LLC

How to Start an L.L.C. in Michigan?

Michigan has opportunities from the auto industry, tech hubs, and lumber yards. Irrespective of where your ecosystem falls, there is a chance that the limited liability company (L.L.C.) might be the right choice for you to start your business. L.L.C. is a common business structure in the United States and accounts for more than a third of all businesses nationwide. A major benefit of running an L.L.C. is that it provides limited liability for business owners by shielding them from legal and financial responsibility and many business debts. The owners of an L.L.C. are known as “members”. 

Before choosing an L.L.C., one needs to consider the following:-

1. Are there any personal assets in need of protection? If yes, then a Michigan L.L.C. will allow you to protect those assets from creditors or litigants if the business faces bankruptcy or legal action.
2. Whether you’re looking to limit your tax liability? Except if the L.L.C. elects to be taxed as a C corporation, it enjoys the pass-through status in Michigan. It means that the business is subject to only a single round of taxation. It also means that the L.L.C. may not pay corporate taxes and will be taxed once at the owner’s personal income levels, similar to the tax treatment of a sole-proprietorship or partnership.

Steps to Start an L.L.C. in Michigan

Choose an idea for your L.L.C.

The first step is to figure out if you’re going to sell a product, a service, or a variety of products and services. One also has to figure out the positioning of the L.L.C. in the Michigan business landscape. You also have to decide on the following:-

1. Who will be your customer? Unless you know your target customer, the picture of Michigan L.L.C.’s idea isn’t complete. One has to perform a competitive analysis of other businesses in your market, analyze marketplaces with similar products or services, hold surveys for prospective customers, and or research industry trends.
2. What is supposed to be the projected profitability? If one has an idea to form an L.L.C., it should be potentially profitable to be worth the investment, both financially and time-wise. This could mean looking at the way products or services are packaged or offered to customers and determining an effective business model for your L.L.C.

Name your Michigan L.L.C.

After deciding to start an L.L.C. in Michigan, there comes another crucial decision, i.e., what will be the name of the company? A good name is essential for building brand recognition and in communicating the business objectives in a memorable way. The name must align with the business’s mission. There are specific rules for naming an L.L.C. in Michigan; they are:

1. The term “limited liability company”, L.L.C. or L.L.C., must be a part of the name of the company.
2. The L.L.C.’s name must be unique and not shared with any other Michigan business. One must conduct a search with the Michigan Department of Licensing and Regulatory Affairs to check if the name of the L.L.C. chosen is available or not.
3. An L.L.C.’s name cannot contain the words “corporation” or “incorporated” or its abbreviations.
4. Use of any other word is strictly restricted by Michigan L.L.C. The Michigan Secretary of State’s office maintains a list of such words.

Create a Business Plan

A business plan includes a company’s name and a brief description of what it sells. It also includes a thorough market analysis outlining the managerial and broader organizational structure, a description of products and services one plans to market, a customer segmentation report identifying target customers, marketing, operations, logistics, and financial plans.

Get a federal employer identification number (E.I.N.)

An E.I.N. or a federal tax I.D. is a nine-digit assigned to businesses by the I.R.S. for tax purposes. An E.I.N. is necessary if your Michigan L.L.C. has more than one member. Further, you also need an E.I.N. if you choose to hire employees or elect to have your L.L.C. taxed as a corporation instead of a pass-through entity. An E.I.N. can be obtained online through the I.R.S. website.

Obtain your Michigan Certificate of Formation

One has to file formation documents, and once they are approved, the state of Michigan will issue a Certificate of Formation. Other than the articles of organization, the formation documents include the name of the L.L.C., the name and address of the registered agent, a general statement explaining the reason to establish your L.L.C., the term for which one expects the L.L.C. to exist, and a signature of the incorporator. On filing these documents, the Michigan Secretary of State will review and approve to register your business.

Choose a registered agent in Michigan

A registered agent is mandatory to be appointed in Michigan. A person or organization that accepts legal documents and other official documents on behalf of an L.L.C. is called a registered agent. A registered agent can be an employee or member of the L.L.C. or a company offering registered agent services. A registered agent must be at least 18 years old and have an address in Michigan. The agent must be on-site at the place of business and available to accept documents during regular business hours.

Obtain business licenses and permits

Various business licenses and permits are required to run a Michigan L.L.C. lawfully. The state has maintained a database for searchable business types, which lists the required and potential licenses for emerging businesses. A retail business requires a sales tax license to run an L.L.C.

Understand Michigan tax requirements

A Michigan L.L.C. is subject to both federal and state taxation. The estimated federal taxes may be collected by the IRS on a quarterly basis. The taxes are calculated based on the earnings to date. Based on the nature of the Michigan L.L.C., you are required to register for some state taxes. Other taxes an L.L.C. owner must be aware of include:

• Personal Income Taxes: Irrespective of how the L.L.C. is formed, whether as a pass-through tax entity or as a C Corporation, taxes on income earned through the L.L.C. will be paid at the personal level.  

• Corporate Taxes: If the L.L.C. is formed as a C corporation, then the L.L.C. will pay taxes on all profits generated before it is distributed to ownership. It will be taxed again at the shareholder’s personal income level. The corporate tax rate in Michigan is 6% of the taxable income.

• Employee withholding tax: Employee withholding tax is a tax on behalf of the workers through the Michigan Department of Treasury and is deducted from the employee’s paycheck.

• Michigan Business Tax: It is a business tax that imposes a 4.95% income tax and a modified gross receipts tax of 0.8% on certain businesses such as L.L.C.s. However, businesses engaged in insurance, banks, and lending institutions are exempt from this tax but pay their own set of state taxes.

Prepare an operating agreement

An operating agreement is a legal document stating how a Michigan L.L.C. will conduct business. It provides directions for internal operations and accountability. It covers the following:-

1. Name of the L.L.C. and its primary address
2. Business purpose and mission statement
3. Duration of the L.L.C.
4. Information about the L.L.C.’s registered agent
5. Information about the articles of organization
6. Organizational chart, listing members and their respective investments in the L.L.C.
7. Overall management plan for the L.L.C.
8. Manner to accept new members and offboard outgoing ones
9. Process in which the profits and losses will be distributed among the members
10. Various indemnification and liability provisions.

Examine business insurance options in Michigan

In addition to the personal asset protection of the L.L.C., one may still want to insure the business products and other unprotected assets. A list of the types of insurance a Michigan business may need is maintained by the federal Small Business Administration. Some insurance options available for newly formed L.L.C.s in Michigan are:

1. Liability Insurance
2. Commercial Property Insurance
3. Professional Liability Insurance
4. Cyber liability insurance
5. Umbrella Insurance

Understanding financial considerations

To properly launch an L.L.C. in Michigan, you will have to make some essential purchases that could include rent towards a brick-and-mortar retail space, ad placements, business equipment, a professionally designed website, or software.

Market your LLC

A marketing plan for your L.L.C. in Michigan includes conducting market research to understand the target customers, advertising and promotion, investing in social media, developing relationships with media outlets and retaining customers by building genuine relationships.

Wrap Up

In this blog, we have seen the requirements to start an L.L.C. in Michigan. From choosing a name for the L.L.C. to obtaining an employer identification number, all are simple steps that must be followed to ensure that your L.L.C. in Michigan is legally compliant.

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