To understand what an LLC in Michigan is, we first have to look into the business structures which are present in Michigan relating to forming an LLC in Michigan.
Among the types of business structures available in Michigan would include sole proprietorship, partnerships, and corporations. Below is a brief overview of what each business structure is like.
Business Structures in Michigan
Sole proprietorships are the simplest type of business structure. Most of the time, an entrepreneur with a small business will utilize this business structure before expanding or growing into other business structures, most commonly LLCs or partnerships.
Sole proprietorships are simple in a sense where they have less legal restrictions, while still retaining profit.
However, sole proprietorships also have unlimited personal liability when it comes to the debs and liabilities of the business, and termination of the business occurs upon the death of the sole proprietor.
General partnerships are formed after the agreement of each partner involved. The agreement should include contribution of each partner, the distributions of profits and losses as well as the terms of termination.
If a written agreement is not drafted, all partners are presumed to have equal shares in the losses and profits of the business. A general partnership has unlimited personal liabilities for the businesses debts and liabilities. A limited partnership is formed when there exist one or more limited partners in combination with one or more general partners. Limited partners have limited personal liability.
On the other hand, there are alternative forms of a general partnership known as the Limited Liability Partnership (LLP) and the Limited Liability Limited Partnerships (LLLP). LLP and LLLP statuses impart general partners with limitations and additional protection for personal liabilities from the businesses debts and liabilities.
Corporations are the most complex business structure. It is highly advised that the paperwork for incorporation be viewed by a legal advisor. This is to ensure that all legal consequences are considered before starting a business.
Corporations limit the liability of the owners based on the shares held by individual owners. Death or transfer of shares do not affect the corporation, unlike other business structures.
Corporations require detailed record-keeping and regulation as they have double taxation for profits. Dividends earned are tax on an individual level.
There exist two types of corporations in Michigan, namely C corporations and S corporations. Both of which have different rules, with C corporations allowing federal income tax rules for determining income and S corporations following Michigan income tax rules for determining income.
Limited Liability Company (LLC)
LLCs are different as the owner of an LLCs personal assets (Car, Home, Bank Account) are protected from the debts and liabilities of said LLC. It acts as a combination of the pass-through taxation of a sole proprietorship or a general partnership and the liability protection of a corporation .
The owners are referred to as members. Said members can be individuals, corporations or partnerships. There is no maximum or minimum number of members needed to form an LLC.
Steps to Form an LLC in Michigan
Step 1: Name of Your Limited Liability Company
Choosing the name of the LLC is the first step in forming an LLC in Michigan. The name of the LLC in Michigan must comply with Michigan law. Unde Michigan law, it is stated that the selected name of the Michigan LLC must contain the words” Limited Liability Company”. Alternatively, the abbreviations “L.L.C.” or “LLC” are also viable substitutes to the phrase “Limited Liability Company”.
The chosen LLC name must be distinguishable and unique from the names of other businesses on the file with the Michigan Department of Licensing and Regulatory Affairs. Future Michigan LLC owners are able to check the availability of the desired name from the Michigan business database.
An Application for Reservation of Name can be filled to reserve the desired name. The Application of Reservation of Name can be filed with the Michigan Department of Licensing and Regulatory Affairs. It is important to note that filing the application will incur an application fee of $25.
It is also advised that the future LLC owners check if the selected name has an available URL in the event they wish to create a website. When doing business out in the world, it is not a requirement to use the Michigan LLC legal name registered in the Articles of Organization.
An LLC in Michigan can opt to use a fictitious business name, also referred to as an assumed business name, which is also known as a “Doing Business As” name (DBA). In Michigan, LLC owners must register their fictitious business name with the Michigan Department of Licensing and Regulatory Affairs in order to use their LLC’s fictitious business name.
This can be done by filing a Certificate of Assumed Name (CSCL/CD-541). This assumed name is valid for 5 years. If a Michigan LLC wishes to terminate or cease using this assumed name, they can file for cancellation of said assumed name by filling the Termination of Assumed Name form (CSCL/CD-543).
Step 2: Appointing a Resident Agent
Every Michigan LLC must have an agent for service of the process in the state. The agent can be an individual or business entity that has agreed to accept legal documents on behalf of the Michigan LLC.
The resident can be a resident of Michigan, a corporation in Michigan, a Michigan LLC, or a foreign LLC . If a foregin LLC wishes to be the resident agent for the Michigan LLC, it must have a certificate of authority to transact business in Michigan.
To be a valid resident agent in Michigan, the appointed agent must have a physical street address in the state of Michigan. If the LLC organizer wants to protect their privacy, they can opt to use a Registered Agent Service.
