In 2020, Michigan had the 9th most new businesses that started, with 261,618 new businesses opening their doors. Michigan also ranks high in regards to its business tax climate, coming it at #14 on the Tax Foundation’s State Business Tax Climate Index. With these in mind, Michigan is a great place to start a business. In this guide we’ll go over the 12 key steps to starting a business in Michigan.
- Research and Plan your Business
- Choose a Business Structure
- Choose your Business Name
- Register your Business
- Get an EIN
- Complete Michigan State Tax Registrations
- Apply for Michigan Business Licenses and Permits
- Open a Business Bank Account
- Set Up Credit Card Processing
- Establish an Accounting System
- Get Business Insurance
- Hire Employees and Set Up Payroll
|Doing Business in Michigan
Key Business Stats
|Michigan New Business Formation|
|New Business Formation Rank||9|
|Businesses Formed in 2020||261,618
(38.64% vs 2019)
|New Business Formation Per Capita Rank||17|
|New Businesses Formed Per 1,000 Population 2020||26.2|
|Business Formation Statistics generated using data from US Census Bureau|
|Cost of Doing Business in Michigan|
|LLC Formation Cost||$50|
|Corporation Formation Cost||$60 minimum|
1. Research and Plan your Business
Before forming your business, it is best to conduct some preliminary research into your business idea and develop a business plan. Market research clarifies your target market, competitors, and unique selling point (USP).
Once complete, you should use the information you’ve collected to draft a business plan. Creating a business plan is a crucial step, so you’ll want to fight the urge to skip it. You may want to get into the action and feel that you already have a reasonably good idea about what to do. It’s best to temper these desires because a good business plan will be your support system throughout the process. If you succeed, you’ll know exactly how to pursue growth. Researchers at Harvard Business Review concluded that a business with a clear and written business plan was 16% more likely to succeed than a business without a plan.
It is important to note that your plan doesn’t need to be a huge undertaking. Even a business plan on as little as three pages can provide a good springboard. Your business plan will provide a general framework by which the business will move forward and provide answers to key questions, such as:
- The USP – what differentiates you from the competition?
- The target market – who is interested in your offering
- The revenue driver – what will drive your income?
- The marketing strategy – how do you get the word out there?
- How will you promote your business
- The ingredients – what do you need to get off the ground?
Recommended: How to Write a Successful Business Plan
2. Choose a Business Structure
The next step is choosing a legal structure for your business. You should consider what kind of personal liability risk you’re comfortable with, what sort of tax status you seek, and what your source of capital is going to be. These are the four most typical kinds of business structures:
Limited Liability Company (LLC)
LLCs are the most common formal business structure. An LLCs main appeal is that owners are recognized as separate from the business entity. Because of this distinction, LLCs provide limited liability protection for their owners. If the LLC faces a lawsuit or cannot cover financial obligations, limited liability protection prevents creditors from pursuing the owner’s personal assets. Another advantage is that they receive pass-through taxation by default and even have the flexibility to choose C-Corporation and S-Corporation taxation.
A Corporation is also considered a separate legal entity from its owners. Its owners are referred to as shareholders and are issued stock in the Corporation, proportional to their ownership interest. Corporations enjoy a great deal of liability protection, but they are subject to higher taxes than other business structures. Under the typical C-Corporation tax status, Corporations are subject to “double-taxation”. This is because a Corporation must first pay tax on their profits at the corporate tax rate, after which they can distribute earnings to shareholders who in turn will also pay taxes.
The simplest business structure for a single-owner business in Michigan is a Sole proprietorship. No formal registration or paperwork is required outside of necessary business licenses and permits. It is important to note that while cheap to start, sole proprietorships do not offer liability protection. That means that in the event of accumulated business debts or lawsuits, creditors can make a legal claim over the owner’s assets to cover the losses.
