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Although starting a business is exciting, navigating the legal and administrative landscape can be daunting. If you’re an entrepreneur looking to establish a business in Michigan, consider forming a Michigan LLC (limited liability company). Forming an LLC offers liability protection, operational flexibility and simplified taxation.
Let’s take a closer look at how to start an LLC in Michigan, from requirements and steps to federal and state tax considerations.
Requirements for LLC formation in Michigan
It’s important to adhere to specific requirements and procedures to form an LLC in Michigan. These include having an approved LLC name, a resident agent and articles of organization.
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Business name
Your business name must be distinctive, include an appropriate suffix and not use misleading words to be organized as an LLC.
- Distinctive name: The name of your LLC must be unique. Identical names may confuse the public and lead to infringement claims. (For example: If a business called Writer’s Association LLC already exists in Michigan, you can’t name your company The Writer’s Association LLC.)
- Suffix: You must include Limited Liability Company, Limited Company or related abbreviations — L.L.C./LLC or L.C./LC — in your formal business name.
- Unacceptable wording: Your business name can’t include corporation/incorporated — or their abbreviations — or any wording that “indicates or implies that the company is formed for a purpose other than the purpose or purposes permitted by its articles of organization,” according to the Michigan Legislature.
Resident agent
A registered agent, often referred to as a “resident agent” in Michigan, is an entity or individual responsible for receiving essential tax and legal documents on behalf of an LLC. The agent must be a Michigan resident, a Michigan LLC or corporation or a foreign corporation/LLC authorized to conduct business in Michigan.
Your agent also:
- Must be at least 18 years old
- Have a physical address in Michigan (no P.O. boxes or virtual offices)
- Keep regular business hours (9 a.m. to 5 p.m.) at that address
- Be available onsite to accept documents and correspondence
Articles of organization
A formal document that establishes your LLC, Michigan articles of organization must contain the following details:
- The desired name for your LLC
- The intended business purpose
- The physical address of your business
- Information about your resident agent, including their name and address
- The duration of your LLC’s existence, if it’s not intended to be perpetual
Steps to starting an LLC in Michigan
The LLC formation process is similar across the U.S., but there are differences from state to state. To establish an LLC in Michigan you’re required to register with the Michigan Department of Licensing and Regulatory Affairs (LARA).
The following steps can help you get started setting up your Michigan LLC; use the Michigan Small Business Development Center’s Guide to Starting and Operating a Small Business as a comprehensive resource.
Step 1: Choose a name
Naming your business is a crucial decision. Choose a name that not only appeals to your target audience but complies with legal requirements. Michigan’s business entity search tool allows you to search existing business names to make sure yours is distinct.
You can reserve your preferred name online, through the mail or in person for up to six months by submitting an application and paying $25.
The state of Michigan also allows you to use trade or assumed names (if available) by filling out a Certificate of Assumed Name and paying a $25 fee. Trade names are different from legal names and can be better suited for marketing and branding.
Step 2: Appoint a registered agent
After choosing your name, you’ll need to appoint a registered agent for your Michigan LLC. You can serve as your LLC’s registered agent or choose a family member, friend or employee, as long as the above requirements are met. Another business can serve as the registered agent, but an LLC can’t serve as its own agent.
If you value a flexible business schedule or prefer not to disclose your private information, you can hire a resident agent service. Hiring a service typically costs between $100 and $300 per year. These services receive legal documents and official mail for your Michigan LLC, offering convenience, compliance and peace of mind.
Step 3: File articles of organization
Next, you need to file your articles of organization with Michigan’s Department of Licensing and Regulatory Affairs (LARA), which can be done via LARA’s website, through the mail or in person.
The cost for submitting the articles is $50, with additional expedited processing fees ranging from $50 (24 hours) to $1,000 (one hour). You’ll also need to pay $25 every year to keep your LLC active.
Step 4: Draft an operating agreement
While not legally required to form a new LLC in Michigan, it’s highly advisable to create a detailed operating agreement. According to the Small Business Administration, operating agreements help protect LLC members from personal liability and ensure key decisions are in writing. This agreement should outline your business structure, member responsibilities and operations of the LLC.
Your operating agreement should include:
- Profit and loss distribution among members
- A schedule and method for profit sharing
- Protocols for addressing member deaths, sales of interests or retirements
- Procedures for allowing new members to join the LLC
- Voting procedures, including conflict resolution in case of a tie vote
Step 5: Obtain an employer identification number (EIN)
Although not officially part of forming an LLC in Michigan, once your LLC has been set up, you should obtain an employer identification number (EIN). It’s crucial for federal tax and regulatory compliance.