Advantages of using a Registered Agent Service include keeping personal addresses off public records. Registered Agent Services also can provide constant reminders and up to date information regarding compliance with the such as reminding the organizer to file documents to prevent incurring late legal fees and penalties.
Registered Agent Services also keep backups of important business and legal documents in the event that the original copies experience unexpected loss. Appointing a Registered Agent Service as the resident agent also allows flexibility of business hours as a he must be available throughout 8am to 5pm every weekday.
A resident agent must reside in the state that the LLC is formed and is operating in, by using a national Registered Agent Service, the organizer of the LLC is free to form LLCs statewide.
Step 3: Filing the Articles of Organization
A Michigan LLC is created by filing Articles of Organization form (CSCL/CD-700) with the Michigan Department of Licensing and Regulatory Affairs.
The articles that must be included in the Articles of Organization include, the name of the LLC, the purpose of which the LLC is formed, the duration of which the limited liability company if not perpetual, the name and physical address of the LLC’s resident agent, the effective date of the filing the Articles if later than the date of filing and the signature and phone number of the LLC’s organizer.
The Articles of Organization can be filed by mail or online with a filing fee of $50. When filing the Articles of Organization, the LLC must state how it will be managed, member-managed or manager-managed.
Step 4: Preparing a Michigan LLC Operating agreement
Although it is not a requirement to have an operating agreement, it is highly recommended to have it as it helps reduce the risk of future internal conflicts between business owners. The LLC organization agreement is a legal document which outlines the powers, duties, liabilities and obligations of each business owner.
In layman terms, the operating agreement serves as a rulebook as to how Michigan LLCs should be operated. The operating agreement also sets expectations for the LLC. As mentioned above, it is a legal document that also establishes credibility of the LLC as a legal entity. Below is a guideline of what should be included in the operating agreement of the LLC.
When it comes to organization, the LLC has the option to decide how it wants the structure of ownership should be (equal ownership or assigning members with different “units” of ownership). The operating agreement should include how the LLC will be managed, whether that be managed by its members or by an appointed manager.
Furthermore, the amount of investments from each member which contribute to the capital of the LLC should serve as a guideline to how raising additional funds should be in the future. The distribution must also be discussed.
The operating agreement should also include guidelines on how the LLC should proceed given that a member wishes to resign or leave. The final guideline that should be included in the operating agreement would be how to dissolve the LLC if the members wish to discontinue the business.
The operating agreement can help protect the members limited liability status and hence should be drafted even though it is not a requirement by the state of Michigan.
Step 5: Obtain an Employer Identification Number for the Michigan LLC
What is an Employer Identification Number (EIN)?. Employer Identification Numbers are nine-digit numbers assigned by the Internal Revenue Service (IRS) to aid in identifying businesses for tax purposes.
In layman’s terms, it functions as a social security password for businesses. The Employer Identification Number is also referred to as the Federal Employer Identification Number (FEIN) or the Federal Tax Identification number (FTIN).
The EIN is essential when forming an LLC as it is used in opening business bank accounts, managing and filing federal state taxes and to hire employees for the LLC. If a sole proprietorship or any business structure wishes to convert into an LLC, they must obtain a new employer identification number from the IRS. Obtaining an IRS is a free and easy process that can be done online or via the mail.
Step 6: Complying with other Tax and Regulatory Requirements
There are different and additional tax and regulatory requirements depending on the services offered by the LLC. There may be different business licenses required depending on the type of business the LLC is.
For local licenses, they can be obtained from the clerk of the town or the city of the primary location of the LLC. For state business licenses, it is advised to use the State License Search feature available on the State of Michigan Website. If the LLC intends to sell goods and collect sales tax, they would have to register themselves with the Michigan Department of Treasury (DOT).
The registration process can be done online via the Michigan Department of Treasury’s e-Registration application or by mail. The types of taxes are further elaborated below. When it comes to income tax, most LLC’s are considered pass-through tax entities, this means that the LLC itself is not taxed but the individual members do.
Michigan is one of the states that does not impose a separate tax or fee on the LLCs for the privilege of doing business in the state of Michigan. However, LLCs do have the option to request that their business be considered similarly to a corporation for tax purposes. If the LLC has employees, the LLC must pay employer taxes.
The taxes are paid to the federal government. The process begins by withholding and paying employee income taxes to the Michigan Department of Treasury. The business is required to register under the Michigan Department of Treasury online or on paper by filling Form 518. After registering, withholding taxes must be filed periodically.
Additionally, the LLC will have to use form 165 annually to reconcile the Michigan LLC’s tax withholding. When it comes to sales and use taxes, the Michigan LLC will need to collect and pay sales tax.