For businesses that have two or more people in ownership positions, a general partnership is the simplest structure. Much like LLCs, they too enjoy the benefits of pass-through taxation. This means they do not pay taxes directly; rather, they pass on the profits (or losses) over to the owners, who then pay taxes on their return. As with a sole proprietorship, general partnerships are also recognized as an informal legal structure. As such, the business is not considered separate from the owners in the eyes of the law. As a consequence, members of the partnership have unlimited personal liability for their actions.
If you’re looking for even more help differentiating between these structures, access our detailed guide.
3. Choose your Business Name
Now that you’re well-informed on the legal structures, it is time to turn our attention to the next step. Your business will need a great name. As with the first step, you may feel the need to just go with whatever comes to mind, thinking that it’s the product or service that matters most. Although ultimately, your service or product has to be good, the name is what gets you through the door. The choice of name can have considerable weight over the outcome of the business. This is because it is a key cog in the marketing machine, something you’ll need to utilize once your business is established. So, it is best to spend some time choosing a good name. If you feel like you’re lacking in the creativity department and can’t seem to come up with any good names, it might help to remember the three crucial ingredients of a great business name:
- Creates an Identity
- Memorable and Easy to Recall
- Easy to Search and Find
For a detailed deep dive into creating a great business name, check out our guide, how to come up with a business name.
4. Register your Business
Following the choice of business structure and name, you must now turn your attention to getting your business in Michigan officially registered. The procedure for this varies based on the business structure, so let’s go over each briefly.
Form an LLC in Michigan
Michigan LLCs are formed by filing a document known as Articles of Organization with the State of Michigan Department of Licensing and Regulatory Affairs. The filing fee to so in Michigan is $50.
Before doing so, you must determine if the name you have chosen is not already in use. You can do this by completing a Michigan business name availability search. Once verified, you can file the Articles of Organization. The filing must include the LLC’s legal name, the owner(s) contact information, address, and a designated Michigan registered agent. While not legally required, you will also want to create an operating agreement to establish the basic rules of how your LLC will function, list ownership percentages, and detail voting rights.
For a step-by-step guide, check out How to Start an LLC in Michigan, where we go over all the information required to complete your Articles of Organization filing correctly.
Form a Corporation in Michigan
To form a Corporation in Michigan, you must file the Articles of Incorporation with the State of Michigan Department of Licensing and Regulatory Affairs. The filing charges should amount to $60. Additionally, you will need to appoint a registered agent who will be able to collect service of process documents. Designing the bylaws and internal rules for operations is a key way that you can make sure your organization is set up for success.
For more information on the incorporation process, see our detailed guide, How to Form a Corporation in Michigan.
Register a Sole Proprietorship in Michigan
At the state level, no formal filings are necessary to register a sole proprietorship. Sole proprietorship owners are required to include their name in the business name. If you wish to carry out your business under a name different from the legal name, you will have to register for a Michigan Assumed Name.
If you’re looking for more detailed information, check out our guide, How to Start a Sole Proprietorship in Michigan.
Register a Partnership in Michigan
Similar to sole proprietorships, general partnerships do not require the filing of any official documents to be set up. Also, they must apply for a Michigan assumed name if they plan on doing business under a name that does not include the partners’ names. It is also recommended that the partners create a partnership agreement as it settles many arguments before they arise and outlines a few technicalities such as power distribution and the decision-making process.
For a more information, see How to Start a Partnership in Michigan for a step-by-step guide to starting a general partnership in Michigan.
5. Get an EIN
An EIN is an acronym that stands for Employer Identification Number. It is issued by the IRS for the purpose of filing taxes and employment. If you run a business that is organized in the form of a Corporation, Partnership, or multi-member LLC (two or more owners), you must obtain an EIN. Even if your business is not required to do so, you should look into getting an EIN as it is useful for numerous business filings.
The IRS has created an Online EIN Assistant where you can apply directly for an EIN free of charge.
