HOW TO START A BUSINESS IN MICHIGAN: KEY CONSIDERATIONS
INTRODUCTION
Are you filled with entrepreneurial aspiration, driven by innovation, and ready to make a profound impact? Does the idea of being your own boss, setting your own rules, and transforming your passion into a thriving enterprise excite you? If yes, Michigan's fertile business landscape may be the ideal place for you to turn this dream into a reality.
Renowned for its versatile economic sectors ranging from the resurgent automotive industry to cutting-edge technology startups, Michigan has a dynamic business environment that fosters innovation and growth. Its legacy as the birthplace of the assembly line and the heart of America's automotive industry is now complemented by a burgeoning tech scene, making the state a beacon for ambitious entrepreneurs.
The spirit of entrepreneurship is deeply ingrained in the fabric of Michigan. It's a place where big ideas are welcomed, fostered, and turned into successful ventures. A testament to this is the state's thriving business community that continues to expand and diversify, reflecting the resilience and creativity of Michigan's population.
If you're contemplating starting a business in Michigan, you will want to read this comprehensive blog post. It's filled with practical tips and key considerations for start-ups, entrepreneurs, and founders.
Embarking on the entrepreneurial journey is no small feat. It takes courage, determination, and a lot of hard work. But with the right guidance and resources, you can turn your business dream into a triumphant reality.
Disclaimer: The information provided in this blog post is intended for informational purposes only and does not constitute legal advice. Interacting with this content does not establish an attorney-client relationship with either the author or the publisher. Please seek the advice of a qualified attorney in your jurisdiction for any legal decisions.
BACKGROUND AND GENERAL CONSIDERATIONS
1.) Select Entity Form and Structure
Starting a business in Michigan involves making a critical decision: selecting the appropriate business entity form and structure. The choice you make at this juncture can influence numerous aspects of your business, from taxation to potential liabilities, and from flexibility of operations to the degree of formality your business will have to observe.
Michigan offers a variety of business entity forms. These include the sole proprietorship, C corporation, S corporation, limited liability company, limited liability partnership, general partnership, and limited partnership. The best fit for your business will largely depend on your specific needs concerning liability and risk management, the number of owners, tax implications, and your preference for a formal or flexible business structure.
To help you make an informed decision, an experienced business attorney can guide you through the process of selecting the most suitable entity form and structure for your business. This attorney can also help you understand the management structure, potential for limited liability, allocations of profits and losses, tax consequences, and formation expenses associated with each business entity form.
For a detailed discussion on each of the business entity forms available in Michigan, please see the following blog post: Choosing the Right Legal Entity for Your Business in Michigan: What You Need to Know.
Remember that maintaining your business involves more than just the initial setup. Depending on the entity form you choose, you may have annual reporting requirements, fees, or taxes. For example, corporations and LLCs in Michigan are required to file an annual report with LARA.
2.) Select Business Name
Finding the perfect name for your business is a crucial part of your journey as an entrepreneur. A name can reflect your brand's identity, appeal to your target audience, and distinguish you from competitors. But before settling on a name, it's critical to perform due diligence to ensure it's legally available for use.
Conduct a name search with LARA to ensure that the name you select for your business is available in Michigan. LARA's online database of business records is a great starting point for this research. If the name you want is already in use or closely resembles an existing name, you'll need to choose another to avoid legal issues and customer confusion.
In addition to checking the availability of your chosen name, it's also wise to carry out a trademark search. The United States Patent and Trademark Office (USPTO) maintains a database where you can check if your business name or logo is already trademarked at a federal level. Remember, owning a state business name doesn't grant you automatic rights to own it as a federal trademark.
If you plan to conduct business outside of Michigan, conduct a name search in each of those states as well. Each state has its own database similar to LARA's, and you'll want to ensure your business name doesn't infringe on existing names or trademarks in those regions.
After confirming the availability of your business name, you can opt to register or reserve it with LARA, adding a layer of legal protection and exclusive rights to that name in Michigan. This step is often completed during the process of forming your business entity, but exact procedures can vary depending on your chosen structure.
