Many businesses in Michigan operate as a sole proprietorship. This makes sense for many small or part-time businesses. You may have limited capital and you may be the owner-boss-employee all wrapped in one. The danger, even in these types of situations, is that legally you and your business are the same.
When things are going well, this may seem unimportant and changing your business entity to something more complex, such as a limited liability company or a corporation, may seem like an unneeded expenses and a distraction from the important work of running your business.
Should your liabilities suddenly increase, due to an accident, interruption of your business operation or litigation, there is potential that your personal assets could be at risk should your business be sued and your adversary awarded a substantial judgment.
Choosing a corporate form, or a limited liability company (LLC) could reduce your potential liability, but each form additional requirements and can affect your tax liability in different ways.
There are different levels of complexity, cost and ongoing regulatory requirements and it is important to discuss all of this with an attorney to determine which form is best suited for your business.
You want to balance the tax and personal liability with the complexity of maintaining the form. Corporations have yearly reporting requirements and pay taxes on corporate earnings while LLCs can take advantage of pass-through taxation that can reduce your overall tax expense.
If you have partners, an LLC can also be attractive entity choice, as you can write a member agreement that fits your specific needs.
Your attorney can explain the nuances of each form and how they would work with your business operation, allowing you make an informed choice.
