Starting your own business requires many steps, but one of the first steps is deciding your business structure. In Michigan, there are several types, ranging from simple to complex. Corporations are required by law to have a board of directors, then there are some structures that offer more limited liability than others, and then there are some that are taxed more heavily than others. Some of the most common business entities are as follows:

Sole Proprietorship

This is the most common and straight forward business structure where one person is the owner. This business is not incorporated, which means less government involvement but also less government protection. Generally speaking, the owner pays personal income tax and self-employment tax on the business profits earned. The owner is solely financially liable for the business. Which also means that if the business needs to settle a debt or a legal claim, your personal assets may be at risk. This type of business structure offers simplicity and more control for the individual owner. The types of businesses that would be a sole proprietorship would be small business such as a local clothing store, photographer, or a local trade operation such as a plumber or electrician.

Partnership

This type of business structure may be ideal for businesses owned by multiple people. It is also the simplest way for more than one person to own and operate a business where all the owners share in the profits and share in the liabilities. A partnership business structure does not pay taxes on income. It passes the profits and losses to the partners. There are two different types of partnerships, general and limited partnerships. In a general partnership, the owners all share full operational control of the business as well as unlimited liability. In a limited partnership, the owners are not always involved in the day-to-day operations. They are more like silent partners in a business. An industry example for limited partnerships would be film making or real estate.

Limited Liability Company (LLC)

An LLC is structured in a way that offers owners the chance to limit their personal liability which protects their personal assets. It offers flexibility like a partnership does, but it provides protection of assets like a corporation does. LLCs (Limited Liability Company) are common in Michigan. They are inexpensive to start and easy to set up. You are required to file original articles of organization which should contain all the information required to form your LLC. They offer flexible management structures and do not put a limit on the number of members or owners the business may have. Typically, LLCs pay lower taxes than corporations. The profits that an LLC makes are treated as the business owners’ personal income, they are not subject to corporate taxation.

C Corporation

Businesses structured as C Corporations are independent of their shareholders. They are the most prevalent type of corporation as they provide defined tax and ownership structures. They are for-profit companies that pay income tax on the profits. Funds distributed out to the shareholder as dividends can also be taxed. They can be expensive to start and require extensive record keeping, but they have strong personal liability protection for their shareholders. This means that, with limited exceptions, the shareholders are not personally responsible for business liabilities and debts. C Corporations have no limit on the number of shareholders they can have and can also offer stock options.

S Corporation

Generally speaking, an S Corporation business structure passes taxable income, credits and deductions, and losses to its shareholders. They have a special tax status with the IRS which provides them with some tax advantages. An S Corporation does not pay corporate taxes, because the profits and losses are passed through the business and reported to the shareholders personal tax returns. A business must meet certain IRS requirements to become and remain an S Corporation. Like all corporations, they must file articles of incorporation. Typically, S Corporations are smaller businesses since they cannot exceed 100 shareholders and they must hold shareholder and director meetings.

B Corporation

This business structure is also called a benefit corporation. They are a for-profit corporation, but they are also mission driven. They must receive a certification that shows they are socially and environmentally responsible and transparent. This type of corporation is taxed in the same way as a C Corporation, so they do not receive any tax breaks. Companies that focus on the planet and people as well as making a profit should be structured as B Corporations. B Lab (the company that performs the certification assessment) says that “Certified B Corporations are businesses that meet the highest standards of verified social and environmental performance, public transparency, and legal accountability to balance profit and purpose. B Corps are accelerating a global culture shift to redefine success in business and build a more inclusive and sustainable economy.” Examples of B Corporations would be TOMS, Ben and Jerry’s, Thrive Market, and Seventh Generation, among many others. B Corporations build trust with their consumers and have the advantage of attracting investors because of their business mission.

Nonprofits

Nonprofit business structures are mission driven. The type of mission typically benefits education, art, charitable causes, or religious purposes. Nonprofits may or may not be tax-exempt. To form a nonprofit organization that is tax-exempt, you would need to apply for and receive a federal 501(c)(3) tax exemption. With this tax exemption, nonprofits are not required to pay taxes on the profits, but most of the profits are used to fund the nonprofit’s mission.

There are advantages and disadvantages to each type of business structure. Deciding how to structure your business can be an involved process. Attorney Mike Gibbons and Peter Gojcaj specialize in business law and can help walk you through the process of structuring your business. Some important things to determine and discuss with your attorney when deciding how to structure your business are as follows:

• The amount of control you want over your business and its management structure.
• The type of liability protection you need and if you can assume it personally.
• The goals and financial situations of each of your business owners.
• The tax options, implications, and requirements of the different structures for your business.
• Your ability to raise capital and if you are going to pursue outside funding for your business.
• The long-term goals of your business.

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