How to Incorporate a Business in Michigan

Limited Liability Company - LLC

A newer structure of business formation, LLCs are a very popular hybrid form of business structure. That is to say they combine the best characteristics of the other business structures. Owners have the limited liability of a corporation along with the pass through taxation of a partnership. A popular choice for sole proprietors (an LLC can be owned by one or many) who are looking to incorporate simply to protect personal assets or to secure loans and at the same time add credibility to their business. The LLC is widely held to be the easiest and least expensive form of ownership structure, save for the sole proprietorship. LLCs are gaining popularity in all segments of small business because they do combine the advantages of a corporation with the tax advantages and management flexibility of a partnership.

The main advantages of forming an LLC are;

The limited liability for business debts and lawsuits
No threat of double taxation since the LLC is not considered to be a separate entity from it’s owner(s)
Allocation of profits and losses need not be proportional to ownership interest

This information is for general informational purposes only and not a substitute for advice from a Tax professional and or an Attorney. Michigan Incorporation Company is a service company and does not offer legal or financial advice.

Note: There is never limited liability no matter which business structure is chosen for personally guaranteed loans or commitments. Also business owners are ultimately personally responsible for unpaid federal, state, and local employment taxes, seek out an accountant’s or payroll specialist’s advice if you plan on having employees or must take payroll yourself.

C Corporations, C-Corp

Corporations are separate entities from their owners, who are called shareholders. As a separate individual entity a corporation may be taxed, sued or sue, enter into contracts, and own property. Shareholders elect a board of directors who oversee the major business decisions and policies. Corporations are usually perpetual, that is they do not dissolve or end with ownership changes, such as death or sales of shares. The single reason most business’s incorporate is to give owners limited liability for business debts and most legal issues. This generally means a creditor of the business cannot come after an owner’s personal assets such as a home, car, or personal bank accounts. It also protects the business from personal creditors of the owner.

Other major advantages of incorporating include:

Flexibility and ease of transfer of ownership (easier to attract investors or partners)
Corporations have less risk of IRS audit compared to other business structures
Income splitting, giving a lower over all tax rate to corporation and owners
Cost of benefits such as retirement plans and medical expenses can be written off as a business expense
Corporations can raise additional funds through sale of stock, there are no limits on number of shareholders
You can elect S-Corporation status when certain requirements are met, which enables the corporation to be taxed like a partnership

Disadvantages of a C Corporation

Some disadvantages of incorporating include the complexity and extra costs during the year and at tax time, certain formalities must be observed to protect the corporation’s “Veil” of protection around the owner’s personal assets. Some also cite that corporations are subject to “double taxation” that is the corporations profits are taxed to the corporation and then to the share holder when taken out in the form of dividends that are not deductions for the corporation. This is not really a problem for most small corporations as profit is normally paid down to zero in the form of wages to shareholders active in the business or as consulting to shareholders who meet minimum guidelines for number of hours consulting annually.

Overall incorporating a small business is largely done for the valuable limited liability it offers business owners and for the added credibility given to the business by putting Inc, Company or LLC at the end of the name. It helps people (Customers, Suppliers, Lenders, Investors) see you as serious and committed rather than some fly by night that may not be willing or able to follow through on its commitments.

S Corporations, S-Corp

An S corporation begins first as a C Corporation, eligible companies then file an S election to make the change. S corporation owners enjoy the same limited liability as C corporations. The basic difference is in the eyes of the IRS, while legally still a separate entity, S corporations generally do not pay income tax, their profits and losses are reported on a information return and then transferred to shareholder’s personal income tax returns.

Advantages:

Owners can write off corporate losses against their personal gains and losses from other sources. After taking what the IRS calls “reasonable compensation” for their efforts shareholder employees can take the rest of business profits out as distributions subject only to their personal income tax rate (saving plenty on employment taxes and avoiding double taxation).

Disadvantages:

Ownership less flexible than that of C corporations and LLCs, the IRS places restrictions on how many and what types owners are allowed. S-Corps also must observe the same formalities as a regular corporation in order to maintain “corporate veil”. Depending on your personal tax situation highly profitable S corporations are exposed to initially higher personal income tax rates.