Remember, choosing a business name is more than a legal requirement. It's also a major part of your brand identity, influencing how customers perceive and remember your business. Take the time to choose a name that not only meets legal criteria but also resonates with your mission, values, and target audience.
3.) File Formation Documents with LARA
Forming your business entity is a significant step on your entrepreneurial journey. Once you've chosen the most suitable business entity form and structure, it's time to make your business official by filing the required documents with LARA.
Documents such as articles of incorporation (for corporations) or articles of organization (for LLCs) outline key details about your business, including your business name, purpose, registered agent, and in some cases, information about shares of stock or members. Filing these documents legally establishes your business in Michigan and sets the foundation for its structure and governance.
Suppose you plan to operate your business under more than one name - an official name and a trade name, for example. In that case, you will need to file a certificate of assumed name (commonly known as a "Doing Business As" or “DBA”) with LARA. A DBA allows your business to operate under a name different from its official registered name, giving you more flexibility in branding and marketing your business.
If your business plans extend beyond Michigan's borders, you will also need to comply with the requirements of those states. This usually involves filing documents similar to those submitted to LARA, to register your business as a foreign entity. The process for foreign qualification varies by state, so it's essential to familiarize yourself with the requirements in each jurisdiction where you plan to operate.
Finally, remember that filing your formation documents isn't a one-and-done task. Most business entities in Michigan are required to file annual reports with LARA to remain in good standing. Staying on top of these ongoing requirements will help ensure your business continues to operate smoothly and legally.
4.) Prepare Entity Governing Documents
Creating detailed governing documents is a fundamental task in launching your Michigan business. These documents - such as bylaws for corporations or an operating agreement for LLCs - provide a roadmap for running your business. They spell out the procedures for governing the entity, including voting rights, management structure, capital contributions, distribution of profits and losses, and procedures for dissolution and liquidation.
Each type of business entity has its own appropriate set of governing documents. For example, bylaws are used by corporations to outline the corporate structure and operations. These typically include information on the board of directors, shareholder meetings, officer positions, and how disputes are to be resolved.
On the other hand, an LLC usually uses an operating agreement. This document is a contract among the LLC's members that sets out the members' financial and managerial rights and responsibilities. In essence, it's a guide on how the business is to be run.
If your business has multiple owners, it's critical to draft a legally binding buy-sell agreement between the entity and its owners. This document outlines what happens to a business owner’s interest in the company if a specified event occurs (such as death, divorce, termination of employment, or departure). It can restrict the transfer of ownership interests to outsiders, describe triggering events that will initiate the buy-sell process, and outline procedures to follow in such scenarios.
The buy-sell agreement is particularly important because it sets an agreed-upon value or specifies a valuation method for the purchase of an owner's interests. It helps to prevent future partnership disputes and succession issues by having a predetermined plan in place. If it's overlooked, disputes and complications can arise that could destabilize or even ruin the business.
In essence, these governing documents serve as the blueprint for how your business will operate, and they are the foundation of a well-organized and legally compliant enterprise. It's advisable to seek legal counsel when drafting these documents to ensure they meet your business's needs and comply with all relevant laws and regulations.
5.) Capitalization and Financing Matters
The initial funding or "capitalization" of your business is a crucial step in setting it up. The business can be financed through debt, equity, or a combination of both.
When a business is financed with equity, it means that you're offering a portion of the ownership of your business, often in the form of shares, in exchange for capital. As a result, investors become part-owners of the business. They'll share in your business's future profits but will also share the risk if the business doesn't do well.
On the other hand, debt financing involves borrowing money that must be repaid over time with interest. This can be done by taking out loans from financial institutions, using credit cards, or issuing bonds. One common instrument is a promissory note - a written agreement to repay the debt. Such an agreement may include a personal guarantee from the business owner(s), which would make them personally responsible for repaying the debt if the business can't do it.
