How to Start an S-Corporation in Michigan (2024 Guide)

Start an S-Corporation in Michigan

If you want to start an LLC in Michigan, there are things that you should consider. Michigan is the home to a thriving business community, making it an attractive location for entrepreneurs. One popular business structure is the S-Corporation, which offers several tax and operational advantages. This comprehensive guide will explore the process of starting an S-Corporation in Michigan, including the costs, steps, advantages, and disadvantages associated with this business structure.

Webinarcare Editorial Team will help you gain knowledge through thorough research and market study. Before starting your S-corp, all the steps in this article must guide you.

What is an S-Corporation?

An S-Corporation is a type of corporation that elects to be taxed under Subchapter S of the Internal Revenue Code. This tax treatment allows S-Corporations to enjoy pass-through taxation, meaning the corporation’s income, deductions, and credits flow through to the shareholders, who report this information on their individual tax returns. This structure helps to avoid the double taxation experienced by C-Corporations.

An S corporation (S corp) is not a type of corporate entity, unlike a limited liability company (LLC) or other companies. It’s a tax classification that might result in significant financial savings for corporations and LLCs but in different ways. S-corp is similar to LLC, except that the IRS treats it as a corporation for tax purposes.

Limitations and Requirements of S-Corp

As you have decided to have an S-Corp structure for your business, you must know the limitations and requirements to qualify for S-Corp status. We have listed some important points to consider following for your reference-

  • Be a domestic corporation.
  • Not be an ineligible corporation, such as specific financial institutions, insurance providers, or domestic corporations engaged in overseas sales.
  • Have just one type of stock.
  • Have a maximum of 100 shareholders or members.
  • Have only permitted individuals, certain trusts, and estates as stockholders or members.

You can apply for an S-Corp in Michigan if qualified for the limitations and requirements.

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How to Form an S-Corporation in Michigan?

To create S-Corp in Michigan, you must follow the below guidelines that include forming a business name, hiring a Resident Agent, filing your Articles of Organization, creating an operating agreement, requesting an EIN, and filing a form 2553.

Step 1: Register a Business Name in Michigan

After you have decided on the idea to start an S-Corp in Michigan, deciding the name for your corporation is significant. Legal procedures should be taken into account when choosing your partnership name. Choose a business name that will enable you to develop a strong brand identity.

If you want to set up an S-Corp, there is a complete guide on Michigan Business Name Search for a proper business name. Here are some guidelines you must follow while naming your S-corp.

  • Avoid profanities
  • The name should be available, and no other entity should have the same name in Michigan.
  • Limit of restricted words that need a license in Michigan
  • Do not use a business name that sounds like a government agency or entity (like “police,” “county,” and “state”)

Step 2: Hire a Resident Agent

The next step in starting an S-corp in Michigan is hiring a Resident Agent, a person that accepts legal paperwork on behalf of your business. This person or business will receive important tax forms, legal documents (such as subpoenas), all notices of lawsuits, and other official government correspondence. Forming an LLC with an S-corp will be easier if you have Resident Agent in Michigan.

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Step 3: File For Articles of Organization

The Articles of Organization is an important document to start your limited liability company (LLC). Michigan Articles of Organization is a simple document that contains the business name and address as well as the name and address of the person who received lawsuits on behalf of the organization. For the Articles of Organization to be filed in MN Secretary of State, you need to pay a filing fee of $50. In Michigan, the filing fee of forming an LLC is $50.

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Step 4: Creating an Operating Agreement

After you have filed your Articles of Organization, the next step is to create an operating agreement in Michigan. The operating agreement is essential and necessary since it will cover your corporation’s important documentation and rules. The operating agreements usually include the following:

  • Article I: Organization
  • Article II: Management and Voting
  • Article III: Capital Contributions
  • Article IV: Distributions
  • Article V: Membership Changes
  • Article VI: Dissolution

After creating the LLC operating agreement, you can benefit in several ways since it will discuss how decisions for the business will be made, including management and member voting structure.

