renders a service that is included in the Public Health Code (such as the practice of dentistry), then all members and mangers of the professional LLC must licensed or legally authorized to render the same professional service.
Although some liability can be avoided by using a professional LLC, not all liability can. Each professional will still be liable for that professional's own negligence, wrongful acts or misconduct or that of any person under the professional's direct supervision. A professional LLC will also remain liable itself up to the full value of its property for the negligence, wrongful acts or misconduct of any of its members, managers, employees, or agents while they are acting on behalf of the professional LLC in the rendering of professional services. Similar provisions are contained in the Michigan Professional Service Corporation Act.
Organizing an LLC is very similar to setting up a corporation. To form an LLC, Articles of organization must be filed with the Michigan Department of Commerce. The articles of organization of a professional LLC must state that the LLC is formed to render specified professional services. The professional LLC will not be able to engage in any other business. The name of a professional LLC must contain the words "Professional Limited Liability Company" or the abbreviation "P.L.L.C." or "P.L.C."
Currently, 25 states have adopted some version of LLC legislation, and about 20 others are considering doing so. Michigan is the first industrial state in the country to have this new form of business entity, and Michigan's treatment of professional LLCs is somewhat unique.
Michigan dentists may be interested in using an LLC for their practices instead of using partnerships or professional service corporations. An LLC will provide dentists with the flexibility and tax advantages of a partnership and the protection against personal liability of a professional service corporation. The LLC may provide a means of consolidating separate dental practices into groups while preserving existing employment relationships. The LLC may also be a useful device for dentists to conduct joint ventures and real estate investments. As more and more states adopt LLC legislation and business planners and professionals grow more accustomed to this form of practice, the LLC may very well become the new entity of choice in Michigan and elsewhere.