This would demand that the Michigan LLC register for this purpose with the Michigan Department of Treasury. After registering, the LLC must pay periodic sales tax payments for goods sold. A sales tax license will be sent once registration is completed. The Michigan LLC must pay an annual sales tax.
Step 7: Maintaining a Michigan LLC
Maintaining the LLC Formed in the state of Michigan would be the next important step. LLCs in Michigan must file an annual statement with the Department of Licensing and Regulatory Affairs. The due date for the report is dependent on when the LLC was formed.
If the LLC was formed before the 30th of September in the prior year, the due date for the annual statement would be on the 15th of February after the year of formation/qualification.
On the other hand, if the LLC was formed after the 30th September, the LLC does not have to file the statement on the 15th of February immediately after it is formed. A pre-printed annual statement (BCS/CD-2700) is mailed to the LLC’s resident agent at the registered office approximately 3 months prior to the due date.
There is a filing fee of $25 for the report. Besides that, it is important that the LLC formed obtains a certificate of good standing from the Department of Licensing and Regulatory Affairs.
The certificate of good standing obtained from the Department of Licensing and Regulatory Affairs serves as proof that the company in question is up to date with their annual filings and payments.
The certificate can be requested from the Department of Licensing and Regulatory Affairs (please refer to the Michigan Department of Licensing and Regulatory Affairs website for contact information).
Aside from that, it is highly advised that members of the LLC separate personal and business finances to avoid confusion. By doing so, the members of the LLC are able to fully say that they are not personally liable for the company’s liabilities and debts.
What are the benefits and drawbacks of starting an LLC?
The benefits of starting an LLC are as follows. LLCs generally do not need the extensive upkeep and recordkeeping of a corporation. The members of an LLC are not personally liable for business debts and liabilities.
Furthermore, the LLC itself is not taxed as it is considered a pass-through entity unless the members of the LLC request to be treated as a C corporation.
The drawbacks of starting an LLC would include the initial cost of starting an LLC being costlier than sole proprietorships and partnerships. Besides that, members of the LLC are required to pay high federal self-employment taxes.
LLCs are also not able to issue stocks and hence they are not ideal for fundraising. Lastly, a high annual fee is incurred for LLCs in Michigan which has a high member count.
Drawbacks aside, forming an LLC in Michigan is a great option as it offers a balance between tax flexibility and legal protection for small business owners, not to mention how easy it is to form one in Michigan.
Are there other options to start an LLC in Michigan?
Yes, there are other options when it comes to forming an LLC in Michigan. Namely, If an individual or group of individuals wish to start an Michigan LLC, but do not want to go through the hassle and the trouble of filing everything by themselves, they do have the option of getting assistance from company formation services.
There is an abundant number of options when it comes to choosing a company formation service. Looking at the companies that are able to help with forming an LLC in Michigan would not limit our choices but it does give us some options to work with.
Among the most popular company forming services that help with LLC formation would include but is not limited to ZenBusiness, Incfile, LegalZoom, Legal Nature, etc.
Questions might arise as to how using a company formation service is beneficial and what are the associated risks. Among the benefits of using a company formation service, time conservation is one of the important ones. When forming an LLC by ourselves, we would end up searching for forms and documents to fill out.
Even after doing extensive research, it is likely that we would miss out a form or two. This can be easily prevented by using a company formation service. Furthermore, most company formation services guide the owner on how to go about settling their first annual requirements.
By settling these annual requirements, paying the fees on time, the individual using the company formation services can rest easy knowing that they are not risking the possibility of receiving a legal penalty for late submission.
Learning from the first time will ensure future company owners are ready to handle the maintenance of their own companies for future years.
There are few if not no downsides to using a company formation service. The main drawback is the cost of hiring the company formation service. If the individual(s) are not willing to pay the cost, they can of course opt to fill out the legal work themselves.
Overall, choosing the option of hiring a company formation service will be the fastest way to form an LLC in the state of Michigan. Aside from being the fastest way to do it, it is also the method that does not require a lot of effort and therefore leaves brainpower and manpower to focus on the business.
Hopefully, this article has helped you in your pursuit of forming a Michigan LLC. It should be noted that forms needed to create an LLC in Michigan can be found on the Department of Licensing and Regulatory Affairs website.
Though the article has mentioned key points that will help you along the journey, it is recommended that you contact a legal advisor on how to proceed with the legal work required. Contacting a legal advisor will ensure that you are compliant with the laws of your current state.
Starting a business correctly doesn’t have to be difficult. With over 15 years of experience consulting new businesses and start ups, Matthew is probably the best person to help you set a strong foundation for your business.