In choosing the legal structure for your business, a number of considerations may affect your decision.  The following definitions show the advantages and limitations of the most common legal structures. 

The size of the business is perhaps the biggest factor in selecting the legal structure.  If you personally are the business, then sole proprietorship is most likely the legal structure of choice.  If your business consists of two or more persons and you want the business to be relatively simple and unregulated, then a partnership may be your choice.

Incorporation should be undertaken if the business has:  assets sufficient to warrant the costs of incorporation; stockholders needing the provision of limited liability; and the ability to profitably withstand the added governmental regulation and related reporting requirements.

Such decisions should not be made without obtaining all needed information.  You, your partners, or potential stockholders may or may not be able to provide this.  If necessary, the professional advice of an attorney and an accountant should be obtained.

NOTE:  Choose the structure which meets the needs of the business now or in the immediate future.  Do not undertake a more complex legal structure than is currently necessary.  You can always choose another structure as the business expands or changes.

CHOOSING A BUSINESS NAME

Filing your business name with a local county clerk’s office or the Bureau of Commercial Services, Corporation Division, creates no substantive rights to a name.  You may wish to exercise care in selecting a name, however, to avoid infringing on names filed by other businesses or being used by another entity as a trademark, service mark or trade name.  To protect any rights a business claims to its name, the business entity must police its name and respond to anyone who infringes on its rights.  To learn more about selecting a business name, refer to the “Choosing a Business Name” publication of the Department of Labor & Economic Growth or call (517) 241-6470.

SOLE PROPRIETORSHIP

A sole proprietor is an individual who owns and operates the business.  There is no legal separation between the individual and the business.  A person benefits from 100 percent of the profits and is personally responsible for 100 percent of all the debts and liabilities of the business.  A sole proprietor who wishes to conduct business under a name other than the real name of the person must file a Certificate of Assumed Name in each county where the business is located.  For more information about an assumed name or “DBA” (doing business as) contact the local county clerk’s office.

GENERAL PARTNERSHIP

A partnership exists when two or more persons join together in the operation and management of business for profit.  Partnerships, like sole proprietorships, are subject to relatively little regulation and are fairly easy to establish.  A formal partnership agreement is recommended in order to address potential conflicts before they arise.  Under a general partnership, each partner is liable for all debts of the business.  All profits are taxed as income to the partners based on their percentage of ownership.  A general partnership, like a sole proprietorship, must file an assumed name certificate with the county clerk’s office in the counties in which the business is located.  For more information, contact your local county clerk.

LIMITED PARTNERSHIP

Like a general partnership, a limited partnership has two or more participants.  In a limited partnership, there are two types of partners.  A general partner has the same rights, powers, and restrictions as a partner in a general partnership.  A limited partner is typically not liable for the obligations of the partnership.  General partners may receive cash or other assets as provided in the partnership agreement and also incur unlimited liability.  Limited partners can only receive a share of profits based on the allocation in the partnership agreement, and they do not have a voice in the management of the business.  Limited Partnerships are registered with the Bureau of Commercial Services, Corporation Division of the Department of Labor & Economic Growth.  To form a limited partnership, contact the Corporation Division at (517) 241-6470 or refer to the on-line information available at the Corporation Division web site.

“C” CORPORATION

A corporation is a legal entity having its own rights, privileges and liabilities, apart from those of the persons forming or owning the corporation.  It is the most complex form of business organization and is comprised of three groups of people – shareholders, directors, and officers.  The corporation can own assets, borrow money, and perform business functions without directly involving the owner(s) of the corporation.  The corporation is subject to more government regulation than proprietorships or partnerships.  Corporate earnings are subject to “double taxation” when they are passed through as stockholder dividends.  However, corporations have the advantage of limited liability.  In order to form either a profit or nonprofit corporation, “Articles of Incorporation” must be filed with the Bureau of Commercial Services, Corporation Division, at (517) 241-6470.  Additional information and assistance is available at the Corporation Division of the Department of Labor & Economic Growth web site.  Copies of forms, statutes, and publications are available at that site.

