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Types of Business Ownership Structures in Michigan

Corporation, LLC, partnership, and sole proprietorship

American Incorporators - Incorporate your business in 5 easy steps When you decide to start a company, you must choose an ownership structure.  Before you can decide this, you must learn about how each structure works. Here's a brief explanation of the most common forms of doing business:Should my Michigan Business be a LLC or a Corporation? Make the right business structure choice for your 
business by becoming informed of your options.

Michigan Sole Proprietorships For many small businesses, the best initial ownership structure is a sole proprietorship or -- if more than one owner involved -- a partnership.

A sole proprietorship is a single-person business -that is not registered with the state as a  LLC or corporation. You can  create a sole proprietorship just by going into business for yourself.  You don't have to do anything special or file any papers to get started.

Legally, a sole proprietorship is inseparable from its owner -- the business and the owner are  the same. This means the owner of the business reports business profits and losses on their personal tax return and is liable personally for any business-related obligations, such as debts or court judgments. 

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Michigan Partnerships

A partnership is simply a business owned by two or more people that hasn't filed papers to become a corporation or a LLC. No paperwork needs to be filed to form a Michigan partnership. As with the sole proprietorship, the partnership's owners pay taxes on their shares of the business income on their tax returns and they are personally liable for the entire amount of any business debts and court judgments. You don't have to do anything special or file any papers to set up a partnership. 

Sole proprietorships and partnerships make sense only in a business where personal liability isn't an issue -- for example, a small service business in which you are unlikely to be sued for any reason and for which you won't be borrowing much money for inventory or other costs.  

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Michigan Limited Partnerships

Limited partnerships are more expensive and fairly complicated to set up and run, and are not common for the average small business owner. Limited partnerships are usually created by one person or company, the "general partner," who will obtain investments from others -- who will be the limited partners.

The general partner controls the limited partnership's day-to-day operations and is liable (personally) for business debts (unless the general partner is a corporation or an LLC). Limited partners of a limited partnership have very little control over daily business decisions or operations and they are not personally liable for business debts or court judgments. Consult a limited partnership expert if you're interested in creating this type of business - it can be risky. 

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Michigan Corporations and LLCs

Forming and operating an LLC or a corporation is a more complicated and a bit more costly, but worth the trouble for most small businesses. The main benefit of a LLC or a corporation is that these business structures limit the owners' personal liability for business debts and court judgments against the business.  This can be a huge benefit in the long run.

A corporation is an independent legal and tax entity, separate from the people who own, invest in, control and manage it. Because of this status, the owners of a corporation don't use their personal tax returns to pay tax on corporate profits  The corporation pays taxes on corporate profits. Owners pay personal income tax only on money they draw from the corporation in the form of salaries, bonuses and other.

LLCs (limited liability corporations) are similar to corporations. They also provide limited personal liability for business debts and claims. But when it comes to taxes, Michigan LLCs are more like partnerships: owners of a LLC pay taxes on their shares of the business income on their personal tax returns each year.

Corporations and LLCs make sense for business owners who either 1) do not want to risk being sued by customers or clients or 2) do not to run the risk of piling up a lot of business debts, or 3) have personal assets they want to protect from business creditors. 

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Nonprofit Corporations in Michigan

A nonprofit corporation is a corporation formed to carry out a charitable, educational, religious, literary or scientific purpose. A nonprofit can raise funds by receiving public and private grant money and donations from individuals and companies. The federal and Michigan state governments do not tax nonprofit corporations (generally) on money they make, because of the benefits they contribute to society.  

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Cooperatives in Michigan

A cooperative is not really a legal business structure.  An organization owned and operated democratically by its members. These business organizers often refer to their businesses as a "group," "collective" or "co-op" -- but these are not legal labels. For example, a consumer co-op could be formed to run a pet store, a music store or any other retail business. Or a workers' co-op could be created to manufacture and sell retail items. 

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DBA Filing in Michigan

DBA is an abbreviation for “doing business as.” The State of Michigan normally uses the term "assumed name" instead of DBA.  DBA registration is necessary if your business operates under a name other than its legal name.  The legal name of a corporation, LLC, or other state registered entity is the name on the articles of business filed with State of Michigan. Conducting business and opening a bank account under a name other than the legal name of your business is only possible after you have fulfilled your Michigan's assumed name (or DBA) filing requirement. 

A DBA is simply a name statement registered with the state and not an official business formation like a corporation or an LLC. If your business is incorporated or organized under state law, you only have to register a DBA if you operate your business under a name other than its legal name as filed with the state.


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