Step 5: Request for an EIN

After documenting the operating agreement, you should get or request an Employer Identification Number (EIN). An EIN will serve as the tax ID for your general partnership. EIN can be obtained from the Internal Revenue Service (IRS). It is a 9-digit number similar to Social Security Number. EIN, however, is distinct from SSN. It is only used for business-related activities, particularly for submitting general taxes. The form must be completed and uploaded to the IRS website.

The application of an EIN in Michigan can be through the following:

  • Apply Online- The online EIN application is the preferred method for customers to apply for and obtain an EIN.
  • Apply by Fax- Taxpayers can fax the completed Form SS-4 application to the appropriate fax number), after ensuring that the Form SS-4 contains all of the required information.
  • Apply by Mail- The EIN application Form SS-4 can be filed via mail. The processing time frame to receive the mail is four weeks.
  • Apply by Telephone-International Applicants – International applicants may call 267-941-1099 (not a toll-free number) from 6 a.m. to 11 p.m. (Eastern Time) Monday through Friday to obtain their EIN.

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Step 6: File Form 2553 for your S-Corp Business

Once you have obtained your EIN and Articles of Organization to form an S-Corp, you must file Form 2553, Election by a Small Business Corporation, to apply for S-corp status. Filing a form 2553 should be done 75 days after the formation of your S-Corp, or at most 75 days after the beginning of the tax year in which the election is to take effect.

If your LLS-Corp has passed the deadline of 75 days, you must also file Form 8832, Entity Classification Election, to opt to be taxed as a corporation. Then you would send Form 2553 and Form 8832 jointly by certified mail from the USPS.

In Michigan, you can file your form 2553 in the Department of the Treasury Internal Revenue Service Center – Kansas City, MO 64999 Fax: 855-887-7734.

Costs of Forming an S-Corporation

There are several costs associated with forming an S-Corporation in Michigan, including:

  1. Filing Fees: When forming a corporation in Michigan, you must file Articles of Incorporation with the Michigan Secretary of State and pay a filing fee of $60 for filing online, in person, and by mail.
  2. Statement of Information: After forming the corporation, you must file a Statement of Information (Form SI-550) within 90 days and pay a filing fee (currently $25). This statement must be filed annually after that.
  3. Franchise Tax: S-Corporations in Michigan are subject to the annual franchise tax, which is the greater of a minimum tax (currently $800) or a calculated tax based on the corporation’s net income.
  4. Other Costs: Depending on the nature of your business, additional costs may include obtaining licenses and permits, registered agent services, and professional fees for legal and accounting services.

Advantages of Forming an S-Corporation

There are numerous advantages to incorporating an S-Corp, but you should be aware of certain problems. Consider the following benefits of an S corporation:

Pass-through Taxation

S-Corporations enjoy pass-through taxation, which helps to avoid the double taxation faced by C-Corporations. This can result in potential tax savings for shareholders. Pass-through taxation is a tax system where the income, deductions, and credits generated by a business entity, such as Michigan General Partnership, limited liability company (LLC), or S-Corporation, are passed through to individual owners or shareholders instead of being taxed at the corporate level.

In this system, business profits and losses are reported on the owners’ or shareholders’ individual tax returns, and taxes are paid at their individual income tax rates. This avoids the issue of double taxation, which occurs in C-Corporations where income is taxed at both the corporate level and again when distributed to shareholders as dividends. Pass-through taxation is generally advantageous for small businesses and their owners, as it simplifies tax filings and often results in lower overall taxes.

Limited Liability Protection

Shareholders of an S-Corporation have limited liability protection, meaning their personal assets are protected from the corporation’s debts and obligations. Limited liability protection in an S-Corporation refers to the legal separation between the personal assets of the shareholders (owners) and the business assets, which protects shareholders from being personally responsible for the company’s debts and legal obligations.

In an S-Corporation, shareholders’ personal assets, such as their homes, cars, and personal savings, are not at risk if the business faces financial difficulties or lawsuits. The shareholders’ liability is limited to the amount they have invested in the company. This limited liability is a significant advantage of incorporating a business as an S-Corporation, as it provides a safeguard for the personal financial well-being of the business owners.