Often, start-ups use a mix of debt and equity financing. This blend of funding offers a balance of risk and reward. Each has its pros and cons and the choice depends on various factors including the nature of your business, its stage of development, and your financial situation.
In addition to raising funds, it may be necessary to transfer certain assets to your business entity. This could include property, equipment, or even intellectual property such as trademarks or patents. These transfers should be adequately documented. This helps ensure a clear record of the business's assets, which is essential for financial reporting, tax purposes, and potential future sale or valuation of the business. It's wise to seek legal and financial advice to navigate these processes effectively.
6.) Securities Matters
Issuing equity or debt can be subject to securities regulations, both at the federal and state level. The Securities and Exchange Commission (SEC) governs these activities at the federal level in the United States, and each state, including Michigan, has its own securities laws and regulations.
Securities are broadly defined and generally include shares of corporate stock or mutual funds, corporate or government bonds, and other types of investment products. When a business raises capital by selling shares or bonds, it is usually issuing securities. The process of selling securities is often called a securities offering.
Both federal and state laws require securities to be registered, unless an exemption applies. Registration is a complex and expensive process, so most small businesses try to fall within an exemption. For example, the federal law provides several exemptions for small and private offerings. One of the most commonly used is Regulation D, which includes multiple exemptions based on the size of the offering, the number of investors, and other factors.
In addition to federal securities laws, you must also comply with the securities laws in any state where you offer or sell the securities. These are often called "blue sky" laws. Michigan has its own set of securities regulations, so it's important to be aware of these as you plan your financing.
Securities laws are complex, and noncompliance can result in serious penalties, including fines, return of funds to investors, and even criminal charges. Therefore, it's strongly recommended to consult with a lawyer experienced in securities law before proceeding with any issuance of equity or debt.
So, as part of your capitalization and financing planning, take time to understand the securities implications. This will ensure your business complies with all legal requirements, thereby mitigating risks and fostering a solid foundation for your venture.
7.) Contract Matters
Contracts are the lifeblood of any business operation. They govern your relationships with customers, suppliers, and other business partners. They are essential tools for defining obligations, setting expectations, allocating risk, and providing remedies if things go wrong.
For your Michigan-based business, having standard form contracts with your customers and suppliers can streamline your operations and help ensure consistency across transactions. These contracts should clearly outline the terms of the agreement, such as the services or products to be provided, pricing, delivery expectations, payment terms, dispute resolution mechanisms, and liability clauses. An experienced business attorney can craft these forms to precisely meet your business's specific needs and circumstances.
Furthermore, your business may need to enter into additional agreements, depending on its nature. For instance, if you plan to hire employees or engage independent contractors, you'll need employment contracts or contractor agreements. If you're developing innovative products or services, you might require non-disclosure agreements to protect your intellectual property. Each agreement has its unique aspects and legal considerations. Therefore, it is prudent to seek legal advice when drafting or entering into such contracts.
On the topic of leasing real estate or other properties, lease agreements will play a crucial role. Lease agreements are not merely about how much you pay in rent; they contain various provisions that can significantly impact your business operations. For instance, clauses may pertain to lease term duration, options for renewal, responsibility for repairs and maintenance, allowances for improvements, restrictions on use, and terms for terminating the lease.
An experienced business attorney can review and negotiate these lease agreements, ensuring they accurately reflect the transaction's business terms and protect your interests. This attorney can help you understand the lease's implications, the landlord's obligations, and your rights as a tenant.
In conclusion, handling contract matters carefully is crucial for the smooth running of your business. From standard forms for routine transactions to complex lease agreements, every contract is an opportunity to protect your interests and promote your business's success.
8.) Employment Matters
Navigating the world of employment law can be a complex task, particularly for new business owners. When hiring staff in Michigan, it's important to consider having a standard form employment agreement in place. This document will help ensure that both you and your employees understand the terms of their employment, their duties and responsibilities, and their rights and obligations.
A comprehensive employment agreement can include confidentiality provisions, protecting your business's proprietary information from misuse or disclosure. This is particularly important if your business deals with sensitive customer data, unique business methods, or innovative products and services.
