How To Start An LLC In Michigan
Are you new to navigating your way on how to start a Michigan LLC? Things may seem confusing in the beginning, but as we go along, they will become less complicated. The first step includes thoroughly understanding everything you need to set up your Michigan LLC and ensuring you are equipped to lay a strong foundation. Starting an LLC in Michigan is simple when you have the right guidance and information.
What is an LLC?
You would find at least one-third of the nationwide businesses registered as LLCs. A Michigan LLC is a business filed and registered in Michigan state by either a sole proprietor or a partnership. These businesses are registered with the National Small Business Association and are completely legal.
A Limited Liability Company, commonly referred to as an LLC, is a beneficial business structure for business owners. They are able to find protection against business liabilities in their state as per the law instated. They are protected from not only their legal and financial responsibilities, but most of the time, they can also find legal standing for any debts brought against their businesses. Everyone who registers their LLC becomes a member of the two types of LLCs called either a single-member LLC or a multi-member LLC if you have multiple owners.
All companies registered under an LLC have the same management structure as a regular corporation. But they enjoy financial advantages and flexibility with their business.
An LLC is not a corporation or a partnership. It has its own legal standing and must follow the law, rules, and regulations each state has set up. A Michigan LLC registered by a resident or foreigner would have very different rules than what would be set up in another state.
If an LLC is sued or challenged in court, the member’s personal assets are not at risk compared to a corporation owner getting sued.
There are various types of Limited Liability Companies that can be registered in Michigan. Each LLC structure offers advantages and disadvantages that vary according to the ownership type and special needs. The preferred taxed LLC is a corporation when it has a minimum of four or above members. Otherwise, a disregarded LLC entity is applied for a sole-member LLC type.
The LLC types that one can register themselves for in Michigan include:
- Sole proprietorship or single-member LLC (SMLLC)
- Partnership LLC
- Limited Liability Limited Partnerships (LLLP)
- Series Limited Liability Company (SLLC)
- Limited Liability Partnerships (LLP)
The choice of which LLC one registers depends on the rules and regulations a future owner filing for the LLC thinks are the most beneficial for them. Getting in touch with legal and financial experts is always recommended to help you determine the best LLC type. These professionals will help you easily understand the business setup process and the work required to run and maintain it to maximize your advantage.
Advantages Of an LLC In Michigan
The first few steps of starting a business are the hardest. But once you thoroughly understand the company and ownership structure, the journey becomes less daunting and more profitable. Hence, the decision to choose which Limited Liability Company type you will be registering for helps you determine which advantages you will be making the most of.
Generally, you will get four top benefits when registering as a limited liability company in Michigan. You should keep these advantages in your mind and understand how they can be beneficial for you before starting one of your own.
Protection of personal assets
The top reason to start an LLC is to shield personal assets from collateral damage in legal proceedings or in case the business gets sued. It provides personal liability protection from creditors and all business vendors. Even in the case of legal action under any business type, all your personal assets will not be brought into court, saving you from bankruptcy. High-risk businesses can make the most of this benefit as the chances of losing personal wealth are next to none.
Benefits against business tax
One of the many reasons people choose to register as a Michigan LLC is the tax benefits. The tax payment is based on a business’s entire profit compared to the income that regular corporations have to pay. This helps the company with significant savings, allowing them to maximize its investments. If you face a loss, you can deduct that amount from the investment made and not count it in the profit the LLC has generated. This generally helps owners save a major chunk of the cash flow from their or the investors’ pockets.
Limited member liability
Whether you are a sole owner or in a multiple-owner setup, the personal assets of all members are protected from liability acts. No creditor can pursue any of the personal assets of the company owner (which could include their home, personal bank accounts, cars, and more). This way, the owner does not have to pay the business debt through their pocket. They can only be pursued based on business assets and debts.
However, there are exceptions, known as piercing the veil, which could lead to creditors targeting the limited liability and the owners losing their benefits.
Flexible Michigan LLC membership
Whether you are an individual, in a partnership, trust, or a corporation, the members banding together to form the LLC are not limited to a certain number. You can register as many owners as you want for an LLC and work together without problems. However, the number of shareholders is limited within the LLC and cannot exceed a maximum limit.
The management structure of the LLC
The choice lies with the owners whether they want to manage the entire entity themselves or elect a management group to ensure the smooth running of the company. The member-managed structure is the management type of LLC where the members are involved in the daily operations of the business.
At the same time, a manager-managed structure is when the owners have appointed a specific management team to handle the daily operations. The LLC itself more or less resembles a corporation; the responsibility of the business management falls directly onto its directors and officers and is usually not on the shoulders of the owners or shareholders.
