Thinking of starting a business in Michigan? Thanks to its fabled automotive industry, technology and innovation are some of its strong points. The Wolverine State also has one of the lowest costs of living in the nation. Here’s what you should know, including business licenses and tax requirements, to launch a business.
Many financial advisors specialize in helping business owners with their finances, both personal and business-related.
Make a Business Plan
Planning is the first step to starting a business. To create a business plan, most entrepreneurs begin with an idea for a product or service they will offer. The selection of the offering is typically guided largely by the founder’s skills and passions. Market conditions should also be a consideration.
Although Michigan is the center for the auto industry, when it comes to employment other industries are bigger – and growing. Trade, transportation, utilities, services, health and education all employ more than manufacturing.
Marketing is the next key question, and Michigan has special characteristics to consider. The population of nearly 10 million consumers is about 79% white, according to the U.S. Census Bureau. And fewer than 1 in 20 are foreign-born. That’s about one-third the rate of the nation as a whole.
The automotive industry represents a significant marketing opportunity for a wide range of products and services. Michigan produces more cars – 2 million a year – than any other state. And there are more than 1,600 automotive-related manufacturing establishments in the state.
Choose a Business Structure
Every business has to be organized in one of the common business entity structures. Choosing a structure needs to be done early and with care. Long-term, this can affect the owner’s level of risk and the business’s ability to grow.
- Sole proprietorship: The simplest and most common business form does not distinguish between the owner and the business. Sole proprietors are exposed to liability from their business operations. However, they don’t have to register with the state.
- Partnership: When two or more people create a business for profit, they form a partnership. General partners also lack liability protection but are not required to register in Michigan.
- Corporations: Corporations are legal entities separate from their owners and offer significant liability protection but at the cost of more documentation and regulatory filings. There are two types of corporations, C corporations and S corporations. The latter type lets a company pass all profits directly to the owner(s), who therefore avoid double taxation. Corporations must register with the state.
- Limited liability company (LLC): These also protect owners from liability and must register with the state. Filing requirements are less burdensome than for corporations.
- Limited partnership: These have two kinds of partners – general and limited – and offer some protection from liability to limited partners. Limited partnerships have to register with the state.
- Limited liability partnership: To protect general partners from liability, a partnership can be registered as a limited liability partnership. The registration has to be redone annually.
Michigan businesses can register through the Corporations Division of the Department of Licensing and Regulatory Affairs.
Register the Business Name
A sole proprietor business operating under anything but the owner’s first and last name must register an assumed name with the county clerk. Other types of businesses register names with the Department of Licensing and Regulatory Affairs when registering the business entity. No two businesses using the same form of entity can have the same name.
Entrepreneurs can check name availability with the state’s online business entity search tool. Or they can call the Department of Licensing and Regulatory Affairs at 517-241-6470.
Get Tax Permits
Michigan businesses need to register for tax purposes with the state and federal taxing authorities.
To get a federal Employer Identification Number, businesses can apply with the Internal Revenue Service. The EIN let employers withhold taxes on worker wages and salaries and file the business’s federal tax return.
Before hiring employees, businesses need an Unemployment Insurance Account. This is handled by the Department of Licensing and Regulatory Affairs and allows the business to file quarterly tax reports.
How Michigan Taxes Businesses
Michigan imposes a corporate income tax of 6% on corporations that are taxed as C corporations by the IRS. Sole proprietors, S corporations and other entities federally taxed as flow-through entities are not covered by Michigan’s corporate income tax.
Small businesses may be subject to an alternate tax rate of 1.8%. Businesses with less than $350,000 in receipts are not required to file or pay corporate income tax.
There are no city, county or other local sales taxes. The state sales tax is set at 6% and is required of retailers but not wholesalers. Contractors are liable for sales taxes on inventory and the value of materials affixed to the property. Service providers must pay sales tax for any tangible personal property that goes to a customer along with the service.
Acupuncturists, clothing manufacturers and auto body repair shops are some of the businesses that require licenses to operate in Michigan. Billiard halls, janitorial services and lawn mowing services do not.
To find out whether a business type needs a permit or license to operate in Michigan, use that state’s online license search tool. It also describes which of the state agencies administers the relevant permits and how to contact them.
The Bottom Line
Michigan’s long history as a center for the automotive industry underpins strengths in innovation and technology. The state’s low cost of living makes starting a business inexpensively. However, its public schools are not ranked well so if you have certain personal circumstances you may want to consider another state.
Tips on Starting a Small Business
- Many financial advisors specialize in helping small business owners with their financial plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Some parts of starting a small business are the same no matter where you plan to operate. Here are some of the basic requirements for beginning a new enterprise.
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