While you might not think much of it, choosing a business structure in Michigan is one of the most important decisions in your business life. Not only does it affect your legal operations but it also has an effect on your administration and financial obligations. Unfortunately, you cannot change the structure as you wish as each option comes with a load of paperwork. It’s important to get a new Michigan business structure right from the start, and this comes from understanding what each decision can spell for your business. We will review all the options available to you, enabling you to avoid digging yourself into a hole.
Let’s start with which are the main types of business entities in Michigan you can create:
- Sole Proprietorships
- Limited Liability Companies (LLC’s)
We will get into what each one entails and why choosing one over the other might be the best choice for your business. Keep in mind that this is a decision that should include all the people in your business to avoid disagreements in the future.
What Should You Consider When Choosing Your Business Structure?
It’s easy to look at one entity and think that it can serve your needs. But like we said in the beginning, your business management structure influences quite a lot how you go about your operations. It has a part to play in:
- Who can own the business: Some structures give you a lot of leeway in bringing other people into the business. Others, on the other hand, are very restrictive on the number of owners or partners in the process of opening a business. You have to think about whether this is something you may want to change as you expand your operations.
- Whether you can change ownership as you conduct business in Michigan: As the business grows or as you take a step back in later years, you may want to leave it to another person. You may even want to sell it or your part of it. Can your structure allow this? Some are very tied to the owner and selling them or transferring them comes with the downside of lost customers.
- How you pay your taxes: Some structures face strict tax implications from the authorities, and you cannot change much when it comes to making your payments. Please note that it’s not only the amount you pay that matters, but also the incentives offered. If your entity has a very restrictive tax structure, you may want to consider other choices. Otherwise, you will spend a lot of time and money on the books and administrative costs and will barely have the chance to reduce that tax burden.
- How liable you are as the owner: Say for example you own a grocery store in your name, and you are the business and the owner. If something happens to someone in the store, you will be liable personally which can eat into your savings and assets. Now suppose something happens to someone in the store, but a company owns the store. In this case, the business would be liable and as much as you are the owner, you would not incur personal debts from this incident. Ask yourself how liable you will be and whether you are comfortable with that level of responsibility.
- How compliant you will have to be: Different structures come with different rules. Some require you to hold regular meetings, note down the minutes, send files to the authorities, and abide by very strict rules. Others are very flexible and allow you to decide what makes the most sense to you as the owner. If you would rather have more say in the operations, you may want to find a structure that affords you this perk.
Popular Types of Business Structures in Michigan
Now that you have understood how your choice can impact your business, let’s look at some of the options available to you. When going through them, relate them to the determining factors above and ask yourself if this is the right choice of the best business structure for you.
In this unincorporated business, you and the entity have no clear divide, and you have no liability protection. Let’s take the example of if you start a business named FT Groceries under this structure. The authorities will regard you and the business as the same thing when you create a sole proprietorship in Michigan. That means that if you incur debts and actions of the company in the line of business, your personal assets will be at risk. It’s very easy for the court to pass a judgment that allows creditors to come after what you have amassed as an individual (owner’s personal assets). You have to be careful with this kind of setup.
On the plus side, you have more say in how you run the business. Plus, you will not incur much in accounting and can save a lot of money on management expenses. However, for a business set to grow and scale the heights, such a setup is very risky.
In this no formal business entity, you join hands with another person and conduct business, hence the name partnership. You and your partner reach an agreement, in writing, about each of your management responsibilities. Let’s use FT Groceries again as an example. You can partner with someone who can bring in the groceries and you can take care of the retail side. It can take two forms:
- General: In this setup, you and your partner share the liability, and the actions of one partner affect the other. For example, if they bring in groceries without paying the creditors and run into debt, you’ll also help pay the debt.
- Limited: In this case, some partners handle the decision-making while the others bring in their expertise. Those in charge of management are more liable than those who are not involved in key decisions.
With this setup, you can separate yourself from the business. Everyone with shares in the business is an owner, and the shares can be publicly or privately held. By selling shares, the business raises income. On the plus side, owners enjoy personal liability protection, and the actions of the centralized management do not impact their personal assets. Also, taxes are paid out on dividends given to the shareholders, hence creating double taxation.
This term is used when referring to for-profit organizations. Such a separate entity must abide by the corporate formalities set out by the authorities to launch a corporation in Michigan. Additionally, it includes a lot of paperwork (articles of incorporation) and is costly due to the high administration needs. Owners have to hold meetings often and formulate laws to govern their operations.
This option comes in handy when owners want to avoid the double taxation issue at the business level and reduce the company’s financial obligations. Instead, the monies are paid out at the individual dividend level. Businesses that use this option can choose to pay their taxes like they would in a partnership.
Limited Liability Company (LLC)
The easiest way to avoid paying taxes at both business and personal levels while avoiding high administration formalities and costs is by opening an LLC in Michigan. It allows you to add as many members as you would like, structure your operations as you want, and even change ownership. Plus, you do not have to write minutes or come up with laws to govern the business. Additionally, it provides liability protection. Expenses incurred in the line of business fall on the business and not you. This popular business form gives you the benefits of all the entities we have covered so far, making it the best option.
Once you have considered the legal and administrative needs of your business, you can look at each of the structures in-depth and decide what works for you. After weighing the advantages and disadvantages of each and engaging professional advisors, you will be well on your way to operate a successful business in Michigan.