SUBCHAPTER "S" CORPORATION

A special section of the Internal Revenue Code permits a corporation to be taxed as a partnership or sole proprietorship, with the profits taxed at the individual rather than the corporate rate.  To qualify as a Subchapter “S” Corporation, a business must meet certain requirements.  For information about this status and how to apply, contact the IRS at (800) 829-3676 for the appropriate forms.  The Articles of Incorporation are filed with the Bureau of Commercial Services, Corporation Division of the Department of Labor & Economic Growth.

PROFESSIONAL SERVICE CORPORATION

A professional service corporation, as the name implies, is a corporation made up exclusively of licensed professionals.  Licensed professionals are those people who have been legally authorized to provide such a professional service.  The professional service corporation may be formed by one or more persons to render professional services.

These entities are formed by filing Articles of Incorporation with the Bureau of Consumer and Industry Services.  The annual information update filed by a professional service corporation must list the shareholders and attest that all are licensed or authorized to provide the professional service.

Professional service corporations are formed to give professionals the benefits of a corporation, while not altering the law involving liability of the individual licensed person.

LIMITED LIABILITY COMPANY

The Limited Liability Company may be treated as a partnership for U.S. income tax purposes and also provides the limited liability of a corporation.  This option may be the preferred choice for certain new operations and joint ventures.  Owners of Limited Liability Companies are called “members.”  These are comparable to stockholders in a corporation or limited partners in a limited partnership.  To create a Limited Liability Company, Articles of Organization are filed with the Bureau of Commercial Services, Corporation Division, of the Department of Labor & Economic Growth at (517) 241-6400.  If the limited liability company has two or more members, the members may wish to execute an operating agreement, which defines the relationship between the company and its members.  Additional information and assistance is available online at the Corporation Division web site along with copies of forms, statutes, and publications.

NONPROFIT CORPORATIONS

Nonprofit corporations are a type of corporate entity that limits payment or distribution of any part of its assets, income, or profit except in conformity with the purposes of the corporation.  Members of the corporation may only receive profits in conformity with the purposes of the corporation.  Generally, a nonprofit corporation is created under the Michigan Nonprofit Corporation Act.  However, there are many special acts that permit the formation of a wide variety of nonprofit corporations.  Some purposes for which nonprofits are commonly formed are those involving religious, educational, and charitable activities.  To create a nonprofit corporation, contact the Bureau of Commercial Services, Corporation Division, of the Department of Labor & Economic Growth.  To check name availability, you may call customer service at (517) 241-6470 or fax your request to (517) 241-0537.  For information about filing requirements, please call (517) 241-6470.  Forms may also be obtained via the Internet. To request that forms be mailed to you, call (517) 241-6470, fax your request to (517) 241-0537, or mail your request to Post Office Box 30054, Lansing, Michigan 48909-7554.

Some nonprofit corporations may be eligible for exemption from federal income taxes.  Contact the Internal Revenue Service at (800) 829-3676 or access Publication 557 “Tax Exempt Status for your Organization” on-line along with the accompanying package “Application for Recognition of Exemption” (Form 1023 and Form 872-C).

An application for exemption from the Michigan sales tax may be obtained from the Michigan Department of Treasury at (517) 636-4660.  Please note that the sales tax exemption, if approved, applies only to purchases made by the exempt organization for their own use.  Sales of products by the exempt organization to the general public are NOT tax exempt.  More information on nonprofits and the sales tax exemption is available at the Department of Treasury.   You may also wish to contact the Department of Treasury, Single Business Tax Division, at (517) 636-4700 to determine if your organization will be exempt from the state Single Business Tax.

If a nonprofit organization is soliciting charitable contributions from the public, it may need to be registered with the Attorney General’s Charitable Trust Division, Post Office Box 30213, Lansing, Michigan 48909; telephone (517) 373-1152.  When contacted, the Attorney General’s Office will mail you (at no charge) an “Initial Charitable Trust/Charitable Solicitation Questionnaire,” or you may download it from the Attorney General’s web site.

The Volunteer Accounting Service Team of Michigan (a private organization) has a start-up packet (for a fee of $35.00 plus shipping and handling charges) for nonprofit organizations.  Contact the Accounting Aid Society, 18145 Mack Avenue, Detroit, Michigan 48224, telephone: (313) 647-9620, or order the packet online.