Michigan Business Formation Attorney
Forming a proper business legal structure is the first critical step in a successful business venture. This step is important to tackle first because the moment any business activity occurs, there is potential for business owners to be exposed to debts and liabilities associated with that business. However choosing the right business legal entity structure and going through the process of formally registering a company will help avoid this and limit exposure to personal liability associated with business activities.
Although you technically can register a business yourself, it’s recommended to consult with a business lawyer who’s licensed in your state to ensure the registration is correctly done to avoid potential liability or other legal issues.
Benefits of Legal Business Entities
There are several specific benefits of formally registering a business, which include reducing liabilities, tax benefits and also improving the reputation of the business by becoming legally legitimate. When a company is created as a separate entity this creates a legal distinction between the individual owners and the business itself, shielding them from most liabilities that may arise from debts and other issues with the business.
Something many business owners don’t consider right away are the tax benefits of creating a legal entity for their business. This can save owners money not only in terms of traditional income tax burdens but also in certain types of tax write-offs, credits and grants for certain types of businesses and business activities. On top of this, having a proper legal structure for a business increases its legitimacy to outside parties, improving the reputation for the business with customers, vendors, investors and other third parties.
In order for businesses to create a legal entity, they must first decide on the type of entity that best suits their needs. After this is decided, they must then file the appropriate legal documents, pay the appropriate filing fees and meet any publicity requirements that may be required for their particular situation. The exact requirements vary depending on the type of business formation chosen.
Types of Entities
There are several common types of legal structures for businesses. The type chosen depends on several factors, such as the business type, number of owners, annual revenue and also whether or not outside investors are involved. Generally speaking, most businesses fall into one of the following types.
C Corporation (C Corp) – This is the most common type of legal business entity for larger companies who have investors or shareholders as owners of the business. This is due to the formal separation of owners from the corporation, meaning that they are not personally liable for any debts or liabilities that may be incurred by the corporation. It is because of this that C Corps are strongly preferred when outside investors are part of the business plan.
S Corporation (S Corp) – Similar to a C Corp in that it separates shareholders from the liabilities incurred by the corporation, S Corps allow for special tax status with the IRS. Instead of taxes being levied on both the corporation and the shareholders when they draw profits, it provides pass-through taxation which only taxes profits when they are distributed to shareholders. It should be noted that this tax status places significant limitations on who can be a shareholder as well as the number of shareholders and even the type of stock classes that can be offered.
Limited Liability Company (LLC) – The most popular type of structure for smaller companies and those who are owned by single owners. These combine the limited liability protections of a corporation with excellent tax efficiency and great operational flexibility. However, these benefits come with limitations as well. Specifically, LLCs have greater tax and accounting complexity which makes them largely unattractive to outside investors and place limitations on capital structure.