For novice business owners, choosing a business structure typically comes down to answering four questions:
- How many people will own the business?
- How much personal liability protection will be needed?
- How do you want your business to be taxed?
- Would your business benefit from being able to sell stock?
A CPA can assist you in deciding which entity is best for taxes. Once an entity is decided, take that information and find a business lawyer (e.g. A|Squared Legal Group). There are six common types of legal business structures in Michigan, each with their own advantages and disadvantages. The following explanations are not exhaustive, but should provide a general idea of two of the four major structures – sole proprietorship and partnership. We will detail the other two, limited liability corporation (“LLC”) and corporation, in a subsequent post.
- Sole Proprietorship: This is considered the simplest form of business entity. A sole proprietorship is an individual who owns a business enterprise that is not a distinct entity separate from the owner. This means that as a sole proprietor you will have unlimited responsibilities for the liabilities and debts of the business. If you want to use any name other than the owner’s real name, you will need to complete a DBA (“doing business as”) form, have it notarized, and filed with the county clerk of the county in which your business is located.
- Partnership: A partnership is created by a contract between two or more persons to combine their efforts or resources to form a business. It is highly recommended that a contract is created which specifies the proportions of ownership, work, and other variables. The partners collaborate at mutual risk for their common profit or commercial benefit. This means that although profits are shared equally, each partner is 100% responsible for any debts of the business.
- General Partnership: This type of partnership is similar to a sole proprietorship because it is easy to maintain and setup. The exception is that it has two or more owners. There is no paperwork to file unless you are operating the business under a name different from the personal names of the owners, in which case you only need to file a DBA.
- Limited Partnership: This type of partnership has one or more general partners and one or more limited partners. The general partner(s) control and operate the business and are 100% liable for any business debts. The limited partner(s) do not participate in the operation of the business and their personal liability is limited to their contribution to the partnership – a limited partner is typically an investor. To form a limited partnership in Michigan, you must file a “Certificate of Limited Partnership” with LARA. If a limited partnership does not meet statutory requirements it will be treated as a general partnership, so you should consult with an attorney before creating a limited partnership