In the previous post, we discussed two entities that are available to Michigan businesses. In this post we discuss the final three entity types - corporations, limited liability corporation, and non-profit corporation:
- Corporation: A corporation is a legal entity that exists separately from its owners. As a result, shareholders (owners) are not personally responsible for the debts of the business. The articles of incorporation must be drafted to comprise the fundamental provisions defining the corporation. These articles must then be filed with LARA and signed by each incorporator along with the appropriate filing fee. Additionally, a board of directors must be elected to lead the corporation, and they are responsible to the shareholder. The board of directors can draft and amend bylaws to create policies and rules for the corporation.
- S-Corporation: Generally, corporations are categorized as “C” corporations. However, after creation of a “C” corporation, you may file an election with the IRS to be treated as a subchapter “S” corporation for tax purposes. An “S” corporation does not have to pay taxes on the earnings of the business but instead the income is passed through to the individual shareholders and reported on their income tax returns. This eliminates the corporate double taxation. An LLC may elect for this type of tax treatment, too. You should consult with a business attorney or CPA prior to obtaining this corporate designation.
- Limited Liability Corporation: An LLC is a type of business that offers a common ground between partnerships and corporations. This entity is an unincorporated association having one or more members. Ownership is represented by membership. The articles of organization comprise the fundamental provisions defining the LLC. LLCs can be managed by managers, rather than members, to separate ownership and management. A manager or managing-member of the company must create, sign, and file a report on or before each anniversary date of registration to LARA. The LLC must be registered with LARA.
- Non-Profit Corporation: Non-profit corporations tend to be religious, charitable, or educational in nature. Its purpose of not to make a profit, but it is permitted to do so if the profits are left within the corporation. Creating a non-profit is similar to creating a corporation: articles of incorporation must be drafted and filed with LARA and a board of directors must be appointed to draft and amend bylaws. Additionally, a non-profit must complete and file an IRS Form 1023 with the IRS to obtain federal tax-exempt status [501(c)(3)]. This long and detailed form asks for lots of information about your organization, including its history, finances, organizational structure, governance policies, operations, activities, and more. Once you have your federal tax exemption, you need to obtain your Michigan state tax exemption.
- Low-Profit Limited Liability Company (L3C): An L3C is a hybrid of a for-profit corporation and non-profit corporation, and has characteristics of each. As with a non-profit, an L3C must be formed in furtherance of some charitable or educational purpose. However, as with a for-profit entity, an L3C may have equity owners who have the right to receive distributions of profits and appreciation in the value of the business entity. Since this entity type is relatively new and requires some strict compliance with Michigan law and the IRS, it would be wise to obtain legal assistance to guide you through this process.