How to Incorporate in Michigan vs. How to Start a Michigan LLC

LLCs and corporations both provide liability protection for their owners. This means that each business entity acts as a shield between the human element and the physical business, so that if a lawsuit was to be filed, or a bankruptcy was to occur, the owners of the business are not likely to see their personal assets (cars, homes, savings, investments, etc..) to be used to pay debts. But beyond that, most people don’t entirely understand the differences between LLCs and corporations. Active Filings is about to drop some knowledge. Let’s take a quick look at some of the structural differences between corporations and LLCs. People looking to start a business often ask whether they should set up an LLC or incorporate for their new venture. Like everything else in life, the answer depends. Below you’ll find the three factors we think will help you make an informed decision.

• Ease of maintenance
  Corporations have to keep minutes, hold meetings, and record votes and resolutions. LLCs require none of these things, saving you time and the overall hassle. There are fewer forms required for registering, and there are generally fewer start-up costs. The knock against LLCs is that they aren’t perpetual. Unless your LLC’s operating agreement specifies exactly what happens in the event a member dies, resigns or declares bankruptcy, most states require that LLCs dissolve when these events occur. Corporations, however, can exist as their own entity, regardless of what happens to the individuals involved in the business.
• Desired tax structure
  By default an LLC is a pass-through tax entity, meaning that the income is not taxed at the company level. The income or loss as shown on this return is ‘passed through’ the business entity to the individual members, and is reported on their individual tax returns. Less paperwork. More straightforward. A corporation is a separately taxable entity, and pays tax on the income prior to any dividend distributions to shareholders. If and when corporate earnings are distributed to shareholders in the form of dividends, the corporation does not receive the reasonable business expense deduction, and dividend income is taxed as regular income to the shareholders. Complicated. Paperwork. The Michigan LLC wins this one.
• Investors
  When it comes to investing in a company, most investors feel most comfortable investing their hard earned money into corporations. The biggest reason investors prefer corporations is their favorable taxation rules. Unlike LLCs, a corporation’s shareholders are not taxed on company profits unless profits are distributed, which means the dividends paid from the corporation can be structured to take advantage of the best tax scenario for the shareholders. If you plan to grow your small business into a larger entity and attract investors, forming a corporation is your best bet.

Note that whether you form an LLC or a corporation, you’ll need to file a Beneficial Ownership Information (BOI) Report with the Financial Crimes Enforcement Network (FinCEN) once your company is officially formed with the state of Michigan. This report provides the federal government with identifying information about your company and those with the most control over profits and business operations. However, unlike state filings, the information shared in your report does not go on the public record and there is no filing fee. (Though if you don’t want to file this on your own, we offer BOI filing service for just $25.)

One final thought on LLCs and corporations. While the local florist down the street is a fine upstanding company, their LLC just doesn’t have the prestige of a Nike, Inc or a Walmart, Inc. When you hear the word corporation, many people think of big multi-national companies with tons of resources at their disposal. While the LLC is perfect for the small to medium-sized business, the words Limited Liability Company (LLC) doesn’t carry the same weight as the corporation. While LLCs first came into being in the late 1970s, the corporation is the oldest recognized business entity in the US, and thus they carry with them an aura of prestige.

While we’ve already broken down the differences between an LLC and a corporation, we’re going to dig a bit deeper into the pros and cons of forming a business in Michigan.

• Flat Income Tax
  The flat tax has advocates for decades. They contend it’s fair because everyone pays the same tax rate. Others argue that a person earning $1,000,000 pays the same rate as a person who earns $50,000, and as a percentage, that number can be unfair. However, a flat tax typically eliminates deductions, tax credits, and most exemptions, which in theory curbs biases toward certain behaviors and activities. It also simplifies the tax code, making compliance easier. Income is taxed at 4.25% which ranks Michigan with some of the lowest taxed states (At 1.71%, Michigan has the 9th highest property taxes in the US).
• Flat Corporate Tax
  According to the Heritage Foundation, there are two big arguments for a corporate flat tax; growth and fairness. Many economists are attracted to the idea because current tax systems tend to reduce growth, and lower income. A flat tax would not eliminate taxes altogether, but by dramatically lowering rates and ending the tax bias against saving and investment, it would boost an business’s performance. At 6.25%, Michigan’s flat corporate tax may be the wave of the future.
• Personal Property Taxes
  In 2014 Michigan began phasing out Personal Property Tax (PPT) for most businesses. This includes all personal property located on real property where that personal property is used more than 50% of the time in industrial processing or in supporting industrial processes. Michigan is hopeful that by reducing property tax, especially for businesses, that those businesses will in turn use the tax savings as an impetus to hire more workers and invest more in the state. In short, it is always good to see a state cutting taxes for businesses, and makes Michigan attractive for new business formation.
• Cheap Annual Report
  Some states charge an arm and a leg for their annual reports. Michigan charges LLCs and corporations a very affordable $25.  

Michigan LLC or Michigan Corporation? Final Answer.
LLCs are the most popular business entity in the US, and for good reason. The flexibility, ease of maintenance, and liability protections rival the more prestigious, but often more work-intensive corporate structure. With this in mind, if you’re looking to form a small to medium business and you don’t need to attract big-time investors, the Michigan LLC is for you.