For multimember LLCs and those with employees, having an EIN is obligatory. Single-member LLCs aren’t mandated to acquire one for business operations but can benefit from using an EIN to safeguard privacy and identity. Moreover, this number serves as a fundamental requirement for LLCs opting for corporate tax treatment when filing federal taxes and is often required for opening a business bank account.
The process of obtaining an EIN for your LLC depends on your chosen method. If you’re using an LLC formation service or hiring an attorney, EIN application services are typically provided or guided. Alternatively, if you decide to apply for the EIN independently, you can obtain it instantly on the IRS website.
Understanding federal and state taxes for Michigan LLCs
On the federal level, you’ll need to comply with federal payroll tax requirements, which include withholding federal income tax and Social Security and Medicare taxes from your employees’ wages. As a Michigan LLC owner or member, you’ll pay self-employment taxes (current rate: 15.3%) to cover Social Security and Medicare obligations. And you’ll pay income tax on your net LLC income with your personal tax return.
Michigan LLCs are subject to state taxes as well.
Michigan sales and use tax
Michigan imposes a 6% sales tax on the total price of tangible personal property sold to end consumers, with a 4% tax rate for electricity, gas and home heating fuels used in residential settings. A companion tax to sales tax, known as use tax, also stands at 6%. It applies to items brought into the state or purchased online, by mail or by phone from out-of-state retailers that don’t collect sales or use tax. Certain services like telecommunications and hotel accommodations are also subject to use tax.
If your business conducts taxable sales within Michigan, you’re required to secure a Sales Tax License through the Michigan Department of Treasury, which allows you to gather and submit sales tax on behalf of the state. You can register online with the Michigan Department of Treasury or through the mail.
Michigan franchise tax
Known as the Michigan Business Tax (MBT), the franchise tax in the state of Michigan comprises a 4.95% business income tax and a 0.8% modified gross receipts tax. This tax applies to your business income if you conduct business in Michigan while adhering to federal law limitations. “Business income” encompasses income from your business activities — with some adjustments and deductions — apportioned based on how much business is done in the state.
Starting in the 2010 tax year, Michigan introduced a mandatory e-filing requirement for MBT returns. Developers of tax software must support e-filing, and all eligible MBT returns must be e-filed. Additional details are provided on the Treasury’s website.
Employment taxes in Michigan
Michigan has measures in place to provide financial protection in cases of unemployment and workplace-related issues. If you have employees, you are required to pay unemployment insurance (UI) tax, with new employers facing a 2.7% rate that adjusts based on history (actual benefit charges, payroll size, etc.) after two years.
Additional taxes and fees in Michigan
As the owner of an LLC, you might face other taxes based on your business type. These include:
- Corporate income tax (CIT): The CIT is a 6% tax on C corporations and offers a 1.8% tax rate with the small business alternative credit. This would apply to LLCs that elect to be taxed as a C corp.
- Flow-through entity (FTE) tax: LLCs taxed like S corporations and partnerships may be eligible to pay the FTE, which is generally the same rate as the Michigan individual income tax (4.25%). This allows them to pay taxes at the entity level rather than on their individual tax return, providing the benefit of “a refundable income tax credit and other adjustments that are passed through and ultimately reported on the Michigan income tax returns of certain members,” according to the Michigan Tax & Accounting Professional Association.
- Heavy equipment owners excise tax: Starting in 2023, a 2% tax is imposed directly on customers who rent eligible heavy equipment, collected by the qualified renter and remitted to the Michigan Department of Treasury quarterly, with separate reports for each business location.
Frequently asked questions (FAQs)
Forming an LLC in Michigan offers personal liability protection for owners, flexibility in management and possible tax advantages as taxes are levied on LLC owners’ individual tax returns and not on the business.
Michigan LLCs are generally taxed at the federal level as pass-through entities, meaning the LLC itself doesn’t pay federal income tax (individual members report their respective shares of profits on their personal income tax returns). However, members can opt for C corp tax status, which incurs a flat 21% federal corporate income tax. LLC members must also pay federal self-employment taxes to cover Social Security and Medicare obligations.
Michigan LLCs with employees are obliged to pay taxes to support the state unemployment fund, which finances unemployment benefits and is assessed based on the business’s age and unemployment claims history. Additionally, federal payroll taxes, including income tax, Social Security and Medicare, must be withheld.
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