Business Planning

Establishing a new business

There are many factors to consider when deciding to start a new business, the first of which is the type of legal entity to form. The most common legal entities are Sole Proprietorships, Partnerships, Limited Liability Companies (LLCs), and Corporations. Generally, the process of forming a new legal entity involves deciding on a name, filing or registering the entity with the appropriate authorities, obtaining an Employer Identification Number , signing an agreement, opening a business account, and creating a record book of legal documents and information about the business.

Sole Proprietorships

Formation

A Sole Proprietorship is not formed as a separate entity, but is rather a business run by an individual for their benefit. A DBA can be filed with your county.

Liability

A Sole Proprietor assumes all of the risk of operating their business. Any liability of the business is a personal liability of the Sole Proprietor.

Operation

While a Sole Proprietorship is not a separate entity from the business owner, the financial activities of the business should be maintained separately.

Taxation

All income and deductible business expenses of a Sole Proprietorship are reported on Schedule C of the Sole Proprietor’s individual tax return.

Partnerships

Formation

A Partnership is an agreement that can be formed verbally or in writing, between two or more people, who intend to do business together for profit.

Liability

Partners are generally personally liable for all debts of the Partnership. However, a Partner in a Limited Partnership may limit their liability to their original investment.

Operation

A Partnership can be any type of business where the Partners contribute their money, property, labor, or skill, and share in the profits and losses.

Taxation

All income and deductible business expenses of a Partnership are reported on Form 1065. However, the income tax liability passes to the Partners.

Limited Liability Companies

Formation

An LLC is formed by filing Articles of Organization with the Corporations Division of the Michigan Department of Licensing and Regulatory Affairs and establishing an Operating Agreement.

Liability

The liability of the Members is similar to that of Partners in a Limited Partnership. Also, an LLC may have just one Member, similar to a Sole Proprietorship, but with the benefits of limiting liability.

Operation

An LLC offers greater flexibility in its structure and operation similar to a Partnership, but has the potential for a more comprehensive Operating Agreement similar to a Corporation’s ByLaws.

Taxation

All income and deductible business expenses of an LLC are reported on Schedule C of the Member’s individual tax return based on their individual percentage of ownership interest in the LLC.

Corporations

Formation

A Corporation is formed by filing Articles of Incorporation with the Corporations Division of the Michigan Department of Licensing and Regulatory Affairs, establishing ByLaws, and obtaining an EIN.

Liability

The liability of a Shareholder is similar to that of Limited Partners in that it is limited to their original investment. The liability of Officers and Directors is subject to the Business Judgment Rule.

Operation

A Corporation is subject to a higher degree of regulation and involves a complex organization of Shareholders, Officers, and Directors. A Corporation’s perpetual nature does provide for easier longevity.

Taxation

Unless a subchapter S election is made, Corporations are subject to double taxation: first on the profits to the Corporation and then again on the dividends/capital gains to the Shareholders.

Business Planning

Disclaimer

P.O. Box 9, Dimondale, MI 48821
Phone: (517) 708-2222

Business Planning

Disclaimer

P.O. Box 9, Dimondale, MI 48821 Phone: (517) 708-2222

P.O. Box 9, Dimondale, MI 48821
Phone: (517) 708-2222