Business Entities in Michigan
By: Danelle E. Harrington
There are four main types of business entities in Michigan: Sole Proprietorships, Partnerships, Corporations, and Limited Liability Companies (LLC’s).
A sole proprietorship is an unincorporated business that is owned by one individual. Business owner’s may have a “doing business as” (DBA) on file with the county, but there is no formal business entity. The upside of this form of business is simplicity. The downside is that there is no liability protection offered.
A partnership is an unincorporated business that is owned by two or more individuals. Business owners may have a certificate of co-partnership on file with the county, but there is no formal business entity. The biggest downside to this type of entity is that there is no liability protection, and each business partner is jointly and severally liable for any and all actions taken by the partnership.
A corporation is an incorporated entity which allows the entity to be treated as a single entity (person). The advantage to a corporation is that it provides liability protection to the owners, the “shareholders” of the corporation. Another advantage to a corporation is centralized management, the shareholders annually appoint a Board of Directors to run the corporation. A corporation can choose to be taxed as either a C-Corporation or S-Corporation. The downside to a corporation is that it requires the shareholders to adhere to corporate formalities in order to maintain their liability protection. Corporate formalities include signing on behalf of the corporation in official capacity, maintaining corporate annual meeting minutes, maintaining corporate books and records, and having bylaws for the corporation. The consequence of not adhering to corporate formalities is losing the corporate liability shield and potentially having the corporation’s shareholders incur personal liability for corporate obligations.
Limited Liability Companies (“LLC’s”) are similar to corporations, and are an incorporated entity with one or more owners that offers liability protection to its owners. However, an LLC has more flexibility in its corporate structure and also has less corporate formalities to adhere to than a corporation. LLC’s are also more flexible from an income tax perspective because they are allowed to be taxed as a sole proprietorship, partnership, C-Corporation, or S-Corporation. LLC’s have quickly become the preferred business entity choice.
If you have a business in Michigan, incorporating can provide valuable liability protection. However, there are a lot of different factors that clients need to take into consideration when deciding which type of business entity is right for their situation and it is important to consult with an attorney before forming any kind of business entity.
Sharon A. Burgess and Danelle E. Harrington practice in the areas of probate/estate planning, long term care planning and elder law, and business and real estate transactions at SMITH BOVILL, P.C. Their articles are intended to introduce various issues arising within this field of practice and are not intended to replace individual legal advice. If you have questions, please contact Sharon or Danelle at one of the firm’s two convenient office locations in Frankenmuth and Saginaw.