Maximize your business advantages in Michigan by filing an S corporation election. Explore our guide to learn how this strategic decision could enhance your tax benefits.
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Considering launching an S corporation (S corp) in Michigan but uncertain of the steps involved? This guide is designed to assist you. Explore the specifics of establishing S corps in Michigan and discover how our services can facilitate the process for your business.
For LLCs in Michigan, electing S corp status could potentially reduce self-employment taxes. Meanwhile, C corporations (C corps) in the state might find S corp election advantageous for bypassing the issue of double taxation.
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 can apply for an S corp election.
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. Then, you’ll file an election form with the Internal Revenue Service (IRS).
Note: Before you begin this process, see the section below titled “Requirements and Limitations of S Corporations” to make sure your business qualifies for S corp status.
For detailed formation steps, see our Michigan LLC formation guide.
For detailed formation steps, see our Michigan Corporation formation guide.
Submit the form to apply for S corp status. Once your Michigan LLC is approved by the state, you need to file Form 2553, Election by a Small Business Corporation, to get S corp tax designation.
The IRS requires that you complete and file your Form 2553 with the IRS:
OR
One caveat for limited liability companies wishing to file as an S corp: If your LLC is past the 75-day election deadline, you’ll also need to file Form 8832, Entity Classification Election, to elect to be taxed as a corporation. Then you would file both Form 8832 and Form 2553 together via USPS-certified mail.
For more information on when and how to file Form 2553, visit the IRS website.
While S corp classification does come with a number of benefits for some businesses, making this election might not be right for all business types. So, be sure to carefully weigh the various pros and cons before deciding how you want to move forward.
The advantages of filing as an S corp for an LLC aren’t exactly the same as they are for C corporations. Let’s look at the advantages for LLCs first.
A traditional LLC already has pass-through taxation, so the benefits of S corp election for an LLC have to do with self-employment taxes. This takes some explanation, but for certain LLCs, it could save a lot in taxes.
The members of a standard LLC are considered self-employed. They’re compensated by receiving their share of profits from the LLC, but they can’t be employed by the LLC. Being self-employed means paying self-employment taxes (Social Security and Medicare, which adds up to 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.
But 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 Social Security and Medicare taxes on their salary and not the profits they receive. Depending on factors such as how profitable your company is, the savings could add up to a lot. (Of course, the members will still pay income and all other applicable taxes on their share of the profits.) Money paid out as salary is a tax-deductible expense for the business.
One caveat to this 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 avoid contributing anything to Social Security and Medicare. The IRS considers “reasonable” to be something similar to what others in your field are earning.
If you have a C corporation (the default form of corporation), filing as an S corp does have its advantages:
One big disadvantage for traditional corporations is “double taxation.” When the corporation makes money, the IRS taxes those profits on the corporate level. But when those profits are distributed to the individual owners (shareholders) as dividends, they’re taxed a second time on the shareholders’ personal tax returns.
But when a C corporation qualifies to be an S corp, those profits are only taxed at the individual level. The business itself isn’t taxed on them. This is called “pass-through taxation,” and it’s how sole proprietorships and general partnerships are taxed. LLCs are also taxed this way unless they choose to be taxed as a corporation.
We need to add here that, since the 2017 Tax Cuts and Jobs Act, the corporate tax rate has been lowered to a flat 21%. So, the disadvantages of double taxation aren’t as severe now as they were.
Just as business profits pass through to the owners of an S corp, so do the losses. Unlike the shareholders of a C corporation, S corp owners can write off the company’s losses on their personal income statements.
This can help offset their income from other sources and can be helpful if the corporation loses money in the first couple of years. Still, make sure you’re aware of the IRS’s shareholder loss limitations.
Under the Tax Cuts and Jobs Act, some S corp owners may be able to deduct up to 20% of their qualified business income. This deduction isn’t available to C corporation shareholders.
Qualified business income (QBI) is basically your share of the company’s profits, or, as the IRS puts it, “QBI is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business, including income from partnerships, S corporations, sole proprietorships, and certain trusts.” The IRS website has a detailed explanation as to what is and is not included in QBI. There’s an income threshold that, if exceeded, may reduce your QBI (see the IRS website for details).
Having an LLC with S corp status can have some drawbacks over a traditional LLC:
As we listed above, S corps must adhere to more regulations than a standard LLC or C corporation. All the members must be U.S. citizens (which can also include certain trusts and estates), and there can be no more than 100 of them. A traditional LLC doesn’t have these limitations.
Because of the above restrictions and the requirements about paying yourself a “reasonable salary,” the IRS tends to monitor LLCs filing as S corps more closely. That could mean a greater chance of being audited, even if you follow the law to the letter. In fact, S corp owners may want to observe many of the same formalities that C corporations do (such as regular meetings and extensive record keeping), even if they’re not legally required to.
S corp status also has its downsides:
As we said, an S corp can’t have more than 100 shareholders, while a C corporation has no such restriction. That limitation could be an issue later if the corporation expands and goes public.
All S corp shareholders must be U.S. citizens, or certain trusts or estates. That could limit your ability to expand internationally. You also can’t have partnerships, corporations, or non-resident aliens as shareholders. C corporations don’t have these limitations.
One way corporations attract investors is to offer preferred stock. That’s fine for C corporations, but the IRS doesn’t allow it for S corps.
Because of the extra restrictions S corps have, the IRS watches them more closely to see if they’re in compliance. In other words, your corporation is more likely to get audited.
We can’t stress enough how important it is to have tax guidance about your specific situation from a qualified tax professional. An accountant with S corp experience should be able to make sure you stay in compliance with the IRS, but they may also be able to help you find additional tax savings.
The S Corporation tax calculator below lets you choose how much to withdraw from your business each year, and how much of it you will take as salary (with the rest being taken as a distribution.) It will then show you how much money you can save in taxes.
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Disclaimer: The savings estimate provided by this tool is for informational purposes only and should not be considered financial, tax, or legal advice. Actual savings may vary depending on individual circumstances and other factors. We recommend consulting with a qualified tax or legal professional before making any decisions regarding your business entity. ZenBusiness, Inc. is not responsible for any actions taken based on the information provided by this tool. Use of this tool does not establish any client relationship with ZenBusiness, Inc.
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You should understand that an S corp is not a business structure. Rather, it’s a tax classification that either an LLC or a corporation can apply for with the IRS if it meets the criteria. We’ll outline those criteria and the steps you would need to take to file as an S corp if you decide that it’s right for your business.
If you want to form an LLC with S corp tax status, our S corp service can help you do just that. Plus, we offer other services to help you run and grow your business and stay in compliance with state and federal laws.
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. For some LLCs, this can add up to big 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’s 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.
Sorry, but our S corp service is only for applying for S corp status when you form your LLC with us.
According to the IRS website, you’ll be notified of whether or not your S corp election is accepted within 60 days of filing Form 2553.
If you’re a new business, you must apply for S corp status no more than 2 months and 15 days after the beginning of the tax year the election is to take effect. For an existing business, you would file at any time during the tax year preceding the tax year it is to take effect.
An LLC is a legal business entity, whereas an S corp is a tax filing status. You can read more on our LLC vs. S Corp page.
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.
Written by Team ZenBusiness
ZenBusiness has helped people start, run, and grow over 700,000 dream companies. The editorial team at ZenBusiness has over 20 years of collective small business publishing experience and is composed of business formation experts who are dedicated to empowering and educating entrepreneurs about owning a company.
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