Business Formation
Whether purchasing a business, hiring an employee, or trying to establish your own company in your area of expertise--starting a new business can be a challenging time. There are many different business entities to choose from--sole proprietorships to subchapter S-corporations. And each business entity has its advantages and disadvantages. Registering and filing the proper paperwork with the state and federal government can be a time consuming and confusing process. CEO READY, in tandem with your attorney, can assist with all the necessary registration requirements, leaving you to focus on what you do best--running your business.
To determine the entity that will be most appropriate for your company, consider factors such as personal liability limitation and the desired tax results. Once you have selected the entity that best fits you and your business, we can assist with drafting the necessary documents and help you form your business efficiently and cost-effectively.
Forming your corporate entity is just the first step in establishing your business. Often, to comply with local regulations, you must apply for certain licenses and permits. We can help you to identify the applicable requirements and assist you with the applications. Additionally, we can provide you with a comprehensive checklist to guide you through the start-up process.
We can assist with all state, federal, and IRS paperwork required of your business. Some of our areas of expertise include:
▪ partnerships
▪ limited liability companies
▪ filing your articles of organizations
▪ Michigan and federal tax payments and planning
▪ application for Federal Tax Identification Numbers (FEIN)
▪ Michigan Form 518 registration
▪ Michigan sales and use tax withholding
▪ workers' compensation
▪ employee hiring and tax withholding
The array of possible business forms can overwhelm inexperienced entrepreneurs. Each type of business organization carries complicated legal and taxation implications that affect the entity and its owners far into the future. New businesses must consider start-up expenses, the complexity of the possible business forms, personal liability issues, tax consequences, and the continuing legal burden imposed by statutes and regulations. Some of the most common business entities include the following:
Sole proprietorships combine ownership and management in one person. A sole proprietorship is a type of business entity which legally has no separate existence from the business owner. Thus, the limitations of liability enjoyed by a corporation and limited liability company do not apply to sole proprietors. All debts of the business are debts of the owner. It is a "sole" proprietor in the sense that the owner has no partners. A sole proprietorship essentially means a person does business in their own name and there is only one owner. A sole proprietorship is not a corporation; it does not pay corporate taxes, but rather the person who organized the business pays personal income taxes on the profits made. Therefore, business owners have personal tax liability for income from the business and for Social Security taxes on the profits. These taxes are paid with the business owner’s personal tax return. If the business has employees, the taxes that are withheld from the employee and the employer taxes will be paid through federal tax deposits and federal and state employment tax returns. NOTE: A sole proprietorship is almost always a poor choice of busines entity for any business.
General Partnership
Partnerships involve two or more individuals or entities operating a business for profit. Profits, losses, and managerial duties are shared among the partners and each partner is personally liable for partnership debts. Each partner receives profits directly from the business as income. Partnerships do not pay tax, but must file an informational return, while individual partners report their share of profits and losses on their personal return. By default, the Michigan Uniform Partnership Act (UPA) determines all the rules and regulations pertaining to partnerships. However, partners can vary the default rules of the UPA by entering and executing a partnership agreement particular to that partnership. Short-term partnerships are also known as joint ventures. There are some legal modifications to the partnership form that allow for some limitation of liability, if statutory requirements are met. There are three forms of partnerships:
Limited Partnership
A limited partnership is a form of business organization that offers some of the partner's (the limited partner) limited liability. It consists of a general partner who organizes and manages the partnership and its operations, and limited partners who contribute capital but have limited liability and assume no active role in day-to-day business affairs.
Limited Liability Partnership (LLP)
LLP's are organized to protect individual partners from personal liability for the negligent acts of other partners or employees not under their direct control. LLP's are usually limited to organizations that provide a professional service, such as medicine or law, for which each partner is licensed. Partners report their share of profits and losses on their personal tax returns.
Corporations are separate legal entities and assume liability for their own obligations.
"C" Corporation
A "C" Corporation (not S-Corporations) pays taxes on profits and is responsible for federal and state tax deposits from employee withholding and employer taxes. Additional taxes are due the State of Michigan for the corporation and for employees. There is also a state informational form that is due annually. Additionally, corporations can sell ownership interests, or shares, in the company to raise capital. Despite these benefits, the tax treatment of a corporation can cause "double taxation." The corporation files its own tax return and pays taxes on profits before it pays dividends to shareholders. Shareholders then must pay taxes on the dividends on their personal income tax returns. In some cases, tax rules can mitigate or modify this double taxation effect. Corporations may range in size from large, publicly held conglomerates to small closely-held businesses involving family members as shareholders.
"S" Corporation
An "S" Corporation is similar to a corporation in that it provides its shareholders with protection from liability. However, unlike a corporation, an "S" corporation is exempt from federal income tax. Instead the taxes are paid solely by the individual shareholders. However, S-corporations have a couple drawbacks for very large businesses. The number of shareholders is limited to 75 shareholders and there can only be one-class of stock.
Limited Liability Companies (LLC's) combine some tax benefits of partnerships with corporate limited liability for all the owners. Limited Liability Companies as entities (along with partnerships and S-Corporations) do not owe taxes as a business. Like partnerships, income tax is not paid at the LLC level, but rather it is "passed through" and taxed at the shareholder level. The profit (or loss) becomes part of the business owners’ returns and taxes are paid at the owner’s personal tax rate (profit or loss flows through to the business owner). In a LLC, members (akin to shareholders in a corporation) control membership shares of the company. And like corporations, a member's liability for the operations of the company is determined by their level of investment. Personal Social Security taxes are paid on the profits by each owner. These entities are responsible for the federal and state tax withholding payments and employer taxes and filing of employee reports.
Click here for the CEO READY "Business Forms and Characteristics Chart."
DISCLAIMER: This website and any information contained herein are intended for informational purposes only and should not be construed as legal advice. Seek competent legal counsel for advice on any legal matter. We employ attorney drafted instruments from material developed by licensed attorneys and created for consultants specializing in business formation.
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Business Planning Documents
Michigan Business Formation Documents