October 28, 2019 Category: Business & Corporate Law
This article looks at how choosing the right business structure can impact a new business in Michigan.
Michigan can be a great place to start a new business. As Inc.com reports, Michigan was recently ranked the fourth-most small-business-friendly state in the country. According to WalletHub, Michigan spends the most as a percentage of its GDP on small business initiatives and it ranks third in the country in terms of lowest business costs. When starting a new business in Michigan, there are many important decisions that will have to be made, from raising capital to drafting partnership agreements. One of the first – and most important – decisions that new business owners will need to make is how they want their new business to be structured.
How a business is structured will have a dramatic impact on a number of issues, including taxation, paperwork, and liability exposure. There is no one-size-fits-all business structure. Instead, the right business structure for a company will depend on the size, type, and growth prospects of that company. Furthermore, as a business grows, it may need to change how it is structured.
By far the easiest business entity to set up is a sole proprietorship, which essentially gives the sole owner of the business complete control over their company. There is minimal paperwork as well when creating a sole proprietorship. However, since personal and business assets are not considered separate, there is little liability protection if the business falls into debt or has a claim made against it.
A general partnership offers the ease of setup that a sole proprietorship offers along with the ability to spread risk and responsibilities between two or more partners. However, partnerships also suffer from the same liability exposure as sole proprietorships, unless the business is set up as a limited liability partnership, which is only available for certain professions.
As a separate legal entity, it provides liability protection for its owners known as members. A limited liability company, or LLC, provides a level of flexibility as to its tax treatment. If there is a single owner, the IRS default tax treatment is a “disregarded entity” which means that all income and expenses flow directly to the sole member. If there are two or more members, then the default treatment is taxation as a partnership. However, elections can be made to have the LLC taxed like a corporation. Additionally, an LLC provides planning opportunities in structuring the rights granted to the members and the sharing of revenue.
A corporation is a separate entity from the people (i.e., the directors) who run it. That means it offers the best liability protection. Corporations typically have an easier time raising capital than partnerships or sole proprietorships do and certain types of corporations also offer significant tax advantages. However, some corporations may end up being double-taxed: once due to corporate taxes and again due to personal income taxes. Corporations are also the most regulated type of business entity and require the most paperwork. In addition, corporations offer the least amount of control to individual directors.
Choosing a business structure is not a decision to be taken lightly. Anybody starting a business in Michigan should get in touch with a business law firm as soon as possible. An experienced attorney can help business owners ensure they start their new enterprise off on the right foot.