6. Complete Michigan State Tax Registrations
Michigan law requires you to complete certain tax registrations at the state level. The variety and number of registrations that you will need to complete will depend upon how your business is classified. Most businesses typically require registration for the Michigan sales tax and employer tax.
- If you offer tangible items for sale, you are most likely required to register for the Michigan sales tax. If your tax presence falls in Michigan, you’ll have to recover and disburse sales tax to the Michigan Department of Treasury.
- If you plan on having people in your employ, you’ll be expected to register for the Michigan Department of Labor and Economic Opportunity employment tax.
7. Apply for Michigan Business Licenses and Permits
In Michigan, all businesses must obtain a general business license from State of Michigan Department of Licensing and Regulatory Affairs to conduct business. Depending on your business’s nature, you may also need to register for business licenses or permits with your county and/or city. Some common types of business licenses and permits include:
- Building Permit – A building permit is often required if you are involved in construction or renovating property.
- Signage Permit – Many cities or counties require you to obtain a permit to put up signs outside your business.
- Professional Licensing – If you work in a regulated industry, you may be required to obtain a specialized professional license. Businesses like barbers, cosmetologists, insurance brokers, pest control, physical therapists, interior designers, beauty salons, daycares, bars, plumbers, and electricians are often required to obtain a professional license.
8. Open a Business Bank Account
You’ve heard the expression “don’t mix business with pleasure”. In the same vein, you should try to create a separation between your personal finances and your business finances. If your personal financial activity is routinely mixed up in your business activity, it could place your personal assets in jeopardy. Since banking activity is monitored and recorded, any such events will not be hard to find. This activity is known as “co-mingling funds” and can result in serious consequences for your business.
Co-mingling funds could result in the loss of your company’s limited liability status. Limited liability deems the business to be a separate entity from you, but if you conduct business in such a way that your banking activity is inextricable from your business’ banking activity, then why should limited liability consider you as separate. Furthermore, it even makes accounting for yourself, and your business that much more challenging since a significant portion of resources will be dedicated to determining which transaction is in a personal capacity and which one is for the business.
Opening a bank account specifically for your business can protect you from such consequences down the road. To gain more insight on the issue, read through our detailed how-to guide. It covers, among other things, matters such as which bank to choose and what documents will be required.
9. Set Up Credit Card Processing
It is now expected for most businesses to recognize and accept payments through credit and debit cards. Around 60% of all transactions over $10 are through a credit or debit card. As a result, your business must accept card payments to stay abreast with the competition.
For more information, see How to Accept Credit Card Payments.
10. Establish an Accounting System
One of the biggest reasons most startups fail is improper or non-existent accounting. Considering the above, having an accounting system is simply the sensible thing to do. It can offer you incredible returns on top of recording financial information. Managers and owners need good data to make prudent financial decisions. A good accounting system does just that. It streamlines that business’s finances and offers incredible insight into business performance.
A modern and efficient accounting system allows you to draft budgets with great ease, control cash flow, and produce the required financial reports to have maximum control over your business’ financial operations. For more detailed instructions on the subject, you can consult ourSmall Business Accounting 101 guide. It walks you through the steps required to do small business accounting, plus much more.
11. Get Business Insurance
Business insurance, much like regular insurance, is something that many people treat as a burden until the day that they end up needing it. It is only logical that you safeguard the thing you’ve worked so hard to build. Proper insurance mitigates risk on the off chance that an accident, natural disaster, or lawsuit strikes your business.
Go over the variety of insurance you can avail for your business in our Small Business Insurance Guide,and make certain that you’re protected.
12. Hire Employees and Set Up Payroll
As the business grows, you may need extra help to run it smoothly. As such, you’ll have to hire employees and set up a payroll. It is your responsibility as an employer to report freshly hired employees and verify your employment status. In Michigan, there is a requirement to acquire unemployment insurance from the Michigan Department of Labor and Economic Opportunity if you want to hire employees.