Additionally, your agreement can incorporate non-solicit and non-compete clauses. A non-solicit clause prevents an employee from enticing other employees or customers away from your business, both during their employment and for a certain period afterward. A non-compete clause restricts employees from starting or working for a competing business within a certain geographic area and for a specific time after leaving your company. Michigan law generally enforces these clauses as long as they are reasonable in scope and duration.
Furthermore, Michigan is an at-will employment state, meaning either you or the employee can terminate the employment relationship at any time for any reason, provided it's not illegal. Including an at-will provision in your employment agreement clarifies this and helps avoid any misunderstanding about job security.
Finally, having an employee handbook and implementing workplace policies can be invaluable for your business. A well-designed handbook provides a central source of information about your company culture, expectations, procedures, and benefits. It can include policies on equal employment opportunity, anti-harassment and discrimination, leave and vacation, health and safety, and disciplinary procedures.
Workplace policies, on the other hand, establish guidelines for acceptable behavior, productivity standards, and dispute resolution. These can cover areas such as internet and email usage, dress code, break times, and more. Regularly reviewing and updating these documents ensures they remain current with employment laws and your business needs.
In conclusion, taking care of employment matters, starting with employment agreements, handbooks, and workplace policies, sets a solid foundation for your Michigan-based business. It can lead to a positive work environment, promote fair treatment, and protect your business legally.
9.) Licensing Matters
In the business world, proper licensing is a critical component for legitimate operation. In Michigan, depending on the nature of your business, you may need to apply for certain licenses or permits.
Michigan offers a comprehensive system to help business owners navigate this process. A convenient way to get started is by conducting a state license search on the Michigan.gov website. This site contains an expansive alphabetical list of Michigan licenses and permits, providing a detailed description for each. This way, business owners can identify which specific licenses or permits they may need to operate their venture legally.
For instance, if you are starting a food-related business, you might need a food establishment license; if you are launching a construction company, you might need a building permit. Some businesses may require multiple licenses, such as a restaurant serving alcohol, which would need both a food establishment license and a liquor license.
In addition to state-level permits and licenses, don't forget that some businesses might also require federal and local authorizations. For example, if your business involves activities regulated by a federal agency, you may need a federal license or permit. Similarly, local city or county business licenses or permits might also be required depending on the location of your business.
Once you’ve identified the licenses and permits you need, follow the application process as provided by the respective licensing body. This might include submitting application forms, paying necessary fees, and possibly undergoing inspections or other evaluations.
It's important to note that failing to obtain the necessary licenses or permits can result in fines, penalties, and potentially, the closure of your business. So, make sure you understand and fulfill all licensing requirements before opening your business.
Remember, when it comes to business licensing in Michigan, thoroughness is key. Proper licensing not only keeps your business in compliance with the law but also enhances your business's credibility with customers and suppliers. Always stay up-to-date with your licensing requirements to ensure the long-term success of your Michigan-based venture.
10.) Intellectual Property Matters
In today's business landscape, intellectual property (IP) often represents a significant portion of a company's value. If your business has intellectual property such as logos, trademarks, patents, and copyrights, it is essential to take steps to protect these valuable assets.
Intellectual property can include a wide variety of things that your business creates or uses in its operations. Logos and trademarks, for instance, are used to identify your business and its goods or services, helping customers recognize your brand in the market. These symbols, names, or phrases should be registered with the USPTO to prevent others from using similar identifiers that could cause confusion for your customers.
Patents are another form of intellectual property that protects inventions or innovations for a set period of time. If your business has developed a unique product, method, or technology, a patent can give you exclusive rights to produce and sell the innovation, giving you a competitive edge in the marketplace.
Copyrights, on the other hand, protect original works of authorship, such as written material, music, and artwork. If your business produces any such works, registering a copyright can prevent others from using or replicating your works without permission.