It is important to note that limited liability protection can only be supported if the shareholders maintain proper corporate formalities, such as keeping separate business and personal finances, holding regular shareholder meetings, and maintaining accurate business records. In such cases, courts may “pierce the corporate veil” and hold shareholders personally liable for the company’s debts and obligations.

Transferability of Shares

Shares in an S-Corporation are more easily transferable than those in an LLC, allowing for greater flexibility in ownership changes. Transferability of shares in an S-Corporation refers to the ability of shareholders to sell, gift, or otherwise transfer their ownership interest in the company to another person or entity. This is an important aspect of an S-Corporation’s structure, as it allows for flexibility in ownership and the potential for raising capital through the sale of shares.

However, there are certain restrictions on the transferability of shares in an S-Corporation, which are imposed by the Internal Revenue Service (IRS) to maintain the company’s eligibility for S-Corp status:

  • Shareholders: The number of shareholders in an S-Corporation is limited to a maximum of 100. Only individuals, certain trusts, and estates can be shareholders; other corporations and partnerships are generally not allowed.
  • Eligible Shareholders: Only U.S. citizens and resident aliens can be shareholders in an S-Corporation. Non-resident aliens are not allowed to hold shares.
  • One Class of Stock: S-Corporations can only have one class of stock. All shares must have the same rights and privileges, such as voting rights and distribution preferences. However, differences in voting rights are allowed if they are not tied to economic rights (e.g., distribution preferences).
  • Perpetual Existence: Perpetual existence refers to the concept that a business entity, such as an S-Corporation, can continue to exist indefinitely, regardless of changes in ownership or management. This means the corporation can outlive its original founders and shareholders and continue to operate even if individual shareholders pass away or decide to sell their shares.

This characteristic of an S-Corporation provides stability and continuity for the business, as it ensures that the corporation’s operations, contracts, and legal obligations remain unaffected by changes in ownership. It also makes it easier for the company to attract investors and raise capital. Potential investors can be confident that the business will continue to exist even if the original owners are no longer involved.

Disadvantages of Forming an S-Corporation

Despite these advantages, moving to an S corporation only sometimes makes sense – or at the very least, necessitates a thorough review of certain situations. The following issues may arise in particular:

Restrictions on Shareholders

S-Corporations are subject to specific restrictions, such as a maximum of 100 shareholders and limitations on the types of eligible shareholders (e.g., only individuals, certain trusts, and estates).

Single Class of Stock

S-Corporations are limited to issuing only one class of stock, which can limit flexibility in raising capital or creating different ownership structures. A single class of stock in an S-Corporation refers to the requirement that the corporation only issues one type of stock with equal rights and characteristics for all shareholders. This means that all shares of stock must have the same economic rights, such as dividend distribution preferences and liquidation rights, as well as voting rights. The single class of stock requirement is one of the key criteria the Internal Revenue Service (IRS) sets for a corporation to qualify for S-Corp status.

Increased Complexity

Forming and maintaining an S-Corporation requires more paperwork, record-keeping, and compliance with state and federal regulations than simpler structures like LLCs.

Franchise Tax

S-Corporations in Michigan are subject to the annual franchise tax, which can financially burden some businesses.

In an Michigan S-Corporation context, the franchise tax is usually based on the company’s income, net worth, or a combination of both. Since S-Corporations are pass-through entities for federal income tax purposes, meaning that their income is not taxed at the corporate level but rather passed through to individual shareholders, they may be exempt from or subject to lower franchise tax rates in some states than traditional C-Corporations.

However, S-Corporations must still comply with Michigan franchise tax requirements, which may include annual filings and tax payments. It is crucial for S-Corporation owners to understand the specific rules and regulations in their state of operation and to consult with a tax professional to ensure compliance and minimize their tax.

