If you’re considering starting a business in Michigan, a limited liability company (LLC) is a great business entity choice, and Michigan is also a great state to do business in general.
Here we’ll cover why Michigan is good for business and the benefits offered by an LLC.
Business Environment in Michigan
Doing business in Michigan comes with many benefits, including a skilled workforce. In fact, the state has the highest concentration of engineers in the country and a skilled trades workforce that ranks in the top ten in the country.
Michigan also has very pro-business laws and is recognized as one of the top ten pro-business states in the U.S. The state also offers many resources for new business owners.
Michigan has a relatively low LLC formation fee and is home to more than 700,000 businesses organized as LLCs.
Benefits of an LLC
An LLC, no matter what the state, offers several benefits that make it a popular choice for entrepreneurs.
Personal Liability Protection
Unlike a sole proprietorship, an LLC is a separate entity from its owners, which means that the LLC can have its own assets and obligations. Because of this separation, the owners of an LLC, called members, are not personally liable for the debts and obligations of the business.
If you instead operate as a sole proprietorship or general partnership, you’ll be personally liable for the obligations of your business, which puts your personal assets at risk if you can’t pay the debts of the business.
Some exceptions to the personal liability protection of an LLC do exist, however. For example, if you act fraudulently or recklessly in the course of managing the LLC, you could be personally liable for damages.
Also, if you personally guarantee a business loan for the LLC, you are personally liable for that loan.
Just like a sole proprietorship, an LLC is a pass-through entity, meaning that profits from the business pass through to the owner and the LLC is not taxed. You instead report profits on your personal tax return and pay taxes on them at your personal tax rate. This differs from a corporation, which is subject to corporate taxes. Dividends paid to the shareholders of a corporation are also taxed, which is often called double taxation.
But there’s a bit of a caveat. The members of an LLC are subject to self-employment taxes on the profits, as well as income taxes. The dividends paid to the shareholders of a corporation are not subject to self-employment taxes.
However, an LLC can elect to be taxed as an S-Corporation in order to avoid those self-employment taxes. Having S-Corp status comes with additional costs, so S-Corp status only becomes beneficial when the self-employment tax savings are more than those additional costs.
Making the taxation choice is a complex one, and should best be done with the assistance of a tax advisor.
Management and Administrative Flexibility
LLCs have very few requirements when it comes to the management and administration of the business. As an LLC owner, you’re essentially free to manage the business as you see fit. A corporation, on the other hand, requires a board of directors that will oversee the managers of the corporation. These managers must be appointed officers of the corporation.
The corporation must also have corporate bylaws and meet the state’s meeting requirements.
No such rules exist for LLCs.
Profit Sharing Flexibility
In most business types, profit distributions are based on each owner’s capital contribution and percentage of ownership. While LLCs often operate the same way, they don’t have to. You can structure your profit sharing any way that you choose.
So, for example, if you and another member each own 50% of the business, but you are the active manager of the business, you and the other member may agree that you’ll receive 60% of the profits while the other member receives 40% since they are not actively involved in the business.
Michigan LLC Facts
To officially start an LLC in Michigan, you’ll file articles of organization with the state. The fee to file is $50, which is low compared to other states. For example, the fee in Massachusetts is $500.
You can file online on the corporation’s online filing system.
You’re also required to file an annual statement for your LLC, which comes with a fee of $25.
Michigan also imposes an annual business tax at a rate of 4.95% plus a .8% tax on gross receipts.
In Michigan, when you form your LLC, you’re required to appoint a registered agent for your LLC, which is a person or company that will accept your business’ official correspondence.
You can be your own registered agent in Michigan, but this will require you to be personally available at your registered address during normal business hours. Instead, you have the option to appoint a registered agent service, which generally costs from $100 to $300 per year.
Michigan does not have an operating agreement requirement for LLCs, but it’s a document that you should have in place. It defines the ownership and profit sharing of your LLC, as well as voting rights and dispute resolution procedures. It’s often a good idea to have a Michigan attorney draw up your operating agreement.
Forming an LLC in Michigan has many benefits, no matter what type of business venture you’re starting. An LLC offers personal liability protection, pass-through taxation, and management flexibility, making it a great choice. When you form your LLC, you may want to consider using a business formation service to handle the process for you. Such services also offer other services that can help you get your new business off on the right foot.