When you file your Articles of Incorporation with the Department of Licensing and Regulatory Affairs (LARA), you’re on the way to legally and officially forming your corporation. You can file the document online, by mail or in person. The Articles of Incorporation cost a minimum of $60 to file. If you have more than 60,000 shares, the fee increases along with the number of shares.

To start an LLC in Michigan, you must file Articles of Organization with the Michigan Corporations Division. You can file the document online or by mail. The Articles of Organization cost $50 to file.

Every business that has a “nexus” within the state is required to file a yearly statement called Michigan Annual Report. The state sends a pre-printed form to the registered office of each company 90 days before the due date. So if you hire Active Filings this mailing will come directly to us, and we’ll alert you when it arrives. Failure to file your annual report may result in your company no longer being in good standing, and after two years of non-filing, your business’ name will become available to any other corporation, limited partnership or limited liability company. When you hire Active Filings to be your registered agent, we’ll keep you up to date on all filings, and you’ll never have to worry about Michigan dissolving your LLC or corporation. This is just one of the many reasons why you should not only hire a professional business formation service, but why you should also seriously consider the pros at Active Filings.

You can file your Michigan Annual Report online, by mail, or in-person. To file online, you’ll need an account with LARA Corporations Online Filing System (sounds like HAL from 2001: A Space Odyssey).

To file by mail or in-person, please return the pre-filled annual report form that the Michigan Corporations Division will send to your registered agent 90 days prior to your due date. Or just hire Active Filings and we’ll hit a home run for you.

Corporations and LLCs are each charged $25.
LLC annual reports are due February 15th.
Corporate reports are due May 15th.

No one likes taxes. America was built on not liking to pay taxes. Nevertheless properly paying your taxes is an important part of running a small business. While we’re not tax professionals, Active Filings hopes to give you a simple and informative overview of the way your LLC or corporation may be taxed.

How will my corporation be taxed?
Corporations face “double taxation.” First they pay taxes on net profits from the business, and then get hit a second time when taxed on the dividends they receive from those earnings. Dividends are taxed at the shareholder’s personal tax rate. An LLC doesn’t have this problem, which means anyone looking to form a corporation should take note of a state’s corporate income tax and personal income tax. One way of avoiding double taxation may be to elect for your corporation to be taxed as an S Corp. By filing IRS Form 2553 (Election by a Small Business Corporation), a corporation with 100 or fewer shareholders can elect to be taxed as an S Corp. Of course, if a corporation chooses S Corp status, they’ll have to jump through a few extra hoops and meet certain requirements required by the IRS.

How will my LLC be taxed?
Single member LLCs, meaning it’s just you running your business, are treated like sole proprietorships by the IRS. This means that any profits or losses your LLC experiences, will pass-through to you as the single owner. All you have to do is file a Schedule C, which reports profits or loss from your business, with your personal tax return (IRS Form 1040). It should be noted that an LLC can elect to be taxed as a corporation under Subchapter C, by filing IRS Form 8832 (Entity Classification Election), or as a corporation under Subchapter S by filing IRS Form 2553 (Election by a Small Business Corporation).

What if my LLC has more than one member?
As with a single member LLC, the IRS will view your multi-member LLC as a partnership. The LLC will retain it’s pass-through tax status, with a few wrinkles with regards to paperwork. Instead of one member filing a 1040, instead each member will have to file a Return of Partnership Income form (IRS Form 1065). This document lets the IRS check and make sure each owner is reporting their income properly. Beyond that, each LLC owner will attach a Schedule K-1 (Partner’s Share of Income, Deductions, Credits, etc.) to their Form 1040. This form shows the IRS each member’s share of the LLC’s profits and losses.

Here’s a tip: If your LLC is going to have more than one member, it would be a good idea to draw up a simple operating agreement. Most states don’t require an LLC to have one, but with so many cooks in the kitchen, you’ll want clear documentation with regards to ownership percentage, voting rights, distribution of profits and losses, as well as rules for buying out a member. You won’t be require to file the agreement, but it should be signed by each member and kept with the LLC’s important documents.

Beyond the basic information you’ll also need:
• payroll documents
• bank and credit card statements
• accounting documents
• partnership agreements
• depreciation schedules
• gross receipts
• checking and savings account interest

What tax forms do I need to file?
Corporations: Form 4567
Partnerships: Form 4567
LLCs: Form MI-1040

What is the Michigan corporate net income tax rate?
6%. Michigan’s corporate income tax rate is currently the 10th lowest in the United States. Not bad!

What is the Michigan personal net income tax rate?
4.25%

When are my taxes due?
Michigan business tax returns are due by the last day of the 4th month following the end of the tax year. For calendar year taxpayers, this date is April 30th. Michigan income/personal tax returns are due April 15th.

What if I need an extension?
The Michigan Department of Treasury does not require that you file for an extension of time to file your state tax return if you are filing for a federal extension. Michigan will grant an automatic six-month extension of time to file until October 15th with a federal extension.