FAQs

What is an S-corporation in Michigan?
An S-corporation is a business corporation that qualifies for federal tax treatment as a pass-through entity, thus avoiding double taxation of corporate income.
How do I form an S-corporation in Michigan?
To form an S-corporation in Michigan, you need to file articles of incorporation with the Michigan Department of Licensing and Regulatory Affairs (LARA).
How long does it take to form an S-corporation in Michigan?
Typically, it takes 5-10 business days to form an S-corporation in Michigan.
What are the liability protections of an S-corporation in Michigan?
As a separate legal entity, an S-corporation provides liability protection for its owners in Michigan, protecting their personal assets from business-related liabilities.
What are the tax benefits of an S-corporation in Michigan?
An S-corporation avoids the double taxation of income, as the company pays income tax but does not have to pay federal income tax on profits, with profits and losses flowing through to shareholders’ personal income tax returns, taxed at the individual rate.
What are the filing requirements for an S-corporation in Michigan?
In Michigan, S-corporations must file an annual corporate tax return with the State of Michigan, and also proof of Annual Michigan Business Entity Report with LARA.
What is the minimum number of owners required to form an S-corporation in Michigan?
In Michigan, there must be at least one owner, but not more than 100 owners, in order to form an S-corporation.
Can an S-corporation be owned by non-US citizens residing in Michigan?
Yes, a Michigan S-corporation can be owned by non-US citizens as long as they are legal permanent residents or have valid work visas.
What is a Michigan business entity search?
A Michigan Business Entity Search is a free online search tool provided by the Michigan Department of Licensing and Regulatory Affairs (LARA), enabling you to look up public information on registered business entities in Michigan.
What is a Registered Agent in Michigan?
In Michigan, a registered agent is a person or an organization who is authorized to accept legal notices and documents on behalf of an S-corporation in Michigan.
Can a Michigan-registered S-corporation do business in other states?
Yes, with proper authorization, Michigan S-corporations can do business in other states by registering its name and acquiring necessary certificate to operate out of state.
What is an Operating Agreement in Michigan?
An operating agreement is not a requirement for an S-corporation in Michigan, however, having one is beneficial as it reflects the company’s bylaws rules and regulations.
What is a Professional Corporation in Michigan?
A professional corporation in Michigan is an entity where a group of professionals with the same education background are authorized to form an S-corporation dedicated to providing similar services.
What is Sales and Use Tax in Michigan?
Sales and Use Tax in Michigan are state-level consumption taxes that are assessed when a recipient purchases a certain product or service.
What is the use tax of Michigan?
Use Tax is a tax on goods that are stored or used in Michigan without a sales tax certificate.
Does the State of Michigan charge annual license fees?
Yes. Upon renewing the business entities in Michigan, fees are based on different categories of business types.
Are there any unique Michigan state tax exemptions from which S-Ccorporations can benefit?
Yes. Michigan’s MBT Tax credit program provides various credits and incentives schemes for the S corporations to qualify.
Can an out-of-state corporation become a Michigan S-Corporation?
Out-of-state corporations can elect for Michigan S Corporation status as long as they are authorized to do business in Michigan.
Do I need a business license to register an S-corporation in Michigan?
No, registration does not imply business licensing in Michigan, however, you may need specific local permits and licenses.
Can an S-corporation have multiple names in Michigan?
Yes, an S-corporation’s articles of incorporation in Michigan can indicate multiple names the corporation may be known as or do business under.
Is there a difference between a domestic and foreign corporation in Michigan?
Yes, domestic corporations are registered and operate in Michigan only whereas foreign corporates in Michigan need authorization to carry out business within the state.
Who can form an S-Corporation in Michigan?
Any individual, group, or Corporations, authorized to do business within the state of Michigan can start an SD-corporation.
Why is limited liability important for an S-Corporation in Michigan?
Limited liability, granted by incorporation in Michigan, allows the owner’s personal assets from business-related liabilities.
Does Michigan law permits one-person S-Corporations?
Yes, Michigan permits one-person company to corporatize themself under S- corporation and qualify for pass-through income.
What kinds of corporations can convert to S-Corporation status in Michigan?
C-corporations, LLCs, partnership, and sole proprietors in the state of Michigan can restructure themselves as S-corporations.
How are state taxes handled for an S-corporation in Michigan?
An S corporation’s income ‘passesthroughs’ directly to the shareholders’ personal tax returnings to avoid the Michigan business tax, Michigan income tax will be applied at shareholder level.
Can I operate one or multiple businesses following the S-Corporation incorporation in Michigan?
Yes, a Michigan S-Corporation may carry out multiple businesses based on their primary articles of incorporation.
Can any Michigan S-Corporation employee-benefits model apply for tax deductions with the employer plan break?
