There are four main ways to organize your business: (1) sole proprietorship, (2) partnership, (3) limited liability company, and (4) corporation. Each has its pros and cons for both legal and tax consequences, and I can help guide you to the right entity choice for your start-up business after discussing your short and long term goals.
If you are interested in discussing the steps to legally organize your business, please contact us today.
A sole proprietorship does not offer any liability protection to the owner. With single-member limited liability companies being allowed in Michigan since 1997 and the relatively inexpensive cost to set up and maintain a single-member limited liability company, it rarely benefits a small business owner to operate as a sole proprietorship.
Partnerships can either be a general partnership (where all partners equally share in the company’s liability), or a limited partnership (where limited partners can shield themselves from personal liability by not having a management role in the company). In most cases, a Michigan multi-member limited liability company will be the preferred method of organizing a company, but a partnership can be beneficial by providing easy dissolution if the partners know at the start it will be a short-term venture.
Limited Liability Company
Limited liability companies have become very common among small business owners in Michigan by offering pass-through tax treatment for the owners and the same personal liability protection as a corporation. But limited liability companies do not have the same formal paperwork requirements of a corporation. Limited liability companies also offer flexibility in the types of entities that can be members, and creativity in drafting an operating agreement to meet the management goals of the owners.
An S Corporation is similar to an LLC by providing pass-through tax treatment for the owners and personal liability protection, but there are many restrictions on who can be the owners of an S Corp. If all of the shareholders will be individuals, an S Corporation can be advantageous by providing self employment tax savings.
While an LLC or S Corporation is often the preferred method of ownership for small and mid-sized businesses because of the pass-through tax treatment for the owners, there may still be advantages to organizing as a C Corporation. A C Corporation does not have to make dividend distributions to its owners, avoiding individual taxation of company profits. Plus, S Corporation and LLC owners often have to recognize fringe benefits as individual taxable income, where C Corporation shareholders do not. It is also important to remember that in Michigan, C Corporations must pay a 6% corporate income tax, where S Corporations and limited liability companies no longer have a state corporate income tax.