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Looking to start a Michigan S Corporation (S Corp) but not sure how to go about it? You’re in the right place. Use our guide below to learn more about S Corps in Michigan and how we can help you get started on yours.
For an LLC, filing as an S Corp could provide savings on self-employment taxes. For C Corporations (C Corps), it can be a way to avoid double taxation. For more information about how filing as an S Corp could benefit your business, see our “What Is an S Corporation?” page. Keep reading to learn how to file as an S Corp in Michigan.
To create a Michigan S Corporation, you’ll need to create either a limited liability company (LLC) or a C Corp (if you haven’t already done so) and then file an election form or forms with the Internal Revenue Service (IRS). An LLC will need to file two forms, while a C Corp will file one.
If you’re ready to learn about filing as an S Corp in Michigan, we’ll walk you through it. First, we’ll show you how to form an LLC in Michigan. If you’d rather form a corporation, follow the instructions on our Michigan corporation page. Then, in Step 6, we’ll explain how to file for S Corp status as either an LLC or corporation.
The first step toward forming a Michigan LLC is selecting a name. Note, however, that it’s important to do a business entity search to ensure that the name you want isn’t already being used by another Michigan business.
Once you confirm that your desired name is available, we can help you reserve your business name. That way, you can prevent others from taking it while you finish the business formation process.
Now it’s time to select a Michigan resident agent, known in most states as a “registered agent.” This agent is the designated person who will receive service of process and other important legal notices for the business and is required by state law. They are required to be available during normal business hours so they can receive notices in person.
The next step in the entity formation process is to file Michigan Articles of Organization with the state. You do so by filing with the Michigan Department of Licensing and Regulatory Affairs, Corporations, Securities & Commercial Licensing Bureau.
Remember that we can handle this for you with our business formation services.
Even though having an operating agreement in Michigan isn’t required by law, it’s a critical document for an LLC. An LLC operating agreement covers the rules your company will follow, lists LLC owners (called “members” in an LLC), and the percentage ownership. It also discusses how finances will be handled, decisions will be made (including member voting structure), and details necessary regulations.
Many LLCs, including those with employees or more than one owner, are legally required to obtain a Federal Tax Identification Number, also known as an Employer ID Number (EIN) from the IRS. Most banks require an LLC to have an EIN to open a business bank account. This nine-digit number is used for tax purposes and other financial paperwork.
Once your Michigan LLC is approved by the state, you need to file two forms to get S Corp status. Complete Form 8832, Entity Classification Election. This asks the IRS to classify your business as a C Corporation for federal tax information. After that, file Form 2553, Election by a Small Business Corporation, to be taxed as an S corp. If you have a C Corp, you’ll only need to complete Form 2553.
The IRS requires that you complete and file your Form 2553 with the IRS:
For more information on when and how to file Form 2553, visit the IRS website.
There are a few Michigan S Corp filing requirements and limitations you should be aware of. Specifically, to qualify for S Corporation status, an entity must:
Not all business entities are eligible for S Corp classification. However, if your business entity meets these requirements, you may choose an S Corp election.
While S Corp classification does come with a number of benefits, making this election might not be right for all business types. Thus, be sure to carefully weigh the various pros and cons before deciding how you want to move forward.
Common advantages of an S Corp election include:
The benefit of saving on self-employment taxes for an LLC takes some explanation, so bear with us:
The members of an LLC are usually considered self-employed. They make money by receiving their share of profits from the company, but they can’t be employed by the LLC. Being self-employed means paying self-employment taxes (money for Social Security and Medicare, which is about 15.3%) on all profits they receive from the LLC. This is more than the taxes they’d pay when working for someone else because their employer would pay part of them.
When the members elect S corp status, though, they can be compensated in two ways, by receiving their share of the profits and by being paid as an employee. When this happens, they only pay self-employment taxes on their salary and not the profits they receive. This can add up to thousands of dollars.
One catch is that the IRS expects you to pay yourself a “reasonable salary” as an employee of the LLC. Otherwise, you could pay yourself an annual salary of $1 and contribute almost nothing to Social Security and Medicare. The IRS considers “reasonable” to be something with what others in your field are making.
However, there are also certain disadvantages to electing S Corporation status. Some examples of these disadvantages include:
The answer as to whether to form a C Corp or S Corp will vary from entity to entity. Ultimately, the decision will come down to what works best for the needs and goals of your particular business. A tax professional can advise you best.
Before figuring out how to form an S Corp in Michigan, you might be wondering what an S Corp is. In short, an S Corp is a tax status that can be selected by an LLC or a C corporation if it meets the IRS’s criteria. For a C Corporation, having S Corp status allows it to pass its corporate income, losses, deductions, and credits through to its shareholders for federal tax purposes without first being taxed at the business level.
This passing of tax obligations onto shareholders is often referred to as “pass-through taxation” because it allows the business entity to avoid double taxation on corporate income, as is the case for other types of entity structures like sole proprietorships and partnerships.
For an LLC, which already has pass-through taxation by default, S Corp status gives the members the option to be employed by the business. When that happens, the members pay self-employment taxes only on their salary instead of paying them on their share of business profits.
One key difference between S Corps and C Corps is that S Corps benefit from pass-through taxation, whereas C Corps do not. Rather, C Corporations must file and pay income taxes at both the corporate level and at the shareholder level.
However, although C Corps can’t avoid double taxation, they do have fewer restrictions and invite less IRS scrutiny than S Corps.
To create an S Corporation, you have to form a business that falls within the limitations identified above and you have to file Form 2553 with the IRS in accordance with the timeframes noted above. If you have an LLC, you must first file Form 8832 to have the LLC taxed as a C Corp.
Yes, LLCs can choose an S Corporation election. And in fact, many LLCs do choose to do so to benefit from the various tax advantages that come along with this type of classification.
Forming a business can be complicated, but we’re here to make it as easy for you as possible.
When you’re ready to take the leap, we can help you form a Michigan LLC with an S Corporation designation and provide you with valuable support for all of your business needs moving forward.
Disclaimer: The content on this page is for information purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
For a corporation, one of the biggest advantages is being able to avoid double taxation on the business’s income at both the entity and individual levels, thereby benefiting from pass-through taxation.
For an LLC, when the members elect S corp status, they can be compensated in two ways, by receiving their share of the profits and by being paid as an employee. Once they do that, they only pay self-employment taxes on their salary and not the profits they receive. This can add up to thousands of dollars of savings in self-employment taxes.
Before formally registering a business name, you should first search the Michigan business entity records to make sure that you don’t select one that is already in use by another business. That aside, however, you can typically name your Michigan S Corporation nearly anything you want as long as you comply with any applicable state naming regulations.
S Corp status may not be right for all businesses. If you’re not sure whether to identify your LLC as an S Corp or keep the default status, be sure to consult with an experienced business law attorney or accountant in your state.
Calculating taxes can be confusing, but you can check out our S Corp tax guide to learn more about navigating taxes for your Michigan S Corporation. If you still have questions, contact a certified tax professional for more information.