The Michigan employer plan tax break applies to franchise, regular types of profit-sharing, and some special types of compensation employed within the S-corporation scheme of employees.
What property tax assistance Michigan Government provides to senior citizens and disabled individuals or Military personal?
Michigan grants tax benefits to disabled veterans, senior persons, and other citizens towards their principal residence.
Who is eligible to start an S-corporation in Michigan?
Any corporation, partnership, or limited liability company (LLC) with no more than 100 shareholders is eligible to start an S-corporation in Michigan.
How is an S-corporation different from a C-corporation in Michigan?
An S-corporation in Michigan is taxed differently than a C-corporation, as its income and losses are passed through to its individual shareholders’ tax returns.
What are the requirements for starting an S-corporation in Michigan?
In Michigan, you’ll need to file articles of incorporation with the Department of Licensing and Regulatory Affairs, as well as meet all state laws and regulations for starting a corporation.
What are the advantages of starting an S-corporation in Michigan?
Some of the advantages of starting an S-corporation in Michigan include protecting your personal assets, optimizing your taxes, and simplifying your business structure.
What are the disadvantages of starting an S-corporation in Michigan?
Some of the disadvantages of starting an S-corporation in Michigan include more complex rules and regulations, higher legal costs, and reduced flexibility.
How do I decide if an S-corporation is right for my business in Michigan?
You should consider factors such as your business structure, the number and type of shareholders you have, and your earnings potential to decide if an S-corporation is right for your business in Michigan.
Can a foreign corporation start an S-corporation in Michigan?
Yes, a foreign corporation can start an S-corporation in Michigan as long as it meets all state requirements and regulations.
How is the income of an S-corporation in Michigan taxed?
The income of an S-corporation in Michigan is passed through to its individual shareholders’ tax returns and taxed at their individual tax rates.
Is there a limit to how much income an S-corporation in Michigan can earn?
No, there is no limit to how much income an S-corporation in Michigan can earn.
How many shareholders can an S-corporation in Michigan have?
An S-corporation in Michigan can have no more than 100 shareholders.
Who can be a shareholder in an S-corporation in Michigan?
Any individual, partnership, or trust can be a shareholder in an S-corporation in Michigan.
Can an S-corporation in Michigan issue multiple classes of stock?
No, an S-corporation in Michigan can issue only one class of stock.
What are the tax rules for shareholders of an S-corporation in Michigan?
Shareholders of an S-corporation in Michigan are taxed on their share of the corporation’s income and losses on their individual tax returns.
Can an S-corporation in Michigan deduct its business losses?
Yes, an S-corporation in Michigan can deduct its business losses, which can then be passed through to individual shareholders.
Can an S-corporation in Michigan choose to be taxed as a C-corporation instead?
Yes, an S-corporation in Michigan can choose to be taxed as a C-corporation instead, but this requires filing a statement with the IRS and meeting certain requirements.
What kind of documentation is required to start an S-corporation in Michigan?
To start an S-corporation in Michigan, you’ll need to file articles of incorporation and a tax election with the Department of Licensing and Regulatory Affairs.
Are there any residency requirements for starting an S-corporation in Michigan?
No, there are no residency requirements for starting an S-corporation in Michigan.
Does Michigan have a state income tax for S-corporations?
Yes, Michigan imposes a state income tax on S-corporations based on their net income.
Can an S-corporation in Michigan avoid paying state income tax?
No, an S-corporation in Michigan cannot avoid paying state income tax on its net income.
What is the statute of limitations for Michigan S-corporation tax audits?
Michigan has a three-year statute of limitations for S-corporation tax audits.
Does Michigan require S-corporations to file annual reports?
Yes, S-corporations in Michigan are required to file annual reports with the Department of Licensing and Regulatory Affairs.
What happens if an S-corporation in Michigan fails to file its annual report?
If an S-corporation in Michigan fails to file its annual report, it may be subject to late fees and penalties.
How do I elect S-corporation status in Michigan?
You can elect S-corporation status in Michigan by filing Form 2553 with the IRS and a tax election with the Department of Licensing and Regulatory Affairs.
Can a Michigan S-corporation convert to a C-corporation?
Yes, a Michigan S-corporation can convert to a C-corporation, but this requires filing paperwork with the IRS and meeting certain requirements.
Can a Michigan S-corporation expand into other states?
Yes, a Michigan S-corporation can expand into other states, but it may need to register and comply with the laws and regulations of each state.
What are the additional filing requirements for a Michigan S-corporation expanding into other states?
The additional filing requirements for a Michigan S-corporation expanding into other states will depend on the specific state and its regulations, so it’s important to research and comply with each state’s requirements.
Can I start an S-corporation without a lawyer in Michigan?
While it is possible to start an S-corporation without a lawyer in Michigan, it’s generally recommended to seek legal advice to ensure you comply with all state and federal laws and regulations.