Easy taxation policies
Typically, in an LLC structure, the business entity level does not pay tax on its income or profit and the losses. This is referred to as “pass-through” by Michigan LLC owners and includes tax returns on their personal income through the LLC. All taxes by the owners are paid on individual levels.
In comparison to other businesses, when you start a Michigan LLC, you establish higher credibility. Starting an LLC may help a new business establish credibility, even if you are a partnership or sole proprietor.
Compliance requirements are limited
Fewer state-imposed compliance requirements, along with the ongoing formalities, are imposed on LLCs in comparison to other types of businesses, like corporations, sole proprietorships, and general partnerships. They could be taxed under C-corporations or S-corporations.
Disadvantages of an LLC in Michigan
Although an LLC in Michigan is advantageous in many ways, it has some drawbacks. Knowing the potential risks before opting to start a Limited Liability Company will help make your decision easier and help you put together an action plan that will help you avoid these issues in the long run.
On-going compliance cost and Michigan LLC formation
Setting up a business in Michigan is not easy. There are many things, including the ongoing compliance cost and the process of forming the LLC, which require a lot of time and money. It gets costly in Michigan if you want to set up a sole proprietorship or even if it’s a general partnership. Numerous states, along with Michigan, charge an initial formation fee and impose ongoing fees for the entire project, including the annual report and/or franchise tax fees. It is always better that you first do your research through the Secretary of State’s office.
Difficult to transfer ownership
Transferring ownership of an LLC is not easy compared to a corporation. The stock shares can be sold to increase ownership of the LLC, but you have to look into the fact if there is a disagreement with the shareholder. In corporations, there are times when the shareholders can end up selling their shares to someone they do not want altogether.
Though when it typically comes to LLCs, the ownership transfer cannot occur unless all the members have agreed to the decision. All members need to be accepting of the terms, whether it is about transferring the percentage or adding someone new to the membership.
How to Form an LLC in Michigan
The best way to start a business in Michigan is by starting LLC. Here are the complete steps for starting LLC:
- The perfect LLC name
- Choose a professional and experienced registered agent
- Acquire an operating agreement for the LLC
- Legally filing the LLC
- Apply for an employer identification number (EIN)
- Create a separate business bank account
The perfect LLC name
The identity of any business is its name. You need a name for your LLC that is unique to your business and will be associated with you till the end. The name you choose for your LLC cannot already be present in the records of the Secretary of State, whether it is of an already qualified LLC of another domestic business or even of another business entity. You will find numerous sole proprietors operating under a registered “doing business” (DBA) name, also known as their trade name. They might want to continue using it as the legal name for the LLC.
You need to ensure name visibility for your LLC. For this, your LLC doesn’t specifically need to be registered as your Doing Business Name. Thorough research for the name needs to be done to ensure it is not being used by anyone else. Even if you want to delay filing for the LLC, you would want to block the name beforehand so it does not remain up for grabs. A number of states would charge you a nominal fee for a short time to reserve the name until you have all other legal issues sorted out.
It is always a good idea to search for trademarks for your desired LLC name and completely avoid having any legal property infringement problems which would confuse your customers.
Choose a professional and experienced registered agent
Whether you are forming a new LLC or want to register an existing LLC in Michigan, you have to find a registered agent there who knows the formation process and is qualified for the job.
A registered agent, or an agent for service of process, starts with receiving the important legal notices along with all the tax documents on behalf of the LLC you want to register. All important legal documents sent by the taxation department, along with any notices and communications that the Secretary of State emails, including annual reports or statements and tax documents, are added.
All related legal documents, including the service of process (aka Notice of Litigation) and court documents like garnishment orders and subpoenas, are sent to the registered agent. Hence you should appoint an agent who’s always available. All these legal documents, which also typically include the summons and complaints filed against the LLC, are important as they provide the required notice/announcement that your LLC is going to be facing a lawsuit.
However, there is no hard and fast rule for hiring someone, and the LLC owner can act as the registered agent. But, appointing one provides ease of mind while the owner deals with other engagements, preventing the chances of delays which could cause many issues for the LLC.
Acquire an operating agreement for the LLC
Almost every state requires an LLC operating agreement; in most states, a verbal agreement is considered final. But, proper documentation is always recommended to avoid any issues later. The agreement binds the members and the LLC as to how the operations would be managed without causing issues for anyone.
Even as the sole member, it is recommended that the agreement is made, and the LLC is a separate entity that helps avoid piercing the veil. If any issue were to happen, the document would serve as a binding contract and save you and your assets. For obvious reasons, keep a well-drafted Michigan operating agreement in a multi-member LLC. There should be a clear mention of the division of ownership, how much labor the members would be putting in, and the profit split percentage to avoid any disputes.
