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Entity Formation

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.

Sole Proprietorship

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.

Partnership

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.

S Corporation

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.

C Corporation

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.