Every business owner needs to incorporate. Forget about sole proprietorships or a partnership — running your business without formally organizing is like driving without insurance: You will be OK so long as you don’t get into an accident. But when someone rear-ends you, you will be in dire financial straits regardless of who caused the wreck.
Incorporation is “insurance” that will protect your personal assets (your house, car, bank accounts, 401k) from financial risks associated with running a business. The rule is that creditors and plaintiffs cannot come after your personal assets to satisfy a business debt or liability. There are of course exceptions to this rule, called “piercing the corporate veil.” But many business owners ask: Should I register as a corporation? Non-profit? LLC? PLLC?
As with all of legal questions, the answer is “it depends on the facts.” Your attorney and accountant will help you decide what works best in your particular situation. However, here is a basic overview of the four most common entity types in Michigan:
- For-Profit Corporation – The Michigan Business Corporation Act sets out the rules for corporate formation and the default provisions for corporate governance. Usually, an attorney setting up the corporation will draft two documents: (A) Articles of Incorporation, which is the basic form filed with the State of Michigan creating the corporation and (B) the Corporate Bylaws, which is an internal corporate document that sets out the corporation’s management, number of shares, stockholders, Board of Directors governance, and various other provisions. There are also various sub-classes of corporations that differ for tax purposes–for example an “S-Corp,” but you will need to consult with your accountant to determine eligibility. Corporations have been around for a long time and are generally a good choice for business owners seeking to set up a tried-but-true business structure – one that is supported by decades of case law and statutory gap-filler provisions. But again, whether a corporation is the right choice is a decision to be made only with the assistance of your legal and financial advisers
- Non-Profit Corporation – Michigan also has a Michigan Nonprofit Corporation Act that governs the creation of non-profit entities. Non-profit status should not be confused with “tax-exempt”–whether an entity is considered “non-profit” is a matter of Michigan law, while it is the federal government and the IRS that determine “tax-exempt” status. Consult with your accountant on all tax related matters! Generally, if your intent is to create a corporate entity for charitable or other non-commercial purposes, the non-profit corporation may be the best way to maximize the relevant tax advantages. From a legal standpoint, a non-profit is created in the same manner as a for-profit corporation, with certain exceptions–for example, a charity must be registered with the Michigan Attorney General. And again, if you seek tax-exempt status, you must file the appropriate paperwork with the IRS.
- Limited Liability Company – This is a relatively new type of entity created through the Michigan Limited Liability Company Act in 1994. An LLC is the preferred corporate form for many small businesses due to its simplicity and modern approach to pass-through taxation. Indeed, a single-member LLC enjoys the same single taxation as a sole proprietorship, as well as the protection of the corporate form without some of the extraneous formalities of a corporation. While simple, an LLC must still file Articles of Incorporation with the State of Michigan and draft an Operating Agreement that sets forth the rules on how the LLC is run. Even when running an LLC, it is critical to observe the corporate forms to maintain limited liability and avoid the dreaded “piercing of the corporate veil.”
- Professional Corporations and PLLCs – Michigan Law requires certain professionals (such as physicians, dentists, lawyers, and certified public accountants) to incorporate as professional entities. Generally, a professional corporation is similar to a regular for-profit corporation and a PLLC is similar to a regular LLC. The most important distinction for a professional corporation or PLLC is that the professional remains personally liable for their own misconduct or negligence. However, the other members of a PC or PLLC remain protected from liability for the misdeeds of a single member. Thus, while professional incorporation as a solo practitioner is not a given, multiple-member entities should definitely consider the advantages of statutory liability protection.
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