Also Read

Why You Should Start Michigan S Corp

One of the key advantages of choosing to start an S Corp in Michigan is the potential tax benefits it offers. S Corporations are considered pass-through entities, meaning that profits and losses are passed through to the shareholders, who report them on their individual tax returns. This can result in significant tax savings, as S Corporations are not subject to federal income tax at the corporate level. In addition, Michigan does not impose a state income tax on S Corporations, providing further tax advantages to businesses operating as S Corps in the state.

Limited liability protection is another important benefit of forming an S Corporation in Michigan. By incorporating your business as an S Corp, you can protect your personal assets from business debts and liabilities. In the event that your business faces financial difficulties or legal challenges, your personal assets such as your home, savings, and investments will generally be shielded from creditors. This can provide peace of mind to business owners and help them navigate uncertainties with confidence.

Moreover, forming an S Corporation in Michigan can enhance your business’s credibility and professionalism. Being registered as an S Corp demonstrates to clients, partners, and investors that your business is committed to compliance and transparency. S Corporations are subject to more stringent record-keeping and reporting requirements than sole proprietorships or partnerships, which can help build trust and credibility with stakeholders and contribute to long-term success.

Another advantage of starting an S Corporation in Michigan is the flexibility it offers in terms of ownership and management structure. S Corporations can have up to 100 shareholders, allowing for growth and expansion opportunities. Additionally, shareholders in an S Corp can consist of individuals, trusts, and certain tax-exempt entities, providing greater flexibility in structuring your business ownership. The ability to issue different classes of stock with varying rights can also be advantageous in attracting investors and structuring equity incentive plans for key employees.

In conclusion, if you’re contemplating starting a business in Michigan, choosing to form an S Corporation can offer numerous benefits that can help set your business up for success. From potential tax savings and limited liability protection to enhanced credibility and flexibility in ownership and management, there are numerous advantages to selecting an S Corp as your business structure. By carefully considering your business goals and consulting with legal and financial professionals, you can make an informed decision that will benefit your business in the long run.

Conclusion

Forming an S-Corporation in Michigan can be a beneficial decision for small business owners seeking liability protection, pass-through taxation, and easier transfer of ownership. By meeting the requirements set by the IRS and following the necessary steps, business owners can take advantage of an S-Corp’s unique structure and benefits. However, it is essential to consider the potential drawbacks, such as increased paperwork and limitations on ownership, before making a final decision. Consulting with a legal or financial professional can help business owners determine if an S-Corporation is right for their needs and goals.

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