HOW TO START A BUSINESS IN MICHIGAN: KEY CONSIDERATIONS
Starting a business in Michigan is a multi-step process that typically includes:
1.) Entity Selection and Structuring;
2.) Business Name Selection;
3.) Filing Formation Documents;
4.) Preparing Governing Documents;
5.) Capitalization and Financing Matters;
6.) Contract Matters;
7.) Employment Matters;
8.) Licensing Matters;
9.) Intellectual Property Matters; and
10.) Implementing a Business Plan.
In this blog post, I discuss 10 key considerations for starting a business in Michigan.
1.) Select Entity Form and Structure
It is crucial to select a business entity form and structure that will fit your needs. In Michigan, different entity forms are available, including sole proprietorship, C corporation, S corporation, limited liability company ("LLC"), limited liability partnership ("LLP"), general partnership, and limited partnership. The right entity form and structure for your business will depend on your business' potential liabilities and risks, number of owners, taxation matters, and desire for flexibility over formality. An experienced business attorney can help you (i) select the right entity form and structure, and (ii) understand the management, potential for limited liability, allocations of profits and losses, tax consequences, and formation expenses of each business entity form.
Below is a general description of each business entity form in Michigan.
a.) Sole Proprietorship:
A business with only one owner becomes a sole proprietorship by default if that business does not formally choose a legal structure. A sole proprietorship does not file formation documents with LARA. As a sole proprietorship, the business owner will be responsible for all debts and liabilities of the business.
A corporation is formed by filing articles of incorporation with LARA. A corporation is legally treated as an entity separate from its owners. As such, a corporation has its own rights, privileges, and liabilities. Its owners, sometimes called shareholders, are not personally responsible for the debts of the business unless they personally guarantee those debts. A corporation usually has more than one shareholder, but it can be 100% owned by one person. A corporation’s governance structure has three layers: Shareholders who elect a board of directors The Board of Directors who oversee major policies and decisions for the company and hire officers Officers who run the company on a day-to-day basis The rights and obligations of shareholders are generally set by Michigan law, and the corporation’s bylaws establish the rights and obligations of directors and officers. Due to its three-tiered organizational structure and legally mandated formalities, a corporation may be more expensive and complex to establish than the other business structures. A corporation is created by filing Articles of Incorporation with LARA along with the appropriate fee. The corporation must also pay an annual fee with LARA to continue its existence
C and Subchapter S Corporations By default, the IRS characterizes corporations as C corporations. A C corporation (the entity itself) pays taxes at special corporate tax rates on the profits it earns and retains. C corporations also distribute earnings to shareholders as dividends, and those shareholders pay taxes on this income. Therefore, many people say corporate earnings are subject to “double taxation,” once at the corporation level and once at the shareholder level. However, qualified small corporations and LLCs can ask the IRS to treat them as a subchapter S corporation. Subchapter S entities do not pay taxes on the earnings of the business; instead, the income passes through to individual shareholders or members and gets reported on their personal income tax returns. This eliminates the corporate “double taxation” of C corporations. To be eligible for subchapter S status, businesses must meet a series of requirements, including having 100 or fewer shareholders or members.
2.) Select Business Name
Conduct a name search with the Michigan Department of Licensing and Regulatory Affairs (“LARA”) to ensure that the name you select for your business is available in Michigan. A name search may also include a trademark search. If you plan to conduct business outside of Michigan, conduct a name search in each of those states as well.
3.) File Formation Documents with LARA
After selecting the right business entity form and structure, file the requisite documents (articles of incorporation, articles of organization, etc.) to form the business entity in Michigan. If you plan to operate your business under more than one name, you will need to file a certificate of assumed name (also known as a “DBA”) with LARA. Finally, if you plan to conduct business outside of Michigan, you will need to file the requisite documents to conduct business as a foreign entity in those states as well.
4.) Prepare Entity Governing Documents
The entity will need properly drafted governing documents (bylaws, operating agreement, etc.) that spell out the procedures for governing the entity, including provisions for voting rights, management, capital contributions, distributions, and dissolution and liquidation.
If there are multiple owners of the business, it is also important to put in place a legally binding buy-sell agreement between the entity and its owners. A properly drafted buy-sell agreement will clearly describe how certain future changes (such as the death, divorce, termination of employment, or departure of a business owner) will affect the management and control / ownership of the business. The agreement should restrict the transfer of ownership interests in the company to outsiders, describe certain triggering event(s), outline procedures to be complied with upon occurrence of such triggering event(s), and set an agreed upon value or specify a valuation method for the purchase of an owner's interests. Failing to put in place a legally binding buy-sell agreement between a company and its owners can lead to future partnership / shareholder disputes and succession issues.
5.) Capitalization and Financing Matters
A business can be capitalized with either debt or equity. If the business is capitalized with equity, the business will issue ownership interests to the investor(s) in exchange for their investment capital. If the business is capitalized with debt, the business will enter into a promissory note in favor of the lender, and such promissory note may or may not include a personal guaranty from the owner(s) of the business. Many business start-ups use both debt and equity for capitalization purposes. Both forms of capitalization have advantages and disadvantages.
Certain assets may also need to be transferred to the business entity, and such transfers should be adequately documented.
6.) Contract Matters
Your business should consider having standard form contracts with its customers and suppliers. An experienced business attorney can tailor such forms to meet your business' particular needs and circumstances. Other agreements your business may have to enter into
Additionally, if your business will lease real estate or other property, your business will enter into lease agreements for such property. An experienced business attorney can review the lease agreements to ensure that they properly reflect the transaction's business terms.
7.) Employment Matters
Consider having a standard form employment agreement that you require employees sign. This form could include confidentiality, non-solicit, non-compete, and at-will provisions. You should also consider having an employee handbook and certain workplace policies.
8.) Licensing Matters
You may need to apply for licenses or permits with the state of Michigan. A state license search can be conducted on the Michigan.gov website, which contains an alphabetical list of Michigan licenses and permits, along with their descriptions.
9.) Intellectual Property Matters
If your business will have intellectual property, you should consider protecting your business’ rights in that intellectual property. Intellectual property includes logos, trademarks, patents, copyrights, etc. Working with an experienced intellectual property attorney can help protect your business' rights in such intellectual property from infringement.
10.) Implementing a Business Plan
In addition to the considerations outlined above, a comprehensive business plan usually includes:
a.) budgeting matters;
b.) determining scope of services;
c.) marketing strategies;
d.) estimating the business’ expenses, including startup costs;
e.) projecting revenue / profitability; and
f.) reviewing insurance needs.
The 10 considerations listed above are not exhaustive. Each business start-up will ultimately have its own unique considerations. Involving an experienced business attorney early in the business formation process can help minimize the risk of potential legal issues from popping up at a later time.
At Dawisha Law, PLLC, we have extensive experience advising clients on business formation matters. We walk clients step-by-step through the business formation process so that they can focus on the operation and growth of their businesses.
If you need legal assistance with forming your business, contact us today and let us help you with your business formation needs.
Principal and Founder
Dawisha Law, PLLC