Legally filing the LLC
You need all your formation documents, including the Certificate of Organization and Certificate of Formation (Articles of Organization), to officially file the LLC with the Secretary of State’s office. The fee for filing the LLC varies from state to state, and for some, it would be affordable, while for others, it might be expensive. In Michigan, you will have to pay between $50 to $150 according to your business, but it is a one-time cost.
Apply for an employer identification number (EIN)
Once your LLC is established, you need to apply for the employer identification number through the Internal Revenue Service. It will be used as your LLC’s identity for all the legal proceedings regarding income and tax. In addition, you must also apply for Michigan’s tax department, which will issue you a sales tax identification number and register your LLC with the labor department.
Create a separate business bank account
Even though it is not a legal requirement, to keep your finances separate from the business, you need another account, as all the taxation bills will be done based on the business account. If you have the same personal account as the business account, it will prove to be a disadvantage for you. A separate account will also help your LLC build its own business credit, which will help with the profits and investments.
Most banks will ask for basic company details, including its formation date, the business type it conducts, and the owners’ names and addresses. Contact your bank about requirements prior to opening an account.
Types of LLC
Which type of LLC is ideal for me?
In Michigan, the main type of Limited Liability Company (LLC) is a domestic LLC. There are different kinds of LLCs based on the business and its management, like single-member LLCs and multi-member LLCs.
- Single-member LLC: This LLC has one owner or member. It’s popular for small businesses and freelancers who want a simple LLC setup.
- Multi-member LLC: This LLC has two or more members. They can manage the LLC themselves (member-managed) or have appointed managers (manager-managed).
Other types of LLCs may include:
- Professional LLC (PLLC): This LLC is for licensed professionals like doctors and lawyers. Michigan might have special rules for PLLCs, so it’s important to check with the Michigan Department of Licensing and Regulatory Affairs or a legal expert.
- Foreign LLC: If an LLC is formed in another state and wants to do business in Michigan, it must register as a foreign LLC with the Michigan Department of Licensing and Regulatory Affairs.
Keep in mind that rules for LLCs can change between states. To get the most accurate and current information, talk to a legal expert or the Michigan Department of Licensing and Regulatory Affairs about forming an LLC in Michigan.
Applicable LLC taxes in Michigan
In Michigan, your LLC has to cater to federal and state tax laws. The estimate of your profit earnings may be collected by the IRS department, usually on a quarterly basis. Depending on whether the LLC is a partnership or a sole-owner corporation, if you have a revenue expense exceeding $1,000, the earnings at the time will be used to calculate the tax.
You would also be liable to pay several taxes, including personal income tax, corporate taxes, unemployment insurance tax, employee withholding tax, and Michigan business tax. Businesses in the banking and insurance fields and lending institutions are exempted from business tax but have to pay their own state taxes.
Costs Of Forming A Michigan LLC
Keep in mind these costs are just estimates and might change based on your situation and extra services you need. The registered agent fee and operating agreement costs can be different if you do the work yourself or hire a professional.
Business license and permit fees depend on your LLC’s work and where it is. It’s a good idea to talk to a legal expert or the Michigan Department of Licensing and Regulatory Affairs to get the most accurate and current information about forming an LLC in Michigan.
Name reservation (optional)
Articles of Organization filing fee
Registered agent fee (up to)
Operating agreement (optional)
Annual statement fee
Is LLC The Best Entity For Me?
Maybe, LLC isn’t the right entity for you. Maybe it is a C-Corp. Only way to find out is to directly compare them all.
LLC vs Corporation (C-Corp)
Sole proprietorships and Limited Liability Companies (LLCs) are two of the most common business entities for individuals and small businesses. Learn what differentiates the two today.
LLC vs S-Corp
Not sure what business structure to choose? Learn about the key differences between LLC and S-Corp today.
LLC vs Sole Proprietorship
The primary difference is that an LLC provides limited liability protection for its owners, while a sole proprietorship does not.
Frequently Asked Questions About Starting An LLC In Michigan
Here are the most commonly asked questions about forming an LLC business in the state of Michigan:
Yes, you need a registered agent for your Michigan LLC. They will receive legal documents and government notices on your LLC’s behalf. The agent must have a physical address in Michigan.
An operating agreement is a document that outlines the rules and structure of your LLC. It covers how the LLC is managed, how profits and losses are shared, and the rights and duties of members. Although not required by law in Michigan, it is recommended.
Yes, Michigan LLCs must file an annual statement with the state each year. The fee for filing the annual statement is $25.