Each form of intellectual property requires a different process for securing protection, with various complexities and legal requirements. It is highly recommended to work with an experienced intellectual property attorney who can guide you through these processes. An IP attorney can also help you monitor and enforce your rights, ensuring that others aren't infringing on your intellectual property and taking appropriate action if they do.
Remember, intellectual property is a significant business asset. By taking the necessary steps to protect it, you're not only safeguarding your business's unique ideas and creations, but you're also enhancing its value and reputation in the market.
11.) Implementing a Business Plan
A business plan serves as a roadmap for your business, outlining your vision, mission, and strategies to achieve your business goals. Beyond the legal, operational, and organizational aspects, your business plan should also cover the following key areas:
a.) Budgeting Matters:
Budgeting is crucial for the efficient management of financial resources. It involves setting financial goals, forecasting future financial outcomes, and designing strategies to achieve these goals. It includes all the financial aspects of your business, from capital expenditure and operating costs to expected revenue and cash flow management.
b.) Determining Scope of Services:
Your business plan should clearly define the products or services your business will offer. This involves assessing the market's needs and your business's capability to fulfill those needs. Understanding your scope of services can help you position your business better in the marketplace and create effective marketing strategies.
c.) Marketing Strategies:
Your business plan should include a comprehensive marketing strategy detailing how you plan to attract and retain customers. This could involve various methods like social media marketing, email marketing, SEO, content marketing, and more. It's important to consider your target audience, competition, and unique selling proposition when devising your marketing strategies.
d.) Estimating the Business’s Expenses, Including Startup Costs:
A significant part of your business plan should be dedicated to projecting your business's financial health. This includes an estimate of all your initial business expenses (like equipment costs, licensing fees, etc.) as well as ongoing operational costs. Accurate estimations can help you identify required financing, manage funds effectively, and determine profitability.
e.) Projecting Revenue / Profitability:
Revenue projection is a critical part of your business plan. It's an estimate of how much money your business will generate in a specific period. Coupled with your expense estimates, revenue projections will help you calculate your business's potential profitability and inform investment decisions.
f.) Reviewing Insurance Needs:
Insurance is a key risk management strategy that safeguards your business from unforeseen financial risks. Your business plan should take into account the types of insurance coverage needed, such as general liability insurance, workers' compensation insurance, property insurance, etc. An adequate insurance plan can protect your business assets, shield you from liabilities, and ensure business continuity in case of major mishaps or accidents.
The process of drafting a comprehensive business plan not only helps you consider and plan for various aspects of running a business, but it also helps you communicate your vision and strategies to potential investors, partners, and employees.
12.) Common Legal Misconceptions When Starting a Business in Michigan
a.) "I Don't Need to Formally Register My Business":
Even small businesses need to be registered to ensure they are recognized as a legal entity, protect personal assets, establish credibility, and fulfill tax obligations. Some, like sole proprietorships, don't require formal registration with the state but may need local permits and licenses.
b.) "Incorporating Automatically Protects Personal Assets":
While forming a corporation or LLC can provide protection from personal liability, this is not absolute. There can be situations, such as in cases of fraud or if the business doesn't adhere to certain formalities, where owners can be held personally responsible.
c.) "All Business Structures are Essentially the Same":
The type of business structure chosen has significant implications on how a company is taxed, its ability to raise funds, the level of paperwork it requires, and the personal liability of the owners. It's crucial to understand the differences and choose the structure that best fits the needs of the business.
d.) "Operating as a Partnership Doesn't Require a Written Agreement":
While Michigan law doesn't require a written agreement to form a partnership, operating without one can lead to confusion and disputes over roles, responsibilities, profit sharing, and more. A written agreement provides clarity and protection for all partners.
e.) "I Don't Need Licenses or Permits":
Almost all businesses will require some form of license or permit. The requirements vary depending on the type of business and its location. Not obtaining the necessary licenses or permits can result in penalties and even closure of the business.
f.) "I Can Use Any Name for My Business":
Before selecting a name, it's crucial to conduct a search to ensure it's not already in use and to avoid infringing on another business's trademark. Once a name is chosen, it needs to be registered with the appropriate state entity.
g.) "My Personal Assets Are Protected in an LLC or LLP":
While forming an LLC or LLP can protect personal assets from business liabilities, it's not a universal shield. Personal guarantees for business loans, misuse of funds, or failure to maintain the separation between business and personal finances can still leave personal assets at risk.
h.) "Employee Agreements Aren't Necessary":
It's advisable to have written agreements with employees, including contracts, non-disclosure agreements, or non-compete clauses. These documents protect both the business and the employee, clarifying expectations, responsibilities, and any conditions of employment.
i.) "All My Intellectual Property is Automatically Protected":
Businesses need to take active steps to protect their intellectual property, including applying for patents, registering trademarks, and copyrighting original works. Failure to do so can leave valuable assets vulnerable to infringement.
Remember, when it comes to legal matters, it's always best to consult with an experienced attorney to ensure your business is compliant with all local, state, and federal laws and regulations.
13.) Hypothetical Scenarios
a.) Non-Compete Disputes in Detroit:
Consider you've established a tech startup in Detroit. You hire a skilled software developer and have them sign a non-compete agreement. This employee later leaves your company and starts a similar venture in the same city. If you've not adequately defined the terms and conditions of the non-compete agreement, you could face challenges enforcing it, leading to the potential loss of proprietary information and competition from your former employee.
b.) LLC Formation Issues in Grand Rapids:
You're starting an event management firm in Grand Rapids and decide to form an LLC for the business. If you incorrectly fill out the formation documents or fail to file them with LARA, your LLC might not be legally recognized. This could expose you to personal liability for business debts and legal claims, which the LLC structure is designed to protect against.
c.) Zoning Disputes in Warren:
Suppose you're launching a food truck business in Warren. If you neglect to check local zoning laws and permit requirements, you may set up shop in an area where food trucks are not permitted. This could result in fines, and potentially, closure of your business.
d.) Trademark Infringement in Sterling Heights:
Imagine you've created a unique brand name and logo for your craft brewery in Sterling Heights. However, you didn't perform a thorough trademark search or register your trademark. Another company, holding a similar trademark, could accuse you of infringement, leading to costly litigation and potential rebranding.
e.) Employment Law Violations in Ann Arbor:
Your Ann Arbor-based design agency employs several independent contractors. If you inadvertently treat these contractors as traditional employees, you may violate Michigan's employment laws, resulting in hefty penalties and potential lawsuits.
f.) Lease Agreement Issues in Lansing:
You're starting a fitness center in Lansing and lease a commercial property without fully understanding the terms of the lease. A misunderstanding over the responsibility for property maintenance could lead to unexpected costs or potential eviction.
These scenarios emphasize the importance of considering all legal aspects when starting a business in Michigan. Consulting with a seasoned business attorney to avoid these pitfalls can save your business significant time, money, and stress.
CONCLUSION
The considerations outlined above form a critical foundation for successful business operations but do not encompass all possibilities. Every start-up is unique, featuring its own blend of needs, challenges, and opportunities. By involving an experienced business attorney at the early stages of your business venture, you can minimize the risk of unforeseen legal obstacles cropping up later in your journey, potentially derailing your progress.
At Dawisha Law, PLLC, we pride ourselves on our comprehensive understanding and practical application of business formation matters. We guide our clients through every step of the business formation process, providing clear, concise advice to ensure they have the legal knowledge they need to effectively operate and grow their businesses. Our focus is on ensuring your legal foundation is secure, allowing you to concentrate on your business's growth and success.
If you require legal assistance with forming your business, we invite you to contact us today. Our team is prepared to help you navigate the complexities of business formation, providing personalized guidance tailored to your specific needs. With Dawisha Law, PLLC, you're not just getting legal support; you're gaining a partner dedicated to helping you achieve your business goals. Let us help you pave the way to a successful, legally sound business. Reach out today and let's start building your future together.
DeLone Dawisha
Principal and Founder
Dawisha Law